Deductibility of managing agency commission depends on statutory declaration, adequate consideration, and whether income is diverted at source.

Payments under an agreement to share managing agency commission were deductible only when the statutory conditions for the special provision were satisfied. For assessment year 1961-62, the payment to Pushpa Devi was treated as income applied after receipt, not a diversion at source, and it was not shown to be wholly and exclusively for business; deduction was therefore denied under the general provisions and no statutory declaration had been filed. For assessment years 1962-63 to 1965-66, the declaration requirement was met, the agreement was supported by adequate consideration, and the special provision governed the shared commission; deduction was accordingly allowed.

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Issues: (i) Whether the payments made to Pushpa Devi in the assessment year 1961-62 were deductible under section 12A or section 10(2)(xv) of the Indian Income-tax Act, 1922, or could be excluded from the assessee's income under section 10(1); (ii) whether the payments made in the assessment years 1962-63 to 1965-66 were deductible under section 39 of the Income-tax Act, 1961.

Issue (i): Whether the payments made to Pushpa Devi in the assessment year 1961-62 were deductible under section 12A or section 10(2)(xv) of the Indian Income-tax Act, 1922, or could be excluded from the assessee's income under section 10(1).

Analysis: The agreement was held to be supported by adequate consideration because Pushpa Devi controlled substantial voting rights in the companies and also agreed to advance Rs. 50,000 for the business. However, the statutory declaration required by section 12A was not filed. The payment was found to be a parting with income after its receipt and not a diversion at source. It was therefore not an overriding obligation. On the facts, the amount was also not shown to be an expenditure laid out wholly and exclusively for the purposes of business under section 10(2)(xv).

Conclusion: The deduction was disallowed and the amount was held not deductible under section 12A, section 10(2)(xv), or section 10(1) of the Indian Income-tax Act, 1922, against the assessee.

Issue (ii): Whether the payments made in the assessment years 1962-63 to 1965-66 were deductible under section 39 of the Income-tax Act, 1961.

Analysis: For the later years, the declaration required by section 39 had been filed. The agreement in writing was found to be supported by adequate consideration, and the assessee's obligation to share managing agency commission was treated as valid under the special statutory provision. The Tribunal's adverse finding on consideration was held to rest on irrelevant and erroneous grounds. The receipts were accordingly treated as falling within section 39, which governed the sharing of managing agency commission and chargeability of the respective shares.

Conclusion: The deductions were allowed under section 39 of the Income-tax Act, 1961, in favour of the assessee.

Final Conclusion: The reference was answered adversely to the assessee for the assessment year 1961-62 and in the assessee's favour for the later assessment years, with the later payments held deductible under the special statutory scheme governing sharing of managing agency commission.

Ratio Decidendi: A payment under an agreement to share managing agency commission is deductible only when the statutory conditions of the special provision are satisfied; where the income is merely applied after receipt and not diverted at source, deduction cannot be claimed under the general charging or expenditure provisions, but where the agreement is supported by adequate consideration and the declaration requirement is fulfilled, the special provision governs and allows deduction.

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