1963 (9) TMI 61 - HC - Income Tax

Assessees Liable for Additional Assessment of Rs. 56,784 + Costs

The court held that the assessees were liable to be assessed on an additional amount of Rs. 56,784, in addition to the remuneration of Rs. 2,95,651. The ... - Issues Involved:1. Proper interpretation of clause 3 of the managing agency agreement dated August 2, 1950.2. Whether the assessees were right in claiming the sum of Rs. 2,32,234 as depreciation for deducting that amount from the profits of the managed company while calculating the commission due to the assessees under the said managing agency agreement.Issue-wise Detailed Analysis:1. Interpretation of Clause 3 of the Managing Agency Agreement:The court examined the proper interpretation of clause 3 of the managing agency agreement dated August 2, 1950, between the assessees and the Baroda Spinning and Weaving Co. Ltd. The clause stated that the company would pay the agents a commission of 4% on the sales of yarn and piece goods manufactured and sold by the company and 10% on the net profits from cotton ginning or any other work. It further provided that if the company could not distribute Rs. 58,390 as dividends in any year, the agents would accept a reduced commission up to one-third to cover the deficit.The assessees argued that the minimum dividend guaranteed under clause 3 was for ordinary shares only, and the Tribunal erred in considering it for both ordinary and preference shares. They contended that the managed company should deduct Rs. 26,275 as dividend for preference shares before calculating the commission. The court rejected this argument, stating that the clause intended the Rs. 58,390 as a total minimum for both types of shares. The court emphasized that the managed company consistently aimed to pay at least 10% on its paid-up capital, and the agreement did not distinguish between ordinary and preference shares regarding the minimum dividend.2. Claim of Rs. 2,32,234 as Depreciation:The assessees claimed that the managed company was entitled to deduct Rs. 2,32,234 as depreciation from its profits for computing the commission payable under clause 3. The Tribunal allowed only Rs. 1,86,143, representing normal depreciation, rejecting the inclusion of initial and additional depreciation. The court held that the Tribunal erred by not distinguishing between depreciation for tax purposes and commercial depreciation. It stated that commercial depreciation, as shown in the balance sheet, should be considered for calculating divisible profits, not the statutory depreciation under the Income-tax Act.However, the assessees did not provide the commercial depreciation figure from the balance sheet. The court concluded that without this information, it could not interfere with the Tribunal's allowance of Rs. 1,86,143 as depreciation.Additional Contentions:The assessees argued that their real income was Rs. 2,95,651, the amount actually received and debited by the managed company, and only this amount should be taxed. They cited the case of H.M. Kashiparekh and Co. Ltd. v. Commissioner of Income-tax, where the court considered the real income after a bona fide surrender of commission. The court distinguished the present case, noting that the assessees consistently claimed they were entitled to Rs. 2,95,651 under the agreement, not that they surrendered a part of the commission for commercial expediency.The assessees also contended that accepting Rs. 2,95,651 resulted in a modification of clause 3, amounting to novation. The court rejected this argument, stating that no consideration for such modification was pleaded or proved, and the case of novation was not put forward at any stage of the proceedings.Conclusion:The court answered the referred question in the affirmative, holding that the assessees were liable to be assessed on an additional amount of Rs. 56,784, in addition to the remuneration of Rs. 2,95,651. The assessees were ordered to pay the costs of the reference to the Commissioner.