1973 PLP 44 (PTD)

2,03,503 87,893 Year ending 30th September 1949 7, 67,294 5,41,526 2,25,768 Year ending 30th September 1950 7,52,204 5,29,284 2,22,920 Year ending 30th September 1951 10,20,922 4,00,052 6,20,870 Total 28,31,816 16,74,365 11,57,451 For the assessment years 1949‑50, 1950‑51, 1951‑52 and 1952‑53 the assessee showed the net amounts of commission earned on the selling agencies by the I. C. I. (Export) Ltd., adding a foot‑note that the amounts were arrived at after deducting the amount of compensation payable to the outgoing agents. By his order dated 28th January 1957, for the assess ment year 1951‑52 the Income‑tax Officer held that the deductions were not permissible. In ate appeal preferred by the assessee the Appellate Assistant Commissioner confirmed the assessment by his, order dated 25th November 1957. The assessee took the matter in further appeal to the Appellate Tribunal 'which dismissed the appeal. The Appellate Tribunal held that there was no justification for the absence of a written agreement between the, I. C. I. (Export) Ltd. and the assessee when the former selling agencies were terminated and the assesses was appointed as the sole selling agent. It was observed that the assessee was not collecting any commission on behalf of the outgoing agents and it was not their legal obligation to pay compensation to the outgoing agents. If the assessee was not entitled to more than 3/5ths of commission during the first two years, it should have credited that amount whereas the assessee had actually. Credited four‑fifteenths on a notional basis which was not in consonance with the arrangement. The conclusion reached by the Appellate Tribunal was that "there was no agreement between the assessee and the I. C. I. (Export) Ltd. and "if there was one it was not acted upon". It was held by the Appellate Tribunal that the payment of compensation was not because of an overriding title created either by the act of parties or by operation of law. At the instance of the assessee the following question of law was. referred to the High Court under section 66(1) of the Income‑tax Act, 1922 (hereinafter called the Act):‑

"Whether the inclusion by the ‑ Income‑tax . Officer of Rs. 2,03,503, Rs. 5,41,526, Rs. 5,29,284 and Rs. 4,00,052 in the assessment for the years 1949‑50, 1950‑51, 1951‑52 and 1952‑53 for the relevant accounting years ending the 30th September 1948, 1949, 1950 and 1951, respectively, in the computation of the total income of the assessee is justified and correct? The High Court answered the question in the negative in a favour of the assessee holding that the inclusion of the amount of compensation in the total income of the assessee for the relevant assessment, years was not, justified. On behalf of the appellant .it was contended that the High Court, had no legal justification for interfering with the finding of the Appellate Tribunal that there was no proof of the agreement between the assessee and the I. C. I. (Export) Ltd. with regard to the quantum of commission to be paid to the assessee for the period between 1st April 1948, and 31st March 1951. On 'this point reference was made by Mr. Chagla to (a) the letter dated 11th March 1947, from the I. C. I. (Export) Ltd. to Messrs Gillanders Arbuthnot & Co.' (b) the affidavits of Mr. W. A. Bell and Mr. J. W. Donaldson and (c) the letter dated 3rd January 1958, of Messrs Lovelocke and Lewes, Chartered Accountants, Calcutta. it was argued that these documents established that there was act1 agreement between the I. C. I. (Export) Ltd. and the assesses, that for the period 1st April 1948 to 31st March 1951, the assesses was entitled to receive as its commission only the amounts representing the difference between the normal rates of commission and the compensation payable to the former agents during that period: The Appellate, Tribunal had considered all these documents and reached the conclusion that there was no agreement between the I. C. 1. (Export). Ltd. and the assesses and `it there was one it was not acted upon'. The Appellate Tribunal remarked that ‑the letter dated 11th March 1947, form the I. C. I. (Export) Ltd. set forth only the terms and conditions. subject to which the selling agencies of the outgoing agents were terminated. It was silent on the crucial question of commission to be paid to the assessee during the three years from the date of its appointment as sole selling agent. The affidavits of Mr. Bell and Mr. Donaldson were produced for the first time before the Appellate Assistant Commissioner. The affidavits were made many years after the ,crucial date of the appointment of the assessee as the sole selling agent of the I. C. I. (Export) Ltd. The affidavits did not mention the amount of commission to be paid to the outgoing agents and the affidavits were also not consistent with the entries in the books of accounts of the assessee. The letter of Messrs Lovelocke and Lewes was produced at a very late stage ` during the hearing of the 'appeal before the Tribunal and even otherwise the letter merely explains the method of accounting adopted by the assessee and did riot carry the matter any further: In the circumstances, the, Appellate 'tribunal held that there was no agreement between the assesses and the I. C. I. (Export) Ltd. and if there eras any such agreement it was not acted upon. It is manifest that the finding of the Appellate Tribunal on this question is a finding on a question of fact and the High Court was not entitled to interfere with this finding. It is well established that the High Court is not a Court of appeal in a reference udder section 66(1) of the Act and it is not open to the High Court in such a reference to embark upon a reappraisal of the evidence and to arrive at findings of fact contrary to those of the Appellate Tribunal. It is the duty of the High Court while hearing the reference to confine itself to the facts as found by the Appellate Tribunal and to answer the question of law in the context of those facts. It is true that the finding of fact will be defective in law if there is no evidence to support it or if the finding is perverse. But in the hearing of a reference under section 66(1) of the Act it is not open to the assessee to challenge such a finding of fact unless he has applied for the reference of the specific question under section 66(1). In India Cements Ltd. v. Commissioner of Income‑tax ((1966) 60 I T R 52 (S C)) it Was held by this Court that in a reference the High Court must accept the findings of fact reached by the Appellate Tribunal and it is for the party who applied for a reference to challenge those findings of fact, first, by an application under section 66(1). If the party concerned has failed to file an application under section 66(1) expressly raising the question about the validity of the finding of fact, he is not entitled to urge before the High Court that the finding is vitiated for any reason. The same view has been expressed by this Court in Commissioner of Income‑tax v. Sri Meenakshi Mills Ltd. ((1967) 63 I T R 609 (S C)) and Commissioner of Income‑tax v. Greaves Cotton & Co. Ltd. ((1968) 68 I T R 200 (S C)). In the present case the assessee has in his application under section 66(1) expressly rained the question about the validity of the finding of the Appellate Tribunal as regards the agreement but the question was not referred by the Appellate Tribunal to the High Court and the contention of the assessee with regard to the question must be deemed to have been rejected. The assessee did not thereafter move the High Court under section 66(2) of the Act requiring it to call for a statement of the case on that specific question. We are therefore of opinion that the High Court was in error in embarking upon a reappraisal of the evidence before the Appellate Tribunal and setting aside the finding of the Appellate Tribunal that "there was no agreement as alleged in the affidavits of Mr. W. A. Bell and Mr. J. W. Donaldson" and "if there was such an agreement it was not acted upon". It was argued by Mr. Chaglall that even if the agreement was not established, the amount paid by the assessee as com pensation to the ex‑agents was an expenditure laid out wholly and exclusively for the purpose of the business and as such is allowable, under section 10(2)(xv) of the Act. The contrary viewpoint. was urged on behalf of the appellant. It was pointed out that the assessee was acting as the agent of the I. C. I. (Export) Ltd. for the payment of compensation to the ex‑agents and the payment was made not in the character of a trader but in the character of the agent of its principal. The contention of the appellant was that tire assessee got the right to sell goods after 1st April 1948, and for getting that right the assessee parted with a portion of its commission for the first two years after 1st April 19.48, and paid very much more than the commission earned in the third year. This position was borne out by the accounts of the respondent which show that the assessee received the commission at full rates and out of it created a reserve account of which these compensations were made to the ex‑agents: We have already referred to‑ the finding of the Appellate Tribunal that no agreement between the assessee and the I. C. I. (Export) Ltd. has been proved. In the absence of proof of the exact terms and conditions of the agreement it is not possible to accept the argument of the assessee that the amount paid as compensation to the ex‑agents was. an "expenditure laid out wholly and exclusively for the purpose of the business" under section 10(2)(xv) of the Act. It was finally contended on behalf of the respondent that fey virtue of an overriding title the income was diverted before it reached the assessee, and so, the amount of compensation paid to the ex‑agents did not form part of the income of the assessee. In other words, the contention was that the compensa tion payable to the ex‑agents was diverted from the income of the assessee by an overriding title arising under the agreement between the assessee and the I. C. I. (Export) Ltd. The argument was stressed that the commission payable as compensation to the ex‑agents dirt not form part of the income of the assessee. We are unable to accept this argument as correct. We have already pointed out that the finding of the Appellate Tribunal is that the precise terms of the agreement between the assessee and the I. C. I. (Export) Ltd. have not been established. In any event, even on the basis of the affidavits of Mr. Bell and Mr. Donaldson the payment of compensation to the ex‑agents was apparently made by the assessee for and on behalf of the I. C. I. (Export) Ltd. The assessee's documents suggest that the payment of compensation was the exclusive liability of the I. C. I. (Export) Ltd. and the assessee was not under a legal obligation to pay the amount of compensation to the outgoing agents. It is not established that the payment of compensation was by an overriding title created either by the act of the patties or by the operation of law. An obligation to apply the income in a particular way before it is received by the assessee or before it has a‑‑creed or arisen to the assessee results in the diversion of income. An obligation to apply income accrued, arisen or received' amounts merely to the apportionment of income and. the income so applied is not deductible. The true test for the application of the rule of diversion of income by an overriding title is whether the amount sought to be deducted in truth never reached the assessee as his income. The leading case on the subject is Raja Bejoy Singh Dudhurla v. Commissioner of Income‑tax ((1933) 1 I T R 135 (P C)), where the step‑mother of the Raja had brought a suit for maintenance and a compromise decree was passed in which the step‑mother was to be paid Rs. 1,100 per month, which amount was declared a charge upon the properties in the hands of the Raja by the Court. The Raja sought to deduct this amount from his assessable income, which was disallowed by the High Court at Calcutta. On appeal to the Judicial Committee Lord Macmillan observed as follows:‑ "But their Lordships do not agree with the learned Chief Justice in his rejection of the view that the sums paid by the appellant to his step‑mother were not 'income' of the appellant at all. This in their Lordships' opinion is the true view of the matter. When the Act by section 3 subjects to charge 'all income' of the individual, it is what reaches the individual as income which it is intended to charge. 1n the present case the decree of the Court by charging the appellant's whole resources with a specific payment to his step‑mother has to that extent diverted his income from him and has directed it to his step‑mother; to that extent what he receives for her is not his income. It is not a case of the application by the appellant of part of his income in a particular way, it is rather the allocation of a ‑sum out of his revenue before it becomes income in his hands." Another case of the Judicial Committee‑is reported in 'P. C. Mullick v. Commissioner of Income‑tax ((1938) 6 I T R 206 (P C)) where a testator appointed the appellants as. executors and directed them to pay Rs. 10,000 out of‑ the income on, the occasion of his addya sradh. The executors paid Rs 5,537 for, such expanses and sought to deduct the amount from the assessable income. The Judicial Committee confirmed the decision of the Calcutta High Court disallowing the deduction and observed that the payments were made out of the income of the estate coming to the hands of the executors and in pursuance of an obligation imposed upon them by the testator. The Judicial Committee observed that it not a case in which a portion of the income had been diverted by an overriding title from the person who would have received it otherwise and distinguished Bejoy Singh Dudhuria's case. In Commissioner of income‑tax, v. Sitaldas Tirathdas ((1961) 41 I T R 367 (S C)), Hidayatullah, J., speaking for the Court, observed as follows: " There a is a difference between an amount which a person is obliged to apply out of his income and an amount which by the‑ nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee; the same consequence, in law, does not follow: It' is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to. pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable." In view of the principle laid down in these authorities we are of opinion that the payment, of compensation by the assessee to the ex‑agents was not by an overriding title created either by act of the parties or by operation of law. We accordingly reject the argument of Mr. Chagla on this aspect of the case. For the reasons expressed we hold that the judgment of the Calcutta High Court dated 28th September 1964, should be set aside and the question referred by the Appellate Tribunal should be answered in the affirmative and against the assessee. The appeals are accordingly allowed with costs. One hearing fee. Appeals allowed.