Managing agency allowance: directed payments count as the principal's income but are deductible if actually incurred via an agent.

Whether a managing agency allowance paid by a company to an agent on the managing agents' direction constitutes the managing agents' income and whether that payment is deductible as expenditure actually incurred are examined. The allowance directed to the agent is treated as income of the managing agent firm because it was received on its behalf. Concurrently, a payment made directly to an agent pursuant to the principal's direction qualifies as expenditure actually laid out by the principal and is deductible under the provision permitting deduction for managing agency expenses. The result treats the amount as taxable income of the firm but allowable as a deductible business expense.

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Issues: (i) Whether the sum of Rs.12,000 paid by the company to J.L.P. Roche Victoria on the direction of the managing agents constituted income in the hands of the managing agent firm; (ii) Whether the sum of Rs.12,000 so paid is deductible as expenditure under section 10(2)(xv) of the Income-tax Act.

Issue (i): Whether the managing agency allowance paid by the company to Roche Victoria on direction of the managing agents is income of the managing agent firm.

Analysis: The articles of association entitled the managing agents to an office allowance; the payment to Roche Victoria was made pursuant to the managing agents' direction and Roche Victoria received the sum on behalf of the managing agents.

Conclusion: The sum of Rs.12,000 is income in the hands of the managing agent firm (in favour of the revenue on this issue).

Issue (ii): Whether the sum of Rs.12,000 paid by the company to Roche Victoria on the managing agents' direction constitutes expenditure actually laid out by the managing agents and is deductible under section 10(2)(xv).

Analysis: The payment to Roche Victoria discharged the managing agency obligations; "actually paid" in sub-section (5) is to be understood as expenditure actually incurred rather than physical transfer by the assessee; there was an implied understanding that Roche Victoria was to be remunerated for services rendered on behalf of the managing agents.

Conclusion: The sum of Rs.12,000 is expenditure laid out by the managing agent firm and is deductible under section 10(2)(xv) (in favour of the assessee on this issue).

Final Conclusion: The legal effect is that the amount is treated as the managing agent firm's income for assessment purposes but, having been actually incurred by the firm through payment to its agent, the amount is allowable as a deduction under section 10(2)(xv), resulting in mixed relief to the parties.

Ratio Decidendi: Where a principal is entitled to remuneration under company articles and directs the payer to make payment to an agent acting for the principal, the receipt so directed constitutes the principal's income, and a payment made directly to the agent pursuant to the principal's direction is expenditure actually incurred by the principal and deductible under the provision permitting deduction of such expenditure.

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