JUDGMENT T.P. Mukerjee, J.
1. This is a case stated by the, Appellate Tribunal under Section 66(1) of the Income-tax Act, 1922, hereinafter referred to as "the Act". The statement of the case relates to the assessment year 1957-58, the relevant previous year being the calendar year ended on December 31, 1956. The question referred is :
"Whether the assessee's contention that the sum of Rs. 60,000 is. exempt from assessment by virtue of Finance Department Notification No. 878(F), dated March 21, 1922, is tenable?"
2. The material facts are these. The assessee in the relevant year was a firm of two partners with equal shares and it was accorded registration in the year of account. The assessee-firm was appointed as the managing agent of Messrs. Dhplpur Glass Works Ltd., a public company, under an agreement dated. February 18, 1945. In terms of this agreement the assessee-firm was entitled to receive an office allowance of Rs. 1,000 per mensem and a managing agency commission of 12 1/2% of the net profits per annum of the company. During the calendar years 1946 and 1947 the managed-company, namely, Messrs. Dholpur Glass Works Ltd., earned considerable profits, and in the next three years, 1948, :1949 and 1950, it incurred losses. Again, in the years 1951, 1952 and 1953 the profits were insufficient. In consideration of the fact that the managed-company had incurred losses and earned inadequate profits during the six years from 1948 to 1953, the assessee-firm relinquished the office allowance to which it, was entitled at Rs. 1,000 per mensem. The total amount relinquished by the assessee-firm on this account aggregated to Rs. 72,000. The assessee-firm also relinquished the managing agency commission to which it was entitled during the six years aforesaid aggregating to Rs. 3, 117. Moreover, the assessee-firm had advanced a total sum of Rs. 43,075 as loan to the managed-company during the said period of six years and in consideration of the fact that the managed-company was in a bad state, the assessee-firm relinquished the interest on the loan which it was entitled to receive. It appears, however, that subsequently, i.e., on and from 1954, the managed-company began to make profits and on the 8th of July, 1958, the managed-company passed a special resolution at an extraordinary general meeting of the shareholders to the following effect:
"Unanimously resolved as a special resolution ,that out of the net profits of the company prior to March 31, 1956, the managing agents of the company be and are hereby paid a sum of Rs. 60,000 over and above their usual remuneration to which they are entitled as detailed below on account of:
(1) Recognition of their past services and putting the factory on sound footing:
(2) Their past sacrifices as per wishes of the board of directors in forgoing their remuneration of Rs. 72,000 from 1948 to 1953, and interest on loans advanced to the company by them for several years from 1948 to 1951, as also their commission in the years 1946 and 1947.
Rs. 40,000 out of the profits of the calendar year 1955, and that necessary entries for payment of this sum be passed in the books of the company as at December 31, 1955.
Rs. 20,000 out of the profits from January 1, 1956, to March 31, 1956.
3. In the assessment for the relevant year, namely, assessment year 1957-58, the managed-company, namely, Dholpur Glass Works Ltd., claimed a deduction in respect of the sum of Rs. 60,000 which it had paid out to the assessee-firm. The claim was, however, disallowed by the Income-tax Officer and the disallowance was maintained by the Rajasthan High Court on a reference made at the instance of the managed-company. A report of the decision of the Rajasthan High Court appears in Dholpur Glass Works Ltd. v. Commissioner of Income-tax, [1969] 72 I.T.R. 278, 279, 280, 285, (Raj.). The question which was referred to the High Court of Rajasthan for its opinion, was as follows:
"Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing the payment of Rs. 60,000 under Section 10(2) and/or Section 10(1)?"
4. It would appear from page 280 of the report that disallowance of the sum of Rs. 60,000 claimed by the managed-company as deduction was made by the Income-tax Officer on the following five grounds:
"(i) That it was not paid as per the terms of the managing agency agreement.
(ii) That the reasons for the payment of this amount contained in the resolution, viz., 'putting the factory on sound footing' denoted a benefit of a lasting nature which made the payment an expense of a capital nature.
(iii) That the firm of M/s. Agarwal Brothers cannot be said to have forgone its claim for office expenses inasmuch as its office was situated in the factory premises and it did not incur any separate expenses out of its pocket for the same.
(iv) That the payment was riot made on any commercial footing and cannot be said to be wholly and exclusively for the purposes of the business.
(v) That the payment was made out of the net profits of the company and was not charged to the profits and loss account."
5. It further appears from the report of the case that Messrs. Dholpur Glass Works Ltd., preferred an appeal against the disallowance before the Assistant Commissioner but the appeal was rejected on the ground that the payment had been made for something which had happened in the past and which had not been incurred for the purpose of the business carried on during the year under consideration. Thereupon, Messrs. Dholpur Glass Works Ltd. filed a second appeal before the Appellate Tribunal. The Tribunal confirmed the decision of the Appellate Assistant Commissioner holding that the payment of Rs. 60,000 amounted to double remuneration for the same set of services, once under the terms of the agreement and again as special remuneration and that it could not be covered by Section 10(2)(xv) of the Act. The Tribunal further held that even if it were assumed that the payment was a permissible expenditure, it was permissible for the year in which the obligation to remunerate the managing agents for the services rendered was incurred, as the managed-company maintained its accounts on mercantile system.
6. The managed-company, Messrs. Dholpur Glass Works Ltd., being dissatisfied with the decision of the Tribunal, asked for a reference to the High Court of Rajasthan on the question of law set out above. The answer given by the High Court to the question was in the affirmative and against the assessee. In giving the answer the High Court concluded as follows:
"On the evidence and finding of the Tribunal below we see no reason to differ from the findings of the Appellate Tribunal that the expenditure was not wholly and exclusively laid out for the purpose of the business. Having regard to this finding, we consider it unnecessary to deal with the other two questions debated at the Bar, namely (i) whether the expeniture is in the nature of capital expenditure, and (ii) whether the expenditure can be deemed to have been incurred in the accounting year. The expenditure thus does not fall within Section 10(2)(xv) of the Act and the Tribunal was right in disallowing the claim.
Our answer to the question is thus in the affirmative. From what has been set out above, it would appear that the learned judges of the Rajasthan High Court, who answered the reference made by the Tribunal, rejected the claim put forward by Dholpur Glass Works Ltd. for the deduction of Rs. 60,000 paid to its managing agents, namely, Messrs. Agarwal Brothers, only on the ground that the expenditure did not come within the purview of Section 10(2)(xv). It would also appear that neither the Appellate Assistant Commissioner, nor the Appellate Tribunal, nor the learned judges of the Rajasthan High Court, dealt with the fifth ground of disallowance given by the Income-tax Officer in his assessment order, namely, that the payment was made out of the.net profits of the company and was not charged to the profit and loss account, Turning to the case of the assessee-firm, namely, Messrs. Agarwal Brothers, the sum of Rs. 60,000 which it had received during the relevant previous year was included in its assessable income for the assessment year 1957-58. The assessee-firm claimed exemption from assessment in respect of the sum of Rs. 60,000 on the basis of the Finance Department Notification No. 878-F dated March 24, 1928. The notification runs as follows:
"The following classes of income shall be exempt from the tax payable under the said Act, but shall be taken into account in determining the total income of an assessee for the purposes of the said Act:
(1) Sums received by an assessee on account of salary, bonus, commission or other remuneration for services rendered, or in lieu of interest on money advanced to a person for the purpose of his business, where such sums have been paid out of, or determined with reference to, the profits of such business and by reason of such mode of payment or determination, have not been allowed as a deduction but have been included in the profits of the business on which income-tax has been assessed and charged under the head 'Business' : Provided that such sums shall not be exempt from the payment of super-tax unless they are paid to the assessee by a person other than a company and have already been assessed to super-tax."
Referring to the terms of the notification, the Supreme Court observed in the case of Commissioner of Income-tax v. M.K. Kirtikar, [1959] 36 I.T.R. 360 (S.C.) that exemption from taxation in respect of a sum received by an assessee from a business on account, inter alia, of commission can be claimed only on three conditions, namely:
(1) where such sum has been paid out of or determined with reference to the profits of the business;
(2) where by reason of such mode of payment or determination the sum paid has not been allowed as a deduction but has been included in the profits of the business; and (3) where on the sum so disallowed in the computation of the profits of the business, income-tax has been assessed and charged under the head 'Business'."
7. The Supreme Court also observed that these three conditions are cumulative and all of them have to be fulfilled before the assessee can claim the benefit of exemption.
8. The Appellate Tribunal in its appellate order referred to the decision of the Supreme Court in Kirtikar's case, and also the three tests laid down therein. The Tribunal observed that in the present case the assessee-firm was not entitled to the exemption on the basis of the Finance Department Notification No. 878-F, dated March 24, 1928, as condition No. (2) set forth above was not satisfied.
9. We agree with the view taken by the Tribunal that condition No. (2) is not satisfied in the present case. From what we have adverted to above, it would appears that the sum of Rs. 60,000 which had been paid by Messrs. Dholpur Glass Works Ltd. to the assessee-firm during the relevant year was claimed as a deduction in its assessment for the assessment year 1957-58. The claim, as already noted, was disallowed by the Income-tax Officer on the grounds, inter alia, that the payment was not made exclusively and wholly for the purpose of the business of Messrs. Dholpur Glass Works Ltd. and that the payment was made out of the net profits of the company and was not charged to the profit and loss account. The High Court of Rajasthan sustained the disallowance, only on the ground that the expenditure was not wholly and exclusively laid out for the purpose of the business of Messrs. Dholpur Glass Works Ltd. The High Court did not sustain the disallowance on the ground that the payment had been made out of the net profits of the company. An assessee is entitled to the exemption under the Finance Department Notification aforesaid only if all the three conditions, set out above, are fulfilled, including condition No. (2) which is that the amount in question had not been allowed as a deduction on the ground that it had been paid out of or determined with reference to the profits of the business. As the claim for deduction by Messrs. Dholpur Glass Works Ltd. was disallowed by the High Court on the ground that Rs. 60,000 had not been laid out wholly and exclusively for the purpose of business it must follow that all the conditions mentioned in the Finance Department Notification are not fulfilled in the present case. The Tribunal was, therefore, justified in taking the view it did.
10. We would, therefore, answer the question in the negative and against the assessee. The Commissioner of Income-tax is entitled to its costs from the assessee which we assess at Rs. 200. Counsel's fee is also assessed at Rs. 200.