Assessees' Business Income Includes Payments to Third Parties

The court held that the assessees were correctly assessed on the total amount received as profits and gains of the business and were not entitled to a deduction for amounts paid to third parties. The court applied the principle from the Pondicherry Railway Company case, stating that payments to third parties are part of the assessees' income and should be assessed accordingly. The court distinguished a previous case where payments were not considered part of assessable income, emphasizing that in this case, there was only a covenant to pay. The court ruled in favor of the tax authority, ordering costs to be paid by the assessees.

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Issues:
1. Correct assessment of assessees on the total amount received as profits and gains of the business.
2. Entitlement of assessees to deduction from their income paid to third parties.

Analysis:
1. The judgment involves a reference by the Commissioner of Income Tax under Section 66(2) of the Indian Income Tax Act, 1922, regarding the correct assessment of assessees who are managing agents of a company. The primary issue is whether the assessees have been correctly assessed on the total amount received by them as profits and gains of the business. The assessees received a sum of Rs. 97,882 as managing agents, out of which they paid a portion to third parties. The Income Tax Commissioner relied on the Pondicherry Railway Company case to argue that the assessees are liable to be assessed for the entire sum received. The court agreed with this view, stating that the principle of the Pondicherry case applies, regardless of whether the payment obligation is based on gross income or net profits. The court held that the sums paid to third parties are part of the income of the assessees and are liable to be assessed accordingly.

2. The second issue pertains to whether the assessees are entitled to a deduction from their income liable to tax for the amount paid to third parties. The assessees argued that the sums paid to third parties were not part of their income, relying on the Bejoy Singh Dudhuria case where payments for maintenance were held not to constitute part of the assessable income. However, the court distinguished this case from the present situation, noting that in the current case, there was no charge on the income, only a covenant to pay. The court held that the Pondicherry case, which involved a similar scenario, governs the present case. Therefore, the court answered the first question in the affirmative, indicating that the assessees have been correctly assessed on the total amount received, and the second question in the negative, denying the assessees' entitlement to a deduction. The court also ordered costs to be paid by the assessees on the original side scale to be taxed by the Taxing Master.

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