1960 (4) TMI 64 - HC - Income Tax

Court excludes surrendered amount from company's total income for assessment year ending March 31, 1950

HM. KASHIPAREKH & CO. LTD. Versus COMMISSIONER OF INCOME-TAX, BOMBAY NORTH, KUTCH AND SAURASTHRA

The court ruled that the surrendered amount of Rs. 57,785 could not be included in the assessee company's total income for the assessment year ending ... - Issues Involved:1. Legality of the Commissioner's order under section 33B(1) during pending proceedings under section 34.2. Allowability of the surrendered amount as a revenue deduction under section 10(2)(xv).3. Inclusion of the surrendered amount in the assessee's total income for the assessment year.Issue-wise Detailed Analysis:1. Legality of the Commissioner's Order under Section 33B(1) During Pending Proceedings under Section 34:The court did not address this issue as neither party presented arguments on it. Therefore, it was deemed unnecessary for the court to provide an opinion on this matter.2. Allowability of the Surrendered Amount as a Revenue Deduction under Section 10(2)(xv):The assessee company, acting as the managing agent for Gujarat Paper Mills Ltd., surrendered Rs. 97,000 out of its managing agency commission of Rs. 1,17,644-4-0 for the year ending March 31, 1950. The Tribunal initially did not accept the entire surrendered amount as a deduction under section 10(2)(xv) but allowed a portion of it based on the managing agency agreement, which stipulated that the managing agent had to forgo part of its commission if profits were insufficient to pay a 6% dividend on the company's capital. The Tribunal allowed the deduction of one-third of the commission, amounting to Rs. 39,214-12-0, as per the agreement's proviso.The court emphasized that income tax is a tax on real income, not artificial or notional income. It stated that 'it is the real income of the assessee which alone is brought to tax.' The court found that the surrender of Rs. 57,839-12-7 (the balance after deducting the allowable one-third) was made on grounds of commercial expediency and should be considered as part of the real income. Therefore, the court concluded that the surrendered amount should be allowed as a revenue deduction under section 10(2)(xv).3. Inclusion of the Surrendered Amount in the Assessee's Total Income for the Assessment Year:The court examined whether the surrendered amount of Rs. 57,785 (Rs. 97,000 minus Rs. 39,215) should be included in the assessee company's total income for the assessment year ending March 31, 1950. The court noted that the managing agency agreement contained a provision that allowed the managed company to reduce the commission if profits were insufficient to pay a 6% dividend. This reduction was a legal obligation and part of the real income computation.The court emphasized the principle of 'real income,' stating that the actual income should reflect the true financial situation, including any bona fide commercial decisions made by the assessee. The court found that the surrender of the commission was made in good faith and for commercial reasons, and it was linked to the determination of the commission's quantum. Therefore, the court concluded that the real income of the assessee for the accounting year should not include the surrendered amount of Rs. 57,785.Conclusion:The court answered the third question in the negative, stating that the sum of Rs. 57,785 could not legally be included in the assessee company's total income for the assessment year ended March 31, 1950. Consequently, it was unnecessary to answer the first two questions. The Commissioner was ordered to pay the costs, and the reference was answered accordingly.