1937 (3) TMI 14 - HC - Income Tax

Commission Inclusion in Profit Assessment Upheld. Deduction Denied for Non-Business Expenditure. Appeal Dismissed.

The Privy Council affirmed the High Court's decision that the entire commission received by the appellants should be included in the assessment of their ... - Issues Involved:1. Whether the assessee company has been correctly assessed on the total amount of Rs. 5,17,288 received as profits and gains of the business.2. Whether the assessee company is entitled to deduct Rs. 1,29,322 paid to certain parties under specific agreements as expenditure incurred solely for the purpose of earning profits or gains.Issue-wise Detailed Analysis:Issue 1: Assessment on Total Amount of Rs. 5,17,288The appellants, a private limited company, acquired the agency business from Tata Sons Ltd. and were entitled to a commission of 10% on the annual net profits of Tata Power Co. Ltd., with a minimum of Rs. 50,000. The appellants also had to pay 12.5% of this commission to F.E. Dinshaw Ltd. and Richard Tilden Smith's administrator. The appellants earned and received Rs. 5,17,288 as commission in 1932 and paid Rs. 1,29,322 to the aforementioned parties.The Income Tax Officer and the Assistant Commissioner included the entire commission amount in the appellants' income without deduction. The High Court upheld this decision, stating that the whole commission received by the appellants was properly included in the assessment of their profits or gains. The High Court referenced the case of C. Macdonald & Co. v. Commissioner of Income-tax, Bombay, which held that the entire commission must be included in the computation of income for tax purposes.Issue 2: Deductibility of Rs. 1,29,322 as ExpenditureThe appellants argued that the Rs. 1,29,322 paid to F.E. Dinshaw Ltd. and Richard Tilden Smith's administrator should be deducted under Section 10(2)(ix) of the Indian Income Tax Act, which allows for the deduction of expenditure incurred solely for the purpose of earning profits or gains. The High Court, however, found that the question of whether the expenditure was incurred solely for the purpose of earning profits was a question of fact and there was no finding to support the deduction.Before the Privy Council, it was argued that the appellants' obligation to pay a quarter of the commission to the aforementioned parties was independent of whether they made any profit. The commission was not considered profit or gain but an item in the computation of profits or gains. The Privy Council distinguished this case from the Pondicherry Railway Company case, where profits had to be earned and ascertained before any sharing took place.The Privy Council concluded that the payments were not made in the process of earning profits but were part of the terms on which the appellants acquired the agency business. The obligation to make these payments was undertaken as part of the acquisition and not for the purpose of producing profits in the conduct of the business. The payments did not arise out of transactions in the conduct of the business and were not considered working expenses or part of the process of profit earning.Conclusion:The Privy Council advised that the appeal be dismissed and the High Court's order of March 27, 1935, be affirmed. The deduction claimed by the appellants was deemed inadmissible as it was not expenditure incurred solely for the purpose of earning profits or gains. The respondent was awarded the costs of the appeal.