A) ABSTRACT / HEADNOTE

This landmark decision, Commissioner of Income-Tax, West Bengal v. Calcutta Agency Ltd. ([1950] SCR 1008), articulates crucial legal principles governing the scope of deductions allowable as business expenditure under Section 10(2)(xv) of the Indian Income-Tax Act, 1922. The Supreme Court overturned the Calcutta High Court’s decision and reinforced the Tribunal’s findings that facts must strictly align with the legal prerequisites for permissible deductions. The assessee company, a managing agent of a cotton mill, had entered into an agreement to reimburse the mill for liabilities arising out of certain hundis drawn by the assessee’s director. The company then claimed this reimbursement amount as a business expenditure under the Act. The Apex Court ruled that since there was no factual foundation for the claim that the expenditure was incurred to avert reputational damage or maintain business continuity, the High Court erred in accepting arguments as facts. The case reaffirmed that the High Court cannot act as a fact-finding authority and that burden lies squarely on the assessee to establish factual grounds for deductions. This judgment remains vital for interpreting business expenditure and the evidentiary standard required in income-tax references.

Keywords: Income Tax, Business Expenditure, Section 10(2)(xv), Deduction, Appellate Tribunal, Hundis, Misfeasance, Managing Agency, Burden of Proof, Jurisdiction

B) CASE DETAILS

i) Judgement Cause Title: Commissioner of Income-Tax, West Bengal v. Calcutta Agency Ltd.

ii) Case Number: Civil Appeal No. 59 of 1950

iii) Judgement Date: 21st December 1950

iv) Court: Supreme Court of India

v) Quorum: Harilal Kania C.J., Patanjali Sastri J., and Das J.

vi) Author: Chief Justice Harilal Kania

vii) Citation: [1950] SCR 1008

viii) Legal Provisions Involved:

• Section 10(2)(xv), Indian Income-Tax Act, 1922

• Section 66(2), Indian Income-Tax Act, 1922

ix) Judgments Overruled by the Case (if any): Not applicable

x) Case is Related to which Law Subjects:

• Taxation Law

• Corporate Law

• Company Management

• Law of Evidence

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The case emerged from a reference under Section 66(2) of the Indian Income-Tax Act, 1922 by the Appellate Tribunal to the Calcutta High Court. The High Court accepted an argument raised by the counsel for the assessee regarding a deduction claim under Section 10(2)(xv). This provision allows deduction of business expenditures that are wholly and exclusively laid out for the purpose of the business. The High Court reversed the Tribunal’s factual finding that such expenditure was not deductible, and accepted counsel’s submissions as if they were proven facts. The Commissioner of Income-Tax then appealed to the Supreme Court, challenging the jurisdictional overreach and the legal propriety of the High Court’s findings. The Supreme Court took the opportunity to draw a strict boundary around judicial roles under income-tax reference jurisdiction, underscoring that factual findings of the Tribunal are sacrosanct unless unsupported by evidence. The judgment stands as a sentinel guarding against judicial overreach in tax reference matters.

D) FACTS OF THE CASE

Calcutta Agency Ltd. acted as the managing agents of Basanti Cotton Mills Ltd. The managing agency agreement entitled them to a monthly allowance and a 3% commission on the sales of the mill’s goods. A director of the assessee company, acting in their capacity as managing agents, had drawn certain hundis (promissory notes) in the name of the mill, which were dishonoured. The Nath Bank Ltd., holder of these hundis, filed suits against the mill and the assessee company for Rs. 1,80,000. The mill, denying liability since the money never entered its accounts, settled the suits, and the assessee agreed to reimburse the mill for its share of the liability.

An agreement was executed where the assessee allowed the mill to deduct a moiety of the commission payable to them as reimbursement for the amounts decreed under the suits. The assessee then claimed this amount of Rs. 22,500 (including interest) as a business expenditure deductible under Section 10(2)(xv) of the Income-Tax Act, 1922. The Tribunal rejected this claim, stating that the payment was neither incurred exclusively for business purposes nor revenue in nature. However, the Calcutta High Court, relying on counsel’s argument and the English case Mitchell v. B. W. Noble Ltd. ([1927] 1 K.B. 719), reversed the Tribunal’s finding. The matter eventually reached the Supreme Court.

E) LEGAL ISSUES RAISED

i) Whether the High Court exceeded its jurisdiction by acting as a fact-finding body in an income-tax reference under Section 66(2)?

ii) Whether the payment of Rs. 22,500 by the assessee to the mill, for a liability incurred due to the director’s misfeasance, qualified as “business expenditure” under Section 10(2)(xv) of the Indian Income-Tax Act, 1922?

iii) Whether the High Court erred in relying on counsel’s submissions as established facts to determine deductibility?

F) PETITIONER/ APPELLANT’S ARGUMENTS

i) The counsels for the Commissioner of Income-Tax, West Bengal submitted that the High Court had no jurisdiction to make findings of fact in a reference under Section 66(2). They argued that the Tribunal’s factual findings are binding unless perverse or without evidence. Here, the Tribunal had found that there was no evidence to support the claim that the payment was made to prevent reputational harm or to preserve business interest. Hence, the High Court’s approach in accepting the respondent’s counsel’s contentions as facts was fundamentally flawed.

ii) They contended that Section 10(2)(xv) only allows expenditure laid out “wholly and exclusively” for business purposes. The payment made here was to cover up misfeasance of a director, which cannot be characterised as a legitimate business expense. Such a payment lacks the nexus with the conduct of the business itself and instead relates to a personal or third-party liability.

iii) The learned Attorney-General M.C. Setalvad, representing the revenue, also emphasized that the expenditure was not incurred in the ordinary course of business, nor was it in the interest of generating income. Therefore, it did not qualify as deductible revenue expenditure under the statute.

G) RESPONDENT’S ARGUMENTS

i) The counsels for Calcutta Agency Ltd. submitted that the payment made to the mill company was a preventive act aimed at avoiding litigation and negative publicity. They argued that exposing the company to public suits would have undermined its credibility and affected its ability to maintain and acquire managing agency contracts.

ii) Relying on Mitchell v. B.W. Noble Ltd. ([1927] 1 K.B. 719), they argued that payments made to avoid reputational damage and maintain the status quo of the company’s business are allowable under Section 10(2)(xv) as business expenditure. They stated that this settlement was motivated by commercial expediency and thereby fit the statutory requirement of “wholly and exclusively” for business.

iii) Counsel argued that since the commission was reduced at the source and the amount was never realized, the company did not earn that sum and hence it should not be taxable in the first place. This was buttressed by the reliance on Raja Bijoy Singh Dudhuria v. CIT (6 I.T.C. 449), where a portion of the income was held not to accrue to the assessee.

H) RELATED LEGAL PROVISIONS

i) Section 10(2)(xv), Indian Income-Tax Act, 1922
Read here
Expenditure not being capital or personal expenses laid out wholly and exclusively for business purposes is deductible.

ii) Section 66(2), Indian Income-Tax Act, 1922
Read here
Provides for reference to the High Court from Appellate Tribunal on questions of law.

I) JUDGEMENT

a. RATIO DECIDENDI

i) The Supreme Court held that the jurisdiction of the High Court in a reference under Section 66(2) of the Income-Tax Act is strictly advisory and confined to questions of law. The High Court cannot reappreciate evidence or act as a fact-finding authority. Factual findings by the Tribunal are conclusive unless it can be shown that such findings are perverse or unsupported by evidence.

ii) The Court emphasized that the High Court gravely erred by treating the arguments of counsel as if they were established facts. The Tribunal did not find any fact that supported the argument that the payment was made to preserve reputation or avoid litigation publicity. The High Court’s approach thus constituted judicial overreach and disregard for the Tribunal’s conclusive factual findings.

iii) On the deductibility under Section 10(2)(xv), the Court held that the amount in question was not a business expenditure. It arose out of misfeasance by the company’s director and was paid to indemnify the mill. Such a payment had no nexus with the ordinary conduct of business and hence did not qualify as an expenditure laid out “wholly and exclusively” for business purposes.

iv) The Court also stated that such payments towards discharge of liabilities arising out of past misconduct, especially of a personal nature, cannot be characterized as revenue expenditure. The Tribunal had rightly held that this was either a capital payment or a non-business-related outlay.

v) The argument based on Mitchell v. B.W. Noble Ltd. ([1927] 1 K.B. 719) was rejected as inapplicable. In Mitchell, the facts showed clear evidence of business necessity for the expenditure. In the present case, no such factual foundation had been laid or found by the Tribunal.

vi) Therefore, the High Court judgment was set aside and the appeal by the Commissioner of Income-Tax was allowed with costs.

b. OBITER DICTA 

i) The Chief Justice opined that even if the company feared litigation or scandal, such apprehensions must be proven with concrete factual material, not speculative arguments by counsel. Mere possibilities or business anxieties do not ipso facto convert an expenditure into one eligible for deduction under the Income-Tax Act.

ii) The Court cautioned that accepting arguments as facts would lead to a dangerous precedent, where mere allegations in legal submissions could substitute evidence. This would undermine the entire framework of appellate and reference jurisdiction under tax law.

c. GUIDELINES 

The Court laid down important procedural and substantive guidelines regarding income-tax references:

• The High Court must limit itself to questions of law as referred under Section 66(2) and not venture into fact-finding.

• The factual findings of the Appellate Tribunal are final unless shown to be unsupported by evidence or perverse.

• Arguments of counsel cannot be treated as factual material unless admitted by both parties or found so by the Tribunal.

• Expenditures to discharge liabilities arising from misfeasance or third-party claims do not automatically become business expenses under Section 10(2)(xv).

• For a payment to qualify under Section 10(2)(xv), it must be shown to be exclusively for business purposes, with a clear connection to income generation or business operations.

• Reputation preservation as a ground for deduction must be established with evidence, not assumed or inferred.

J) CONCLUSION & COMMENTS

The Supreme Court’s judgment in Commissioner of Income-Tax, West Bengal v. Calcutta Agency Ltd. is a foundational precedent in the interpretation of business expenditure under Indian income-tax jurisprudence. It establishes a clear demarcation between factual findings and legal questions, and reiterates that deductions under tax law must be strictly construed. The Court’s insistence on adherence to procedural discipline—requiring the High Court to confine itself to the Tribunal’s findings—safeguards the hierarchy and coherence of tax adjudication.

Further, the Court made a vital distinction between expenditure incurred in the course of business and those related to misconduct or settlement of liabilities, drawing attention to business purpose doctrine. The company’s attempt to classify reimbursement of a director’s misconduct as deductible business expense was firmly rejected, reinforcing the need for clear nexus and intent in such claims.

This decision also signals that judicial reasoning must be factually anchored. By invalidating the High Court’s reliance on unproven arguments, the Supreme Court reinforced judicial accountability. The ruling sets a high bar for factual substantiation in tax cases, and continues to be cited across Indian tax law for both substantive and procedural clarity.

K) REFERENCES

a. IMPORTANT CASES REFERRED

i) Mitchell v. B. W. Noble Ltd., [1927] 1 K.B. 719

Relevance: Cited by the assessee, but held inapplicable due to lack of factual support.

ii) Raja Bijoy Singh Dudhuria v. Commissioner of Income-Tax, 6 I.T.C. 449 (Privy Council)

Relevance: Cited in argument that the income never accrued, but rejected.

b. IMPORTANT STATUTES REFERRED

i) Section 10(2)(xv), Indian Income-Tax Act, 1922

Topic: Business expenditure – wholly and exclusively laid out for business purposes

ii) Section 66(2), Indian Income-Tax Act, 1922

Topic: Reference jurisdiction of High Court in tax matters