Depreciation calculation under managing agency agreements must follow the adopting statute as at agreement date, favouring the assessee.

Clause 2(b) of the managing agency agreement requires depreciation for computing net profits to be determined by reference to the British India Income-tax Act as it stood on the agreement date, applied for the whole period of the agreement; the Court gives effect to the qualifying phrase "in force at the date hereof" and to "for the whole period of this agreement" and applies the principle that an instrument adopting a statute ordinarily adopts it as it exists at the instrument date. The Tribunal's factual finding that the commission was a bona fide payment was accepted, and the result was affirmed in favour of the assessee.

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Issues: Whether clause 2(b) of the managing agency agreement dated 18 April 1937 must be construed to require that depreciation for computing "net profits" be calculated in accordance with the British India Income-tax Act as in force on the date of the agreement (and applied for the whole period of the agreement), or whether depreciation is to be determined in accordance with the Income-tax Act as amended from time to time.

Analysis: The clause defines "net profits" by reference to depreciation "as would have been from time to time allowed in calculating profits, had the British India Income-tax Act (in force at the date hereof) been in force in Hyderabad for the whole period of this agreement." The Court gives effect to the qualifying bracketed phrase "in force at the date hereof" and to the subsequent words "for the whole period of this agreement," construing the clause as adopting the provisions of the British India Income-tax Act as they existed on the date of the agreement. The Court relies on established principles of construction of deeds and statutes that an instrument which adopts another statute by reference ordinarily adopts it as it stands at the date of the instrument, and applies that meaning to the clause. The Tribunal's factual finding that the managing agency commission was paid and was a bona fide payment was accepted; accordingly the expenditure is deductible when calculated by reference to depreciation as allowable under the Income-tax Act in force on the date of the agreement.

Conclusion: The clause is to be interpreted as requiring depreciation to be calculated in accordance with the British India Income-tax Act as in force on the date of the managing agency agreement; the Tribunal's construction is affirmed and the result is in favour of the assessee.

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