PETITIONER: <ORG> Vs. RESPONDENT: SALES TAX OFFICER, BHOPAL DATE OF JUDGMENT14/04/1977 BENCH: <NAME>, SYED MURTAZA BENCH: <NAME>, SYED MURTAZA BHAGWATI, P.N. UNTWALIA, N.L. CITATION: 1977 AIR 1275 1977 SCR (3) 578 1977 SCC (3) 147 CITATOR INFO : F 1988 SC1250 (7) ACT: Sales Tax--Dealer consuming goods for his own purposes--If a sale exigible to tax. HEADNOTE: The appellant was a manufacturer of sugar. It also ran in the mill premises a petrol pump selling high speed diesel oil, petrol and other lubricant oils of <ORG>. A part of these oils was consumed by the appellant for its own trucks and other vehicles. The Sales tax authorities assessed to tax the petrol consumed by the appellant for its own use as well. On appeal the Commissioner of Sales Tax held that since the appellant was an agent of <ORG>, title to the property in the goods sold by it remained with the principal and as such that part of the petrol and other oils consumed by it was also a sale exigible to tax. Allowing the appellant's appeal HELD: The petrol consumed by the appellant for its own purposes was not a sale exigible to tax. A conspectus of the terms of the agreement showed that after taking deliv- ery, the appellant became the owner of the goods and if it consumed the same for its own purposes, it was doing so not as an agent but as owner. [592 E] 1(a) In a contract of sale title to property in the goods passes on to the buyer on delivery of the goods for a price paid or promised. Once this happens the buyer becomes owner of the property and the seller has novestige of title left in the property. Having regard to the complexities of modern times the concept of sale has undergone a change and made a departure from the old doctrine of laissez faire. Even if the seller, by an agreement, imposed a number of restrictions on the buyer, such for example as, fixing of price, submission of statement of accounts, area of sale and so 6n these restrictions would not per se convert a contract of sale into one of agency. [581 H] (b) A contract of agency differs from a contract of sale inasmuch as an agent, after taking delivery of the property, does not sell it as his own but sells it as the property of the principal under his instructions and directions. [582 B] (c) While interpreting the terms of an agreement, the Court has to look to the substance rather than the form of the agreement. Use of words like "agent" or "agency", "buyer" and "seller" is not sufficient to lead to the infer- ence that the parties did in fact intend that the said status would be conferred. In certain trades, the word "agent" is often used without any reference to the law of principal and agent. [582 <CITATION> . 21 STC 313, 316 followed. <NAME> and Sons v. <ORG> LR.  l KBD 710, 717, <CITATION> . ,4. <ORG>  Supp. SCR 1, 3-4 and <ORG> ( <CITATION> , 80 ITR 213 referred to. <NAME> v. <ORG>  2 K B D I, <ORG> v. <ORG> (in Liquidation),  2 Scots. L.T. 205, <ORG> v <ORG>.  2 All. F.R. 386, 579 Willcox & Gibbs Sewing Machine Company v. <NAME>, 35 U.S. Law. Ed. 882, 884 held inapplicable. In the instant case, the evidence furnished by the agreement was sufficient to conclude (a) that the goods were supplied not on consignment basis but by way of outright sale; (b) that the agreement was to sell petrol and other oils, after the dealer had bought the property from <ORG>, at prices fixed by that company; (c) that stipulation of sale price was to protect the company's goodwill and to ensure quality of goods to be distributed-in fact stipula- tion of price which is generally a common term in all agree- ments between monopolistic companies and their distributors did not detract from the freedom of contract of sale; (d) sale by the appellant to other customers did not disclose that the property belonged to <ORG>; (e) it was the appel- lant that bore losses due to leakage, driage and evaporation in storage and (f) reimbursement by the company of transport charges and handling expenses and also reimbursement of supplies made by the appellant to certain designated custom- ers showed that the agreement was a contract of sale and not of agency. Further, the term requiring the dealer to furnish state- ments of sales and other matters showed that the company wanted to keep itself fully informed of the proper conduct of the business in order to maintain its goodwill and to terminate the agreement in case it found that the appellant was misusing the privilege given to it. The term "commis- sion and allowances" indicated that certain special benefits were conferred by the company on its distributors. It did not show that it was an agency. Nor was the term requiring the appellant to furnish security for the due observance and performance of the stipulations an indication that the agreement was an agency. <CITATION> , AIR 1919 P.C. 166, 167 referred to. <CITATION> , AIR 1956 Cal. 188 ap- proved. JUDGMENT:

CIVIL APPELLATE JURISDICTlON: Civil Appeals Nos. 1135- 1138 of 1972.

Appeals by Special Leave from the Judgment and Order dated the 5th May, 1970 of the Commissioner of Sales Tax, Madhya Pradesh in Revision Case Nos. 2-5/RMS of 1968-1969 respectively.

<NAME>, (Mrs.) <NAME> and <NAME> for the Appellant.

<NAME>, H.S. Parihar and 1. N. Shroff for Re- spondent.

The Judgment of the Court was delivered by FAZAL ALl, J.--These appeals by special leave are di- rected against the order of the Commissioner of Sales Tax dated May 5, 1970 rejecting the revision filed by the appel- lant before him against the order or' the Appellate Assist- ant Commissioner, Sales Tax, imposing sales tax. The appellant filed an appeal against the order of the respondent-Sales Tax Officer--to <ORG> under the Madhya Pradesh Sales of Motor Spirit and Taxation Act , 1957 hereinafter referred to as 'the Act'--and pari pasu filed a petition under Art. 226 of the Constitution in <ORG> challenging the constitu- tionality of the Act and the assessments made in pursuance thereof. <ORG>, by its judgment dated January 25, 1961, dismissed the petition of the' appellant". The appellant. then approached this Court through a special leave petition and also a petition under Art. 32 of the Constitution but without any suc- cess. This Court by its judgment dated December 21, 1962, held that <ORG> had erred in assuming jurisdiction in deciding disputed questions involved in the petition and should have insisted on the appellant to move <ORG> provided under the Act. The petition under Art. 32 , however, .was allowed by this Court and a part of the definition of "sale" in s. 2(1) of the Act was declared ultra vires. In the instant case, however, we are not concerned with this aspect of the matter.

In compliance with the orders of this Court, the appel- lant filed an appeal before the Appellate Assistant Commis- sioner of Sales Tax which was allowed by his order dated March 6, 1963, and the case was remanded to the Sales Tax Officer for fresh assessment after making necessary en- quiries. Thereafter the respondent Sales Tax Officer assessed the appellant afresh by his order dated October 20, 1963, and made similar assessments for the other periods. Against this order the appellant moved this Court again but ultimately withdrew the petition and filed 'a revision petition under s. 28 of the Act to the Commissioner of Sales Tax, Madhya Pradesh. The Commissioner, after hearing the arguments of both the parties, invited further documents and after making further queries upheld the order of the Appel- late Assistant Commissioner of Sales Tax holding that the appellant was liable to pay sales tax inasmuch as the con- tract which was entered into between the appellant and <ORG> was a pure and simple contract of agency and not a contract of sale. The Commissioner opined that as the contract was one of agency, the title to the property remained in the <ORG> and if the appellant used the petrol for its own purposes as agent, then such a user would amount to a sale of the property of the <ORG> by the agent to itself so as to he exigible to sales tax. It is against the order of the Commissioner dated May 5, 1970 that the appellant has come up to this Court after obtaining special leave.

We have heard counsel for the parties at very great length and we have also gone through the documents flied by the parties before the Commissioner and incorporated in the Paper Book. It seems to us that the only point for deci- sion lies within a very narrow compass. The short point to be decided is whether at the time when the appellant was consuming the high speed diesel oil and petrol for its own purposes, was it doing so as owner of these articles or merely as an agent of <ORG> ? In other words, if it is held that as a result of the agreement between <ORG> and the appellant and the transactions following thereupon the title to the diesel or petrol passed to the appellant by the delivery of these articles, then from that date the appel- lant became owner of these articles and was entitled to use them as he liked, because he had already paid the price of the diesel and petrol received by it. If this be the position, then it is manifestly clear that the user by the appellant for its own purposes may not amount to a sale which had already taken place at a point of time when the goods were delivered by the <ORG> to the appellant. On the other hand, if it is held that the appellant was a mere agent under the agreement and was selling the articles on behalf of its principal--the <ORG>--then any user of these articles or properties may amount to a sale so as to be exigible to sales tax. We may add that even then it was contended for the appellant that it would not amount to sale, but it did not press his contention later. The question, therefore, will have to be determined having regard to the terms and recitals of the agreement, the intention of the parties as may be spelt out from the terms of the documents and the surrounding circumstances and having regard to the course of dealings between the par- ties. In all the Sales Tax statutes as also the definition of "sale" in the Act in this case, the definition given in the Sale of Goods Act has been bodily lifted from that Act and inserted in the Tax Statutes. In the instant case under the Madhya Pradesh Sales of Motor Spirit Taxation Act, 1957, "sale". is defined thus:

" "sale" with all its grammatical variations and cognate expressions means transfer of motor spirit for cash or deferred payment or for other valuable consideration and includes transfer of motor spirit by a society or club or any association to its members, but does not include a mortgage hypothecation, charge or pledge;

Explanation l.---Consumption of motor spirit by a dealer himself or on his behalf shall be deemed to be a "sale";

Explanation II.---A sale of motor spirit deemed to be a sale inside the State within the meaning of sub-section (2) of section 4 of the Central Sales Tax Act, 1956 , shall also be deemed to be sale inside the State for the purposes of this clause;"

Thus it would appear that in order to satisfy the conditions of "sale" under the definition of the Act, the following conditions must be satisfied:

(i) that there should be a transfer of motor spirit from the seller to the buyer;

(ii) that the transfer must be for valu- able consideration which may be either cash or deferred payment; and

(iii) that the transfer must not be in the nature of a mortgage, hypothecation, charge or pledge.

Under Explanation I, consumption of motor spirit by a dealer himself or on his behalf shall be deemed to be a sale. But this Explanation has already been held to be ultra vires by this Court in the previous <ORG> case. Thus the essence of the matter is that in a contract of sale, title to the property passes on to the buyer on delivery of the goods for a price paid or promised. Once this happens the buyer becomes the owner of the property and the seller has no vestige of title left in the property. The concept of a sale has, however, undergone a revolution- ary change, having regard to the complexities of the modern times and the expanding needs of the society, which has made a departure from the doctrine of laissez faire by including a transaction within the fold of a sale even though the seller may by virtue of an agreement impose a number of restrictions on the buyer, e.g. fixation of price, submission of accounts, selling in a particular area or territory and so on. These restrictions per se would not convert a contract of sale into one of agency, because in spite of these restrictions the transaction would still be a sale and subject to all the incidents of a sale. A contract of agency, however, differs essentially from a contract of sale inasmuch as an agent after taking delivery of the property does not sell it as his own property but sells the same. as the property of the principal and under his instructions and directions. Furthermore, since the agent is not the owner of the goods, if any loss is suffered by the agent he is to be indemnified by the principal. This is yet another dominant factor which distinguishes an agent from a buyer--pure and simple. In <ORG>, Vol. 1, 4th Edn., in para 807 at p. 485, the following observations are made:

"The relation of principal and agent raises by implication a contract on the part of the principal to reimburse the agent in respect of all expenses, and to indemnify him against all liabilities, incurred in the reasonable per- formance of the agency, provided that such implication is not excluded by the express terms of the contract between them, and pro- vided that such expenses and liabllities are in fact occasioned by his employment."

We have mentioned this fact, particularly because under the agreement between <ORG> and the appellant the loss sustained by the buyer has to be borne by it after delivery of the goods and the seller is not responsible for the same. Such a special arrangement between the parties is a factor which taken along with other circumstances points towards the agreement being one of sale. It is well settled that while interpreting the terms of the agreement, the <ORG> has to look to the substance rather than the form of it. The mere fact that the word 'agent' or 'agency' is used or the words 'buyer' and 'sell- er' are used to describe the status of the parties concerned is not sufficient to lead to the irresistible inference that the parties did in fact intend that the said status would be conferred. Thus the mere formal description of a person as an agent or buyer is not conclusive, unless the context shows that the parties clearly intended 'to treat a buyer as a buyer and not as an agent. Learned counsel for the appel- lant relied on several circumstances to show that on a proper construction of the agreement it could not but be held to 'be a contract of sale. Learned counsel strongly relied on a decision Of this <ORG> in <CITATION> ,(1) where this <ORG> held the transaction to be a sale in almost similar circumstances. Speaking for the <ORG>, <NAME>, J., observed as follows: (1) 21 S.T.C. 313; 316 "As a matter of law there is a distinction between a contract of sale and a contract of agency by which the agent is authorised to sell or buy on behalf of the principal. The essence of a contract of sale is the transfer of title to the goods for a price paid or promised to be paid. The transferee in such a case is liable to the transferor as a debtor for the price to be paid ; and not as agent for the proceeds of the sale. The essence of agency to sell is the delivery of the goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods and will therefore be liable to account for the sale proceeds."

It is clear from the observations made by this Court that the true relationship of the parties in Such a case has to be gathered from the nature of the contract, its terms and conditions, and the terminology used by the parties is not decisive of the said relationship. This Court relied on a decision in <NAME> v. <ORG> (1) where despite the fact that the buyer was designated as sole selling agent, the Court held that it was a contract of sale Lord <NAME>, with whom other Lords agreed, observed as follows:

"Now it is well known that in certain trades the word "agent" is often used without any reference to the law of principal and agent. The motor trade offers an obvious example, where persons described as "agents" are not agents in respect of any principal, but are purchasers who buy from manufacturers and sell independently of them; and many difficulties have arisen from this habit of describing a purchaser, sometimes a purchaser upon terms, as an agent."

In a earlier decision of this Court in <CITATION> . (2) it was observed thus:

"The essence of sale is the transfer of the title to the goods for price paid or to be paid. The transferee in such case becomes liable to the transferor of the goods as a debtor for the price to be paid and not as agent for the proceeds of the sale. On the other hand, the essence of agency to sell is the delivery of the goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods and who is therefore liable to account for the proceeds." <ORG> in <ORG> v.

Commissioner of Income-tax (Central) Bombay(3) had, in almost similar facts, held that even though there were restrictions on the assessee, the agreement being one of distribution was to be treated as a contract of sale and not an agreement of agency. It would thus appear that (1) L.R. [1932] I K.B.D. 710, 717.

(2) [1966] Supp. S.C.R. 1,34.

(3) 80 I.T.R. 213 even if a party is described as agent in the agreement he may not be an agent but a buyer though described as an agent. In fact we feel that there may be agreements which may contain some elements of agency but may be-contracts of sale in other respects.

Learned counsel for the respondent then relied on the decision in <NAME> v. <ORG>) This author- ity does not appear to be of any assistance to the respond- ent because in that case the court came to a finding of fact that there was no concluded contract at all and the agree- ment was merely an executory one and, therefore, the ques- tion of determining the relationship between the parties did not naturally arise.

Similarly reliance was placed on <ORG> v. <ORG> (in Liquidation).(2) Here also the question was decided on the peculiar terms of the agreement in question and this authority cannot be called into aid for the purpose of deciding the present case.

Learned counsel for the respondent also relied on <ORG> v. Stimson(3) but the facts in the aforesaid case appear to be quite different from the facts of the present case.

Strong reliance was also placed by Mr. Panjwani coun- sel for the respondent on <ORG> v. <NAME>) where the Court observed as follows ::

"And it is agreed and understood that this appointment or agency is not saleable or transferable by second party without obtaining the written consent of first party, but such consent is to be given providing the purchaser or other person is acceptable to said first party."

"There was some discussion at the bar as to whether <NAME> was, strictly, an agent of the company. We think he was. He was none the less an agent because of his appointment as "exclusive vendor" of the defendant's machines within a particular territory, or because of the peculiar privileges granted to or the peculiar restrictions imposed upon him"

It seems to us that the law on the subject has been stated by the <ORG> in a different context and, therefore, this case does not appear to us to be of any assistance in deter- mining the question at issue in the instant case. The '<ORG> in the aforesaid case had inferred agency from the mere fact that under the agreement the sale was to operate in a limited territory. This by itself, in our opinion, is not sufficient to lead to the inference that the agree- ment was one of agency. It is (1) [1934] 2K.B.D. 1.

(2) [1917] 2 Scots. L.T. 205.

(3) [1962] 3 All E.R. 386.

(4) 35 U.S. Law. Ed. 882,884.

always open to the buyer to purchase goods for a limited purpose and within the field of that limited purpose the buyer has absolute to the property once it is delivered to him by the seller.

Learned counsel for the respondent then relied on a deci- sion of <ORG> in <CITATION> - tax and Sales Tax, Trivandrum,(1). But that decision is contrary to the principles enunciated by this Court in <ORG> case (supra) and <ORG> case (Supra). Moreover, as pointed out by <ORG> in that case there were special terms and stipulations in the contract which persuaded the <ORG> to hold that it was a contract of agency. We would, therefore, like to confine the ratio of that case to the peculiar facts of that case. Further, it appears that while <ORG> had expressly dissented from a decision of <ORG> in <CITATION> (1) and did not accept the propositions laid down by the said Court, this Court had affirmed the aforesaid <ORG> decision in <CITATION> (3) where it was observed thus:

"We therefore agree with the view of <ORG> that clause 24 does not qualify the legal effect of the other important clauses of the agreement, and that the cement delivered, despatched or consigned by the manufacturing companies to <ORG> or to its orders or in accordance with its directions was sold by the manufac-

turing companies to <ORG> ...... "

In view of the observations of this Court, therefore, the <ORG> decision referred to above must be held to have been impliedly overruled.

Having discussed the law 'on the subject, we shall now analyse the agreement in the present case and interpret the same m accordance with the principles laid down by the various authorities referred to above. To begin with, clauses 1 and 2 express in absolutely categorical terms that the nature of the agreement is to sell the property in question and nothing else. Clause 2 runs thus:

"The Company shall sell to the dealer and the dealer shall buy from the Company the said products at the prices preestablished by the Company therefore and which are in effect on the date on which the Diesel Oil is des- patched/or delivered by the Company."

Clause 2 expressly states that Hispeedol was to be sold and the dealer was b in the property from the <ORG> at prices to be fixed by the <ORG>. The terms "buying" and "selling" have not been used by way of a routine or formal description of the status of the parties (1) 12 S.T.C. 464.

(2) 9 S.T.C. 248.

(3) 12 S.T.C. 615,622.

but appear to us to form an integral part of the contract clearly exhibiting an intention of the nature of transaction which the parties intended tiffs document to be, namely, that it is a contract for sale and nothing else. We must remember that the agreement in question is a contract for distribution of Hispeedol produced by <ORG> which has a monopoly for producing a particular type of oil which it sells. A common feature of any distribution agree- ment is that the seller insists on a particular price at which the property is to be sold and impose certain restric- tions in order to protect his goodwill and ensure the quali- ty of his goods to be distributed through sale. The chart filed by the appellant at p. 191 of the Paper Book would clearly show that the appellant paid the price of the bulk supplies almost within a month of the date of delivery of the goods. This chart runs thus:

"A. H. Bhiwandiwalla & <ORG>, Managing Agents, <ORG>, Sehore, Cash Debit voucher No.. 2011, dt. 1-7-1958.

"Please pay to. M/s. Caltex (India) Ltd., Account: Petrol Diesel Oil & lubricants.

In full payment of the following bills Rs .-np. No. 19232 dt. 9-4-58 for 1000 Gs. petrol Rs. 2920-00 No. 19283 dt. 8-5-58 for 1000 Gs. petrol Rs. 2920-00 No. 19321 dt. 29-5-58 for 1000 Gs. petrol Rs. 2920-00 8760-00 No. 17586 dt. 1-5-58 for 1000 Gs. Hispeedol Rs. 1770-00 No. 17593 dt. 7-5-58 for 1000 Gs. ,, Rs. 1770-00 No. 17610 dt. 14-5-58 for 1000 Gs. ,, Rs. 1770-00 No. 17621 dt. 18-5-58 for 860 Gs. ,, Rs. 1540-00 6850-00

Rupees fifteen thousand six hundred ten only. 15610-00

For the <ORG> Sd/- Illegible Manager. "

This chart also reveals a crucial fact, namely, that the supply of the products by the Company was made to the appel- lant not on consignment basis but by way of outright sale. It appears from the documents produced by the appellant before the Commissioner that on inquiries made from the seller, namely, <ORG>, they confirmed the fact that the goods were sent to the buyer on the basis of out- right sale. In this connection, the relevant portion of the letter read thus:

"We refer to 'the discussion your Mr. <NAME> had this forenoon with our M/s. <NAME> and <NAME> ......

In this connection we would like to confirm as under "1. Since the inception of your dealership, clause No. 4 of our Standard Petrol Dealer Agreement does not apply to you.

2. Supplies of Petroleum Products ex Bombay or ex our Depots in Madhya Pradesh have been made to you on the basis of outright sale."

This letter also shows that clause 4 of the Standard Petrol Dealer Agreement did not apply to the appellant. Similarly another letter at P. 167 of the Paper Book written by the Manager of the appellant to the Commissioner of <ORG> clarified the position that the appellant had purchased the goods on outright basis. The relevant portion of this letter may be extracted thus:

"<ORG> <ORG>, never supplied goods i.e. petrol & Hispeedol on consignment basis. We had always purchased the goods from them on out-right purchases against our orders placed with them from time to time. Sample copies of our correspondence relating to placement of orders in respect of petrol & hispeedol are enclosed herewith for your perusal."

The appellant had filed detailed correspondence to prove the facts clarified before the Commissioner. This aspect of the matter was further reiterated by the appellant in his letter to the Commissioner' dated November 7, 1969, the relevant portion of which may be extracted as follows:

"<ORG> supplied us petrol & hispeedol against our orders placed with them from time to time and they billed us immedi- ately thereafter at the bulk rates prevailing from time to time ....... Payments were also made to <ORG> on outright basis immediately after receipt of the goods .......

All books of account, all files contain- ing orders, bills, payment vouchers and correspondence are produced before you for your verification."

This letter further shows that all the vouchers, corre- spondence etc. had been produced 'by the appellant in proof of the recitals mentioned in the letter. It is, therefore, clear that the moment the appellant received the supplies of Hispeedol from the seller, the Hispeedol became the property of the appellant and the appellant was absolutely free to sell the Hispeedol and petrol to any one it liked at the prices fixed within the territory specified in the agreement. Thus the title to the property passed to the appellant the moment it took delivery of the same. It is, therefore, manifest that having taken delivery of the property if the appellant was using it for its own consump- tion it was using its own property in which the Company had no title at all and such a user therefore could not, by any stretch of imagination, be treated as a sale.

Another very important circumstance which clearly shows that the contract was one of sale and not of agency is the fact that after having taken delivery of the petrol and Hispeedol the appellant sold the same to its various custom- ers, not even mentioning that the property belonged to <ORG> but issued cash memos in its own name which clearly indicates that after taking delivery of the property the appellant became the absolute owner thereof and repre- sented itself to be the owner of the property and sold it not as the property of the <ORG> but as its own property. This fact is clearly proved, by the cash memos and credit vouchers produced by the appellant at pp. 195-197 of the Paper Book. The cash memo describes <ORG> as the owner of the goods and so does the credit voucher.- This, therefore, conclusively shows that the agreement could not have been an agreement of agency because the essential distinction between an agreement of sale and agreement of agency is that in the former case the property is sold by the seller as his own property and in the latter case the property is sold by the agent not as his own property but as the property of his principal and on his behalf.

Another important circumstance which indicates that the goods were sold to the appellant is that the appellant in his letters produced on further queries made by the Commis- sioner of sales Tax made a clear statement that the appel- lant had borne the losses due to leakage, driage, evapora- tion etc. during the course of storage at the pumps of the appellant and the seller <ORG> did not reimburse the appellant for such losses. The relevant portion of this letter may be extracted thus:

"As we had purchased petrol & hispeedol on out-right purchase and sale basis from <ORG>, we borne the entire losses arising out of entire expenses or handling at our receiving point. We also borne the losses due to leakages, driage and driage and/or evaporation during the course of storage at our pumps. <ORG>, did not reimburse us for any loss."

If the appellant would have been agent of the <ORG> then under the law of agency the agent had an indefeasible right to be reimbursed or indemnified by the principal for the losses caused. But as the appellant bore the losses person- ally, this clearly indicates that the properties after being sold to it were its absolute properties and if any losses occurred they were borne by the appellant as owner and not by the seller.

Another important condition in the agreement was clause 23 at p. 130 of the Paper Book which runs thus:

"The dealer shall at any time, upon request of the <ORG> make from his stocks, deliveries of reasonable quantities of said products for account of the <ORG>, to con- sumers at such points within the territory as the <ORG> may designate. In consideration of his making such deliveries, the dealer shall be reimbursed in full for all transportation expenses, and receive in addi- tion thereto, such allowances for handling as may then currently be in effect under this agreement."

Under this clause the appellant was required to deliver reasonable quantities of products at the request of the <ORG> to consumers designated by the <ORG> at such points within the territory as may be specified. In consid- eration of complying with the request, the seller <ORG> agreed to reimburse the appellant in full for the supplies and the appellant was also entitled to be paid transporta- tion expenses and handling allowances as may have been incurred by it. This is another decisive factor which negatives the theory that the agreement could be one of agency. Indeed such a stipulation in the agreement is wholly inconsistent with the position of the appellant being an agent for in that case there was absolutely no scope for such a stipulation and the seller <ORG> as a principal of the agent could have instructed it to supply the goods or petrol to designated customers and there was no question of the agent being reimbursed, because the property supplied belonged to the principal and was delivered to certain persons on the instructions of the principal. This clause, therefore, is yet another important factor which shows that the agreement was intended to be a contract of sale rather than a contract of agency.

Furthermore, the agreement contains a clear and unequivocal declaration by the seller Company that the status of the appellant woUld not be that' of an agent. In this connection, clause 15 of the agreement runs thus:

"Nothing in this agreement contained shall in any way operate by implication or otherwise to constitute the dealer as agent of the <ORG> in any respect and for any purpose whatsoever, and the dealer shall have no right or authority to assume or create any obliga- tion of any kind express or implied on behalf of the <ORG> in any other respect whatsoev- er."

This clear declaration on the part of the parties leaves no" room for doubt that the agreement was intended to be a contract for sale and that the appellant was not only not regarded as an agent but was expressly excluded from the category of an agent.

The cumulative effect of the circumstances mentioned above leads to the inescapable conclusion that the <ORG> had been sold to the appellant and not held by it merely as an agent of <ORG>. The petrol agreement also which has been placed before us contains similar stipu- lations and it was not disputed by counsel for the respond- ent that if the <ORG> Agreement is held to be a con- tract of sale, then the same would have to be said of the Petrol Agreement also. Thus the principles which would make the contract of the purchase of <ORG> a contract of sale would apply mutatis mulandis to the Petrol Agreement also. Learned counsel for the respondent, as also the Commis- sioner, have relied on certain stipulations in the agreement which show that the 11--502 SCI/77 agreement was one of agency. The first circumstance relied in this connection was that under clause 12 of the agree- ment, the appellant was to maintain sale, service and other record as may be considered necessary and was to furnish the <ORG> when called upon statements of sales, financial and other matters as and when required by the <ORG>. Clause 12 runs thus:

"The dealer shall maintain sales, serv- ice, and other record as may be considered necessary by the <ORG> and shall furnish the <ORG> when called upon with all such sales, financial and other statements as may be required by and in forms satisfactory to the <ORG>."

In our opinion this clause does not at all conclusively show that the appellant was an agent of the Company. The object of inserting this clause in the agreement appears to be that during the term of the agreement the appellant undertook to maintain proper sales, service and other record so that the Company's reputation may not suffer and if any statement regarding the sales or other matter were required by the Company, they were not required because the appellant was the agent of the Company but it was because the Company wanted to keep itself fully informed of the proper conduct of the business by the appellant in order to maintain its goodwill. It is manifest that if during the period of the agreement there were serious complaints against the appellant regarding the misuse of the privileges given to it under the agreement, the Company could under the terms of the agreement terminate the agreement so as to 'save its reputation. Read as a whole, this stipulation does not amount to make the appellant liable to render regular accounts to the Company inasmuch as the statements called for were required only for a very limited purpose, viz., to prevent the appellant from misusing his privileges and thereby jeopardising or harming the reputation of <ORG>. In these circumstances, therefore, the argument based on this clause appears to be of no assistance to the counsel for the respondent.

Clause 8 of the agreement clearly shows that the appel- lant had been loaned properties belonging to the Company like petrol pumps and their accessories etc. and it was in respect of these properties which had been given to the dealer for working the petrol pumps that the statements of account were called for from the appellant. This ap- pears to be the modus operandi adopted by the seller Company in respect of all its distributors. There is no stipulation in the agreement which requires or enjoins on the appellant to submit accounts of the Hispeedol or petrol which he may have sold to various customers, after having taken deliv- ery of the same from the Company. In these circumstances, therefore, this argument of the learned counsel for the re- spondent must be overruled.

Another circumstance relied upon by the respondent was the fact that the appellant was under the terms of the agreement to sell the goods at a price fixed and not higher or lower than that. We have already indicated that when a <ORG> enters into a distribution agreement it always fixes a particular price in order to protect its goodwill and in order to control the market. Such fixation of the price by itself would not be a restriction which would take away the freedom of contract of sale. Such a stipulation is found in almost all the agreements entered into between the monopolist <ORG> and their distributors. The respondent would not, therefore, be justified in treating this circum- stance in order to show that the agreement was one of agency.

Similarly the argument that the appellant was to sell the goods in a territory fixed by the <ORG> does not show that the agreement was not of sale because this is also one of the common features of a distribution agreement. The question to be determined is not what was the territory fixed by the seller <ORG> but whether there was any limi- tation to sell to any particular person within the territory for which the properties were sold to the appellant. On this point there is absolutely no restriction. It was further contended that under clause 26 of the agreement the <ORG> agreed to pay a commission and certain allowances to the appellant which shows that the appellant was an agent The relevant portion of clause 26 runs thus:

"In consideration of the dealer under- taking faithfully, to carry out their part of the Agreement as set for the above, the <ORG> undertakes to pay the dealer such commission and allowances as the <ORG> in its sole discretion shall think fit. The rate of commission and allowances that are current at the time are setforth in the schedule attached hereto, but the <ORG> reserve the right to alter such corn. mission and allow- ances as and when they. think fit without any previous notice to the dealer and without assigning any reason therefore."

A perusal of this clause as a whole would show that the use of the words "commission and allowances" is not to indicate agency, but to indicate certain special benefits which the Company wanted to confer on its distributors. Furthermore, then payment of commission by itself is not conclusive to show that the agreement was one of agency. <CITATION> , (1) Lord <NAME> observed as follows:

"It comes to this, that all the documents show on the face of them a contract as between principals. The mere mention of commission in the contract as signed is not in any way, as pointed by the learned Judges of <ORG>, inconsistent with the relation being between principal and princi- pal."

This decision was followed by <ORG> in <CITATION> (2) and we find ourselves in complete agreement with the view taken by the Calcutta (1) A.I.R. (1919) P.C. 166, 167.

(2) A.I.R. (1956) Cal. 188 High Court. For these reasons, therefore, the argument by learned counsel for the respondent is not tenable in law. Finally, reliance was placed on clause 18 of the agree- ment appearing at p. 126 of the Paper Book which requires the dealer to furnish security for the due observance and performance of the stipulations contained therein. Such a stipulation also does not by itself show that the agreement was one of agency.

The present agreement undoubtedly contains some ele- ments of agency also, but the main question which has to be determined in this case is whether or not at the point of time when the appellant was consuming the Hispeedol or petrol for its own purposes it was acting as an owner of the goods or as agent of the seller Company. From the facts and circumstances discussed above,-we have shown that the appel- lant, after taking delivery of the goods, was the owner of the goods and if it consumed the same for its own purposes it was not doing so as agent but as owner which it was fully entitled to do. In this view of the matter, the quantities of petrol consumed by the appellant for its own purposes would not constitute a sale so as to be exigible to sales tax. We have carefully perused the order of the Commissioner and find that the Commissioner has taken an erroneous view of the law and has drawn legally wrong infer- ences from the various stipulations contained in the agree- ment. The Commissioner has also not given effect to well established legal principles in interpreting the agreement. For the reasons given above, we are unable to maintain the order of the Commissioner which suffers from manifest errors of law apparent on the face of the record. We, therefore, allow these appeals, set aside the order of the Commissioner dated May 5, 1970, and hold that the use of the Hispeedol and petrol by the appellant for its own purposes is not exigible to sales tax and the proceedings for impos- ing sales tax on the appellant are hereby quashed. The appellant will be entitled to its costs throughout.

P.B.R. Appeal allowed. ?593


PETITIONER: <NAME> Vs. RESPONDENT: THE COMMISSIONER OF INCOME-TAX,BIHAR & ORISSA DATE OF JUDGMENT: 05/01/1961 BENCH: <NAME>, J.L. BENCH: <NAME>, J.L. HIDAYATULLAH, M. SHAH, J.C. CITATION: 1961 AIR 668 1961 SCR (3) 359 CITATOR INFO : R 1965 SC 321 (17) R 1966 SC1053 (18) D 1976 SC 640 (5,9) ACT: Income-tax--Deductions--Expenditure incurred for purpose of trade--Assessee paying share of profits in return of advance made--Whether allowable deductions-- Indian Income-tax Act , 1922 , ss. 10 (2)(iii) and 10(2)(xv). HEADNOTE: The assessee entered into a contract for working certain collieries. As he did not have the requisite funds, he entered into an agreement with M whereunder M was to advance a sum upto Rs. 11/2 lacs, but could withdraw the money at any time and stop further advances and was not liable for any losses; the assessee was to pay interest on the advances at 6% per annum in addition to a sum equivalent to 11/16th of the net profits of the business. In pursuance of the agreement M made advances to the assessee and the assessee paid interest and 11/16th of his net profits to M. The assessee claimed these amounts paid to M as allowable deductions under s. 10(2)(iii) or under s. 10(2)(xv) of the Income-tax Act. The amount paid as interest was allowed but the other sums paid were not allowed on the ground that these sums were not wholly and exclusively laid out for the purpose of the business. Held, that the assessee was entitled to the deductions claimed. The case had to be decided according to the tenor of the agreement and the circumstances of the case. In order to justify the deduction of the sum given up had to be for reasons of commercial expediency; it may be voluntary but so long as it was incurred for the assessee's benefit, e.g., the carrying on of his business, the deduction was claimable. In the present case there was nothing to show that the assessee could have made any better arrangements or would not have lost the contract had he not entered into the agreement with M. Therefore in a commercial sense the payments were an expenditure wholly and exclusively laid out for the purpose of the business. <CITATION> ,  38 I.T.R. 601, followed. <CITATION> . jaggannath Kissonlal,  2 S.C.R. 644, M/s. <NAME> & Abdul Shakoor Bros. v. The Commissioner of Income-tax,  2 S.C.R. 651, and Strong v. <NAME>, (1906) 5 T.C. 215, relied on. <CITATION> , (1931) L.R. 58 I.A. 239, distinguished. <ORG> v. <NAME>, (1931) 16 T.C. 293, 360 <CITATION> . (1937) L.R. 64 I.A. 215, <ORG>, v. <ORG>, (1924) S.C. 231, <CITATION> .  7 I.T.R. 195, <CITATION> - tax, Bombay,  5 I.T.R. 270, <CITATION> ,  21 T.C. 528, referred to. JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 448 and 449 of 1959.

Appeals by special leave from the judgment and order dated February 12, 1958, of <ORG> in Misc. Judicial Cases Nos. 679 and 680 of 1955.

<NAME> and <NAME>, for the appellant (In both the appeals).

<NAME> and <NAME>, for the Respondent (In both the appeals).

1961. January 5. The Judgment of the Court was delivered by KAPUR, J.-These appeals by the assessee are brought against two judgments and orders of <ORG> at Patna in Income-tax references under s. 66(2) of the Income Tax Act answering the questions in the negative and against the assessees. The questions were:

(1)..."Whether on the facts and circumstances of this case Rs. 72,963-12-0 was a revenue expenditure deductible under section 10(2)(iii) or under section 10(2)(xv) of the Indian Income Tax Act?"

(2)..."Whether on the facts and circumstances of this case Rs. 76,526-1-3 was a revenue expenditure deductible under section 10(2)(iii) or under section 10(2)(xv) of the Indian Income-tax Act?"

The facts of the appeals are these: The appellant was an employee of M/s. Karam Chand Thapar & Bros. and for each of the accounting years relating to the assessment years 1947- 48 and 1948-49 his salary was Rs. 10,572. He also had an income of Rs. 500 from shares in certain joint stock companies. On December 20, 1945, he entered into a contract with <ORG>, for raising coal from Bhaggatdih Colliery, Jharia and actually started his business from January 1, 1946. Evidently he did not have the requisite funds for his business and therefore in order to finance it, he entered into an agreement with <ORG> on February 25, 1946. The trust is a public charitable trust, which was created by <NAME>, who constituted himself as the Managing Trustee. The relevant terms of this agreement between the appellant and the trust were that the trust was to advance a sum upto Rs. 11 lacs, the contract was to be "carried in accordance of the policy" settled between the appellant and the trust; the trust could withdraw its money at any time and to stop further advances; the trust was not to be liable for any losses; the appellant was to send monthly returns to the trust and the seventh clause was "that in consideration of the trust having agreed to finance my said contract business up to Rs. 11/2 lacs I have agreed to pay to the trust interest on the amount from time to time owing to the trust in respect of the monies to be advanced as above at the rate of 6 p.c. per annum in addition to a sum equivalent to 11/16th of the net profits of this business of mine." In pursuance of this agreement the appellant, besides interest, paid to the trust the sum of Rs. 72,963 for the first accounting year and Rs. 76,526-1-3 for the second accounting year corresponding to years of assessment 1947- 48,1948-49 and claimed these amounts as allowable deductions under s. 10(2)(iii) or under s. 10(2)(xv) of the Income-tax Act. The amount of interest has been allowed but the claim in regard to the other sums paid was disallowed by the Income-tax Officer on the ground that the agreement was not genuine and bona fide and that it was not prompted by ordinary business considerations. The matter was taken in appeal to the Appellate Assistant Commissioner who upheld the order of the Income-tax Officer. An appeal to <ORG> was also dismissed and so was an application  for reference under s. 66(1) , but <ORG> directed the <ORG> to state the case on the questions set out above. For the two assessment years the question was the same excepting for the amounts claimed as allowable deductions.

In its order dated April 4, 1955, <ORG> had found that the payments were not for the purpose of the business and that taking into account the nature of the accounts, the nature of the payments and the relationship between the parties, it could not be said that the amounts were wholly and exclusively laid out for the purpose of the business and therefore rejected the claim. In the statement- of the case the <ORG> has said that the average amount which had been advanced by the trust to the appellant in the first year was Rs. 18,100 and the payments made to the trust in the two years were therefore a share of profits and not expenditure laid out wholly and exclusively for the purposes of the business.

<ORG> approached the question from the same angle. It was of the opinion that the question should be determined on principles of ordinary commercial trading and because the Managing Trustee was in a dominating position and only a small sum of money i.e., Rs. 18,100 on an average had been advanced, the payment of Rs. 72,963 in addition to interest was an absurdly large sum which with the interest paid work- ed) out at about 400% interest. <ORG> also took into consideration the fact that the appellant was an employee of <NAME> or his company. Put in their own words <ORG> observed "having regard to the relationship between the parties and having examined the clauses of the agreement of the 25th February, 1946, between the assessee and the board of trustees I am of the opinion that the real legal position in this case is that there is a joint adventure between the parties, a quasi partnership which falls something short of partnership and that the arrangement between the parties was that the amount of profits should be ascertained and then they shall divide it up in certain specified proportions".

The payments, therefore, did not fall within s. 10(2) (xv). The question was therefore answered in the negative and against the assessee. The appellant has come in appeal to this <ORG> by special leave.

As far as the record goes at the relevant time the appellant was a person of comparatively small means. No doubt he was getting a salary of Rs. 10,572 a year and had about Rs. 500 from his share holdings but beyond that he does not seem to have had any other means. There is nothing to show on the record that he had any security to offer or did offer for the money that he was borrowing. Thus the trust was lending monies to the extent of Rs. 11/2 lakhs without security and upon a venture which might or might not have been successful. The <ORG> and <ORG> seem to have fallen into an error by taking a mean of the advances made by the <ORG> to the appellant during the first accounting year. The record shows that the advances were very considerable in the first year ranging from Rs. 12,000 in January 1946 to Rs. 1,86,000 in July of that year and in the following months of that year they ranged from Rs. 59,000 to Rs. 7,000. In the following years beginning from the end of 1946 to 1953 considerable sums of money had been advanced which ranged on an average from Rs. 1,97,000 in 1947 to Rs. 3,17,000 in 1953. In regard to 1947, the <ORG> has found that the average amount of loan was Rs. 1,20,317 but according to the figures supplied by the appellant in his petition for special leave to appeal to this Court, the average comes to Rs. 1,97,919. In any case very considerable sums of money had been advanced by the <ORG> and as we have said above to a person who was not a businessman, who neither gave nor is shown to have been able to give any security. The agreement between the appellant and the trust has to be considered in the context of those circumstances and if taking all the surrounding circumstances into consideration the trust found it necessary to have control over the working and over the finances and had offered stringent conditions it is not a matter which can be considered to be abnormal.

Another matter which was taken into consideration by the <ORG> was that the amounts claimed as deductible items were shown as a share of profits of the trust which had been debited in the appellant's profit and loss appropriation account or in other words the appellant as per his accounts admitted that it was an appropriation of the profits to the trust. The <ORG> thus was of the opinion that the interest to be received by the Trust was 11/16 part of the profits of the appellant's business and that the method of accounting clearly showed that the appellant was only parting with the share of profits. This, in our opinion, is an erroneous approach to the question. The case has to be decided according to the tenor of the document as it stands and the circumstances of the case. The genuineness of the document has not been challenged though an effort was made by the <ORG> to so construe the document and so read the facts as to make both the amounts liable to tax in the hands of the appellant.

As to what is a deductible expense has to be viewed in the circumstances of each case. <CITATION> (1) this Court observed that in deciding whether a payment of money is a deductible expenditure, one has to take into consideration the question of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may enure for the benefit of a third party. Another test laid down in that case was whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying out of its business and it is immaterial that a third party also benefits thereby. Thus in cases like the present one, in order to justify the deduction the sum given up must be for reasons of commercial expediency. It may be voluntary but so long as it is incurred for the assessee's benefit e.g. the carrying on of his business, the deduction would be claimable. In Commissioner of Income-tax, (1)  38 I.T.R. 601  <CITATION> (1) the assessee executed a promissory note jointly with another person in order to raise the money for himself and for the other. The other person became insolvent and the assessee had to. pay the whole amount and claimed that amount as an allowable deduction under s. 10(2)(xv) and it was found that it was a practice in the Bombay market to borrow money on such promissory notes and there was an element of mutuality in the transaction. The loss sustained by the assessee was allowed as a deductible item on the basis that a commercial practice of financing the business by borrowing money on joint and several liability was established. In another case decided by this Court M/s. Haji Aziz & <NAME> v. The Commissioner of Income-tax (2) it was held that the expenses which are permitted as deductible are such as are made for the purpose of carrying on the business i.e. to enable a person to carry on business and earn profits in that business and the disbursements must be such which are for the purpose of earning the profits of the business. See also <ORG> v. <NAME> (3). These cases therefore show that if any amount is expended which is commercially expedient and is expended for the purpose of earning profits it is a deductible expenditure. In support of their opinion <ORG> relied upon the cases hereinafter mentioned but in our opinion they do not apply to the facts and circumstances of this case. The first case referred to is <CITATION> (4). In that case the assessee company, incorporated in the United Kingdom, obtained a concession of constructing a railway in the territories of Pondicherry. The assessee company was to pay to <ORG> 1/2 of its net profits. <ORG> on its part gave land on which the railway was to be built free of charge and also agreed to pay a subsidy. The question for decision in that case was whether the monies paid by the (1)  2 S.C.R. 644.

(3) (1906) 5 T.C. 215.

(2) [1961] 2 S.C.R. 651.

(4) [1931] L.R. 58 I.A. 239.

assessee company to the French Government i.e., of its net profits were allowable as a deduction under the provisions corresponding to s. 10(2)(xv) . Lord <NAME> observed at p. 251:-

"A payment out of profits and conditions on profits being earned cannot accurately be described as a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point, and the revenue is not concerned with the subsequent application of the profits."

But these observations have been later on explained in other cases to which reference will be made presently. In <ORG> v. <NAME> (1) the assessee leased lands and premises abroad reserving a rent of pound 9,60,000. It was also provided in the deed that if at the end of the financial year it was found that after providing for this rent the result of the company's operations was insufficient to pay interest on charger, and debentures etc., the rent for the year was to be abated to the extent of the deficiency. In computing its profits the assessee company claimed the sums of rent paid in two respective years. They were held not payable out of the profits or. gains and were allowable deductions. At page 318 <NAME> said that the sum which was to be paid by the company was a recompense in respect of possession and use of the premises abroad and the company had entered into some liabilities by way of payment for their premises and that payment was an outgoing of the business which was to be provided for and allowed before profits of the business could be ascertained. In <ORG> Lord <NAME> distinguished the Pondicherry case,(1) by saying that in that case the ascertainment of profits preceded the coming into operation of the obligation to pay and when profits had been ascertained the obligation was to make over thereof to the French Government. Dealing with the passage above referred to Lord <NAME> said at p. 331:-

"I was dealing with a case in which the obligation was, first of all, to ascertain the profits in a (1) [1931] 16 T.C. 293.

(2) (1931) L.R. 8 I.A. 239.

prescribed manner, after providing for all outlays incurred in earning them, and then to divide them. Here the question is whether or not a deduction for rent has to be made in ascertaining the profits, and, the question is not one of the distribution of profits at all."

<CITATION> (1) <ORG> entered into an agency agreement with <ORG> agreeing to pay to <ORG> a commission of 10% on the annual net profits of <ORG>, subject to a minimum whether any profits were made or not. Later on two persons D and S advanced funds to <ORG> on the condition that in addition to the interest payable to them by <ORG> they should each receive from <ORG>, 12 1.2% of the commission earned by <ORG> <ORG> assigned their entire right to the assessee company and the <ORG> entered into a new agency agreement with the assessee company and the assessee company received a commission and out of that paid 1/4 to D and S. Relying on <ORG> case (2) <ORG> held that that was not an allowable deduction as expenditure incurred solely for earning profits. On appeal <ORG> held that Pondicherry case did not govern the case. The nature of the transaction was held to be this that the obligation to make the payments was undertaken by the assessee company in consideration of its acquisition of the right to property to earn profits i.e. of the right to conduct the business and not for the purpose of producing profits in the conduct of the business. Dealing with <ORG> case (2) Lord Macmillan said:-

"In the Pondicherry case the assessees were under obligation to make over a share of their profits to the French Government. Profits had first to be earned and ascertained before any sharing took place. Here the obligation of the appellants to pay (1) [1937] L. R. 64 I.A. 215.

(2) (1931) L.R. 58 I.A. 239.

a quarter of the commission which they receive from <ORG> to <ORG>, and <ORG> <ORG> administrators is quite independent of whether the appellants make any profits or not."

and at page 225 Lord Macmillan said:-

"In short, the obligation to make these payments was undertaken by the appellants in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right to conduct the business, and not for the purpose of producing profits in the conduct of the business."

At page 226 <ORG> accepted the following test laid down by Lord President in <ORG> v. Commissioners of Inland Revenue (1) where it is observed:-

"What is 'money wholly and exclusively laid out for the purposes of the trade' is a question which must be determined upon the principles of ordinary commercial trading. It is necessary, accordingly, to attend to the true nature of the expenditure, and to ask oneself the question, Is it a part of <ORG> working expenses; is it expenditure laid out as part of the process of profit earning".

<CITATION> . (2) the company received a commission on the basis of profits. The managed company was in urgent need of money and the assessee company found a financier a Mr. <NAME> and an agreement was entered into with the managed company and Mr. <NAME> by which the latter agreed to lend a crore of rupees on the condition that the assessee company assigned to him a share in the commission which the assessee company might receive from the managed company. That was held to be an agreement on the part of the assessee company to share their commission with Mr. <NAME> and it was a part of the arrangement on which the assessee company obtained finance and therefore the payment to Mr. <NAME> was an expenditure solely for the purpose of earning profits or gains and it was not of a capital nature. At (1) (1924) S.C. 231.

(2) (1939) 7 I.T.R. 195.

page 203 Beaumont C.J. said that the question whether the payment of a part of the commission to a third person can be regarded as expenditure incurred solely for the purpose of earning that commission is a question which must be answered on the facts of each case on a commercial basis. <CITATION> (1) it was observed that it was not universally true to say that a payment the making of which is conditional on profits being earned cannot properly be described as an expenditure incurred for the purpose of earning such profits. Lord <NAME> in explaining the judgment in the <ORG> case (2) said at page 278:-

" To avoid misconception it is proper to say that in coming to this conclusion they have not taken the view that the case is governed by the decision in <CITATION> , though that case no doubt shows light on the nature of the problem which has to be solved in the present case. It should perhaps be added that a sentence in the judgment in that case has been explained, if explanation was necessary, by Lord <NAME> in the subsequent case of <NAME> v. <ORG>."

As to when a deduction is claimable and when it is not, it was said at page 277 that if a company had made an apparent net profit and then had to pay to a director as a contractual recompense, the net profit would be the difference between the two but if there was a contract to pay a commission on the net profits of the year it must necessarily be held to mean as net profits before the deduction of the commission.

<CITATION> (3) the assessee company agreed to pay two other companies a certain percentage of its annual profits after deduction of expenses and debenture interest in consideration of their giving to the assessee company the full benefit of their technical and financial knowledge (1)  5 I.T. R. 270. (2)  L.R. 58 I.A. 239. (3)  21 T.C. 528  and experience. Certain payments were made in pursuance of that agreement and it was held that payments under the agreement were permissible deductions in computing the assessee company's profits. Dealing with the Pondicherry Railway case, (1) at page 548, the learned Master of the Rolls said:-

" It is to be observed that Lord <NAME> in that paragraph was quite clearly using the word I profit' in one sense and one sense only; he was using it' in the sense of the I real net profit' to which Lord <NAME> referred. That he was doing that is, I think, abundantly clear when the nature of the contract there in question is considered, which was merely a contract under which a percentage of profits was payable by the railway company to the French Government. There was no question of services or anything of that kind in the case; it was merely a sum payable out of profits. I do not find myself constrained by that expression of opinion, because it must be read; as Lord <NAME> has said in a subsequent case <ORG> v. <NAME> (2 ) at pp. 331-2, in relation to the particular subject matter with which he was dealing."

As has been said above the question to be considered in this case is governed by the observations of this Court in <CITATION> . (3) and the circumstances under which the trust agreed to lend the appellant such a large sum of money shows the true nature of the transaction. On the facts proved in the present case the Trust agreed to finance the business of the appellant on the terms set out in the agreement and there is nothing to show that he could have made any better arrangements or would not have lost the contract if he had failed to enter into the agreement i.e. the agreement to pay the amounts in dispute. Therefore in a commercial sense the payments were an expenditure wholly and exclusively laid out for the purpose of the business.

In our opinion, therefore, <ORG> was in error and the question referred should have been (1) [1931] L.R. 58 I.A. 239. (2) (1931) 16 T.C. 293, 331-

32. (3) [1960] 38 I.T.R. 601.

answered in the affirmative in favour of the appellant. The appeals are, therefore, allowed and the judgments, and orders of <ORG> are set aside. The appellant will have his costs in this <ORG> and in <ORG>. One hearing fee.

Appeals allowed.


CASE NO.: Appeal (civil) 4330 of 2006 PETITIONER: <ORG> and <ORG>. RESPONDENT: <NAME> and <NAME> DATE OF JUDGMENT: 29/09/2006 BENCH: <NAME> & <NAME> JUDGMENT:

JUDGMENT <NAME>

Leave granted.

Appellant herein is a nationalised Bank. Some scheduled banks initiated a scheme commonly known as Daily Deposit Scheme. There were, however, various nomenclatures given therefor, as for example, Mini Deposit Scheme, Pygmy Deposit Scheme etc. The said schemes were introduced for mobilizing small savings from public. For the said purpose, services of deposit collectors were taken to canvass opening of accounts, to collect deposists from the account holders at their residence/business premises, and to deposit collections in the banks on a daily basis.

<ORG>, which has since merged with <ORG>, had such a scheme. Respondents herein were deposit collectors in <ORG> floated by the said Bank. Under the agreement, they were entitled to commission at the rate of 3.5% of the collections made by them. Those <ORG> deposit collectors working in <ORG> since 1979 had been allowed to continue with <ORG> No. 1 upon their amalgamation in 1993. The system of paying commission at the rate of 3.5% of the amount collected by them continued.

An industrial dispute was raised by such deposit collectors of various banks pursuant whereto <ORG> by a notification on 3.10.1980 referred the following dispute for adjudication before <ORG>, Hyderabad:

"Whether the demand of the Commission Agents or as the case may be Deposit Collectors employed in the Banks listed in Annexure that they are entitled to the pay scale and other service conditions admissible to regular clerical employees of these banks is justified? If not to what relief the workers concerned entitled to and from which date?"

<ORG> along with some other nationalised Banks was also parties to the said reference. <ORG>, viz., <ORG> was also impleaded in the said reference. By an award made on 22.12.1988, the <ORG> opined that the deposit collectors were workmen and as such the reference was maintainable.

In its award it was directed:

(i) Eligible deposit collectors, i.e., those who are less than 45 years of age as on 3.10.1980, if otherwise eligible, would be considered for regular absorption after taking qualifying examination,

(ii) Those, other than (i) above, shall be given benefits as conferred by the Award, i.e. a. Full back wage of Rs. 7507 linked to minimum deposit of Rs. 75007 p.m. b. Incentive remuneration @ 2% for deposit collected above Rs. 75007 p.m. c. Conveyance allowance of Rs. 507 p.m. for deposit collected less than Rs. 10,000/7 and Rs. 1007 p.m. for deposit collected over Rs. 10,0007 p.m. d. Gratuity equal to 15 days commission for each year of service rendered.

A writ petition filed by <ORG> before <ORG> questioning the correctness of the said award was dismissed. A special leave petition was preferred by the said <ORG> before this Court. The Appeal was also dismissed. The judgment of this Court is since reported in [2001] 3 SCC 36. This Court noticed that before <ORG> it was conceded that the relief of being absorbed as regular staff of the <ORG> in clerical cadre was not available to be granted whereupon <ORG> had set aside, the directions of the <ORG> to absorb the deposit collectors as regular staff. Other directions, however, came to be upheld. Appeals were also filed by the Workmen before this Court The contention of Respondents was noticed in the following terms:

"Mr <NAME> submitted that gratuity need not be only under the Payment of Gratuity Act . He submitted that the <ORG> had not said that it was awarding gratuity under the Gratuity Act . He submitted that the <ORG> has powers, dehors the Gratuity Act , to direct payment of gratuity. He submitted that the <ORG> always has power and jurisdiction to modify conditions of service and, in this case, it has been found by the <ORG> that there were no fixed pay scales, no bonus, no gratuity, no dearness allowance and, therefore, the <ORG> had given the direction, as set out hereinabove, as and by way of a package. He submitted that earlier commission was being paid at a rate of 3.5 per cent by most of the banks. He pointed out that now, over and above the sum of Rs. 7500, the commission had been reduced to 2 per cent. He submitted that to that extent Deposit Collectors were losing, but as this was part of the package as given by the <ORG> it was being accepted by the Deposit Collectors. He submitted that the directions given by the <ORG> were fair and just and absolutely right. He submitted that the order of <ORG> was correct and this Court should not interfere."

This Court also noticed the submissions made on behalf of the Workmen that deposit collectors had been working for 20 to 25 years and that there was nothing wrong if they were either absorbed in the banks or given regular pay scales, allowances and other service conditions as applicable to other employees of the banks.

This Court dismissed the appeal preferred by <ORG> stating:

"We also see no substance in the contention that these Schemes are unremunerative. The banks have introduced these Schemes because they want to encourage the common man to make small and regular deposits. As a result of such Schemes, the number of depositors have become much larger. We have no doubt that such Schemes are continued because the banks find them remunerative. The banks have large collections through such Schemes."

Notices were issued to the Mini Deposit Collectors for recovery of the amounts paid to them from the date of the judgment of <ORG>, i.e., 1.4.2001 stating:

"The bank shall start paying you the remuneration in respect of your assignment as "Mini Deposit Collector" as per the said terms of the above Award as modified by <ORG> with effect from 1.4.2001 pending calculation of arrears/ recoveries in respect of the prior period i.e. from 28.3.1997 to 31.3.2001. The payment/ intimation of the arrears/ recoveries after adjustment of the amount already paid in respect of the period prior to 1.4.2001 i.e. from 28.3.1997 to 31.3.2001 will be made/ given to you shortly."

Legality of the said notices came to be questioned by the Workmen in a writ petition filed before <ORG> inter alia on the premise that no unilateral decision could have been taken by Appellant without giving an opportunity of being heard to them. Attention of <ORG> was also drawn to an inter-departmental correspondence dated 26.5.2001 issued by <ORG> which is to the following effect:

"Attention of the branches is invited to our Circular Nos. DZO/P&D/Cir.34/F.739/2001 dated 19.04.2001 and Circular No. DZO/P&D/Cir.39/2001 dated 08.05.2001 wherein we have communicated the guidelines received from H.O. with regard to payment of remuneration to the Pigmy Agents in the light of the <ORG> Judgment.

Now we have been informed by <ORG> that they have been in touch with the <ORG> regarding further course of action contemplated by them. On hearing from them, the necessary guidelines will be informed. Till such time, the procedure followed hitherto for payment of commission will continue.

Branches are advised to act accordingly and inform the agents."

<ORG> allowed the said writ petition on the premise that principles of natural justice were required to be complied with before issuing the said notice.

Mr. <NAME>, learned counsel appearing on behalf of Appellant would submit that the award being binding on all the workmen in terms of Section 18(3)(d) of the Industrial Disputes Act, direction by <ORG> to comply with the principles of natural justice was wholly unwarranted. It was further submitted that in a case of recovery of the amount in terms of an award, the writ court could not have exercised its discretionary jurisdiction.

Mr. <NAME>, learned counsel appearing on behalf of Respondents, on the other hand, would submit that that the writ petitioners being not parties to the said award, the award was not binding upon them. Had an opportunity been given to them, they could have shown that <ORG> cannot take a different stand vis-a-vis other nationalized banks.

The Industrial Disputes Act , 1947 was enacted inter alia for settlement of industrial disputes and for certain other purposes. Maintenance of industrial peace by way of settlement of disputes is one of the objects of the said legislation. Section 18 of the Industrial Disputes Act specifies the persons on whom settlements and awards are binding. Sub-section (3) of Section 18 thereof provides as under:

"(3) A settlement arrived at in the course of conciliation proceedings under this Act or an arbitration award in a case where a notification has been issued under sub-section (3A) of section 10A or an award of <ORG>, <ORG> or National <ORG> which has become enforceable shall be binding on -

(a) all parties to the industrial dispute;

(b) all other parties summoned to appear in the proceedings as parties to the dispute, unless the <ORG>, arbitrator, <ORG>, <ORG> or National <ORG>, as the case may be, records the opinion that they were so summoned without proper cause;

(c) where a party referred to in clause (a) or clause (b) is an employer, his heirs, successors or assigns in respect of the establishment to which the dispute relates;

(d) where a party referred to in clause (a) or clause (b) is composed of workmen, all persons who were employed in the establishment or part of the establishment, as the case may be, to which the dispute relates on the date of the dispute and all persons who subsequently become employed in that establishment or part."

From a perusal of clause (d) of sub-section (3) of Section 18 of the Industrial Disputes Act, it is, thus, evident that all workmen who are employed in the establishment or who subsequently become employed in that establishment would also be bound by an award made by an industrial tribunal. The management as also the workmen were parties to the said award. Hence, Respondents cannot be heard to say that the award was not binding on them only because they were not parties.

In an industrial dispute referred to by <ORG> which has an all-India implication, individual workman cannot be made parties to a reference. All of them are not expected to be heard. The <ORG> representing them were impleaded as parties. They were heard. Not only the said <ORG> were heard before <ORG>, as noticed hereinbefore from a part of the judgment of <ORG>, they had preferred appeals before this Court, Their contentions had been noticed by this Court. As the award was made in presence of the <ORG>, in our opinion, the contention of Respondents that the award was not binding on them cannot be accepted. The principles of natural justice were also not required to be complied with as the same would have been an empty formality. The court will not insist on compliance of the principles of natural justice in view of the binding nature of the award.Their application would be limited to a situation where the factual position or legal implication arising thereunder is disputed and not where it is not in dispute or cannot be disputed. If only one conclusion is possible, a writ would not issue only because there was a violation of the principles of natural justice.

<CITATION> .,  6 SCC 237, the law is stated in the following terms:

"... More recently Lord <NAME> has deprecated the "useless formality" theory in R. v. Chief Constable of <ORG>, ex p Cotton by giving six reasons. (See also his article "Should Public Law Remedies be Discretionary?" 1991 PL, p. 64.) A detailed and emphatic criticism of the "useless formality theory" has been made much earlier in "Natural Justice, Substance or Shadow" by Prof. <NAME> of Canada (see 1975 PL, pp. 27-63) contending that <NAME> and <NAME> were wrongly decided. <NAME> (Administrative Law, 8th <ORG>., 1996, p. 323), <NAME> (Administrative Law, 3rd <ORG>., p. 596) and others say that the court cannot prejudge what is to be decided by the decision-making authority. <NAME> (5th <ORG>., 1994, paras 10.031 to 10.036) says courts have not yet committed themselves to any one view though discretion is always with the court. <NAME> (Administrative Law, 5th <ORG>., 1994, pp. 526-30) says that while futile writs may not be issued, a distinction has to be made according to the nature of the decision. Thus, in relation to cases other than those relating to admitted or indisputable facts, there is a considerable divergence of opinion whether the applicant can be compelled to prove that the outcome will be in his favour or he has to prove a case of substance or if he can prove a "real likelihood" of success or if he is entitled to relief even if there is some remote chance of success. We may, however, point out that even in cases where the facts are not all admitted or beyond dispute, there is a considerable unanimity that the courts can, in exercise of their "discretion", refuse certiorari, prohibition, mandamus or injunction even though natural justice is not followed. We may also state that there is yet another line of cases as in <CITATION> , <CITATION> . that even in relation to statutory provisions requiring notice, a distinction is to be made between cases where the provision is intended for individual benefit and where a provision is intended to protect public interest. In the former case, it can be waived while in the case of the latter, it cannot be waived."

<CITATION> .,  5 SCC 337, the law is stated in the following terms:

"The principle of natural justice, it is trite, is no unruly horse. When facts are admitted, an enquiry would be an empty formality. Even the principle of estoppel will apply. [ <CITATION> .] The principles of natural justice are required to be complied with having regard to the fact situation obtaining therein. It cannot be put in a straitjacket formula. It cannot be applied in a vacuum without reference to the relevant facts and circumstances of the case. ( <CITATION> and <CITATION> .)"

[See also <CITATION> (2006) 5 SC 235] <ORG> had no other option but to implement the award. If it did not, its action could be held to be penal. Reliance placed by Respondents on the letter of <ORG> dated 26.5.2001 is also misplaced. The said circular letter does not state that the principles of natural justice were required to be complied with. As on the date of issuance of the circular letter they had not received the necessary guidelines, a temporary measure was proposed to be taken therefor.

For the reasons aforementioned, the impugned judgment cannot be sustained which is set aside accordingly.

However, keeping in view the peculiar facts and circumstances of this case, we direct that the recoveries may not be made from Respondents so as to avoid undue hardship to them. This order is being passed in exercise of our jurisdiction under Article 142 of the Constitution of India.

Orders to the aforementioned effect have been passed in many cases, e.g. <CITATION> .,  2 SCC 521 and <CITATION> .,  Supp. 1 SCC 18.

However, this part of the order shall not be treated as a precedent. The appeal is allowed with the aforementioned directions and observations. No costs.