TaxTMI 
TaxTMI 
1938 (11) TMI 18
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.... district business having no connection with any other Managing Agency worked by the assessees. For the financial year 1936-37, the assessees were assessed by the income-tax Officer, Companies Circle, on a total income of Rs. 3,71,600. In arriving at the aforesaid total income, the Income-tax Officer disallowed three payments aggregating in all to Rs. 4,37,737 on the ground that they represented "commission paid to co-sharers" and were therefore "appropriations of profits" and not items "of revenue expenditure". A copy of the Income-tax Officer's Assessment Order passed on 12th February, 1937, is annexed hereto and marked Exhibit A. 3. The three disputed payments related to the assessee's business as Managing Agents of (1) The Tata Iron and Steel Co. Ltd., (2) the Indian Cement Co. Ltd., and (3) the Shahabad Cement Co. Ltd. 4. As regards the first item, the assessees were appointed Managing Agents of the Tata Iron and Steel Co. Ltd., for a period of 30 years commencing from the 1st July, 1916, and thereafter until they resigned or were removed, by a deed dated the 2nd May, 1918, a copy whereof is annexed hereto as Exhibit B. In 1924, as this Company was in very urgent....
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....assessees have now petitioned to me requesting me to refer the case under Section 66(2) of the Act to this Honourable Court, but that if I could see my way to revise the decision of the Assistant Commissioner and allow the deduction claimed by them, it may not be necessary to state a case to this Honourable Court. A copy of their petition dated 27th December, 1937 is annexed hereto, marked Exhibit F. I am, however, unable to grant any relief and submit this Statement of the Case to your Lordships for favour of decision. 8. Question for the decision of the Honourable Court:-I submit the following question for favour of decision:- Whether in the circumstances of the case, in computing the assessee's income from their business as Managing Agents of the Tata Iron and Steel Co. Ltd., the payment of Rs. 2,94,308 to the co-sharers F.E. Dinshaw and Messrs. F.E. Dinshaw Ltd., out of the commission of Rs. 11,74,348 earned by them is allowable as an item of expenditure under Section 10(2)(ix) of the Act or under any other provision thereof. 9. Opinion of the Commissioner.-As Section 66(2) o....
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....ission earned to the assessees, irrespective of any payment therefrom by the latter to other parties. The non-payment of any share in the commission would not have produced any effect whatever on the earning of the profits for the year and the only result of such non-payment would have been a suit for enforcing the agreements under which such a payment was to be made by the assessees. 10. The assessees' point appears to be that at the time the loan in question was taken, the very existence of the Tata Iron and Steel Company was threatened, that is would have had to be wound up if the required money was not forthcoming and that in that case, the assessees would have wholly lost the agency or at any rate, their earning power would have been greatly curtailed but for the loan thus procured from Mr. F.E. Dinshaw. What would have happened if the said loan transaction had not been put through is entirely a matter for conjecture. It is possible, a loan at a higher rate of interest from another party might have been secured or the Company might have reduced its activities or gone into liquidation. The argument, however, amounts to this that in order to prevent the loss of the agency....
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....eference made by the Income-tax Commissioner under Section 66(2) of the Indian Income-tax Act. The question which he has raised is this- "Whether in the circumstances of the case, in computing the assessees' income from their business as Managing Agents of the Tata Iron and Steel Co., Ltd., the payment of Rs. 2,94,308 to the co-shares F.E. Dinshaw and Messrs. F.E. Dinshaw Ltd., out of the commission of Rs. 11,74,348 earned by them is allowable as an item of expenditure under Section 10(2)(ix) of the Act or under any other provision thereof." The material facts are that by an agreement, dated the 2nd May 1918, the assessees, were appointed managing agents of the Tata Iron and Steel Co. Ltd., and under that agreement they were entitled to receive a commission based on profits, with a minimum payment of Rs. 50,000 a year, which was not dependent on profits. In the year 1924 the Tata Iron and Steel Co., Ltd., was urgently in need of funds, and the ordinary practice in this country is for the managing agents to finance the company of which they are such agents. I do not mean to suggest t....
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....ether an agreement to pay a part of the commission in the circumstances in which it was made in this case amounts to an expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning profits or gains within Section 10(2)(ix) of the Income-tax Act. In two previous cases, which came before this Court, namely, Commissioner of Income tax, Bombay v. C. Macdonald & Co. and the Tata Hydro Electric Agencies, Bombay v. Income tax Commissioner, Bombay Presidency to which I will refer more in detail in a moment, this Court took the view that a question of this sort was determined against the assessees by virtue of the decision of the Privy Council in Pondicherry Railway Co. v. Commissioner of Income tax. Having regard to the explanation of the principle which we understood, perhaps wrongly, to underly that case, which has now been given by the Privy Council in the Tata Hydro Electric Agencies case and the Indian Radio and Cable Communication Company v. Commissioner of Income tax, Bombay, and also by the English Court of Appeal in British Sugar Manufacturers Ltd. v. Harris, I think that the Pondicherry case ceases to present any difficulty. The question....
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....Ltd., and Richard Tilden Smith as being expenditure incurred solely for the purpose of earning their profits or gains". So that in that case the Privy Council noticed without suggesting disapproval an admission by Counsel which exactly covers the point which we have to determine in this case. Of course, that admission is not binding on us, but in my opinion, it was an admission well founded. I think that the agreement to share commission in this case did amount to an expenditure incurred solely for the purpose of earning the profits or gains of the assessees. We therefore, answer the question raised in the affirmative. Costs on the Original Side scale to be paid by the Commissioner. RANGNEKAR, J.--The facts are that the assessees are carrying on business as managing agents of the Tata Iron and Steel Co. Ltd., under an agreement dated the 2nd of May 1918. Clause 2 of the agreement provides for payment of commission to the managing agents on the annual net profits of the company, calculated in a particular manner there set out, subject to a minimum annual remuneration of Rs. 50,000 whether the company made any profits or not, or whether any dividends were declared or not. Cl....
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....bay Presidency and Aden. Now, in the Pondicherry case the facts were that the Pondicherry Railway Company Ltd., were bound to pay to the French Government one-half of its net profits, and Lord Macmillan in the Privy Council observed as follows: "A payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits. It assumes that profits have first come into existence. But profits on their coming into existence attract tax at that point, and the revenue is not concerned with the subsequent application of the profits." It is not for me to say, as has been said, that the statement that a payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits, is really too wide, but as pointed out by the Master of the Rolls in British Sugar Manufacturers, Ltd. v. Harris, Lord Macmillan in that paragraph was quite clearly using the word "profits" in one sense and one sense only; he was using it in the sense of the "real net profit", referred to in a case to which I shall presently co....
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....ondicherry case. Then the Commissioner of Income-tax, as I have pointed out, proceeds upon certain observations of Lord Macmillan in The Tata Hydro Electric Agencies, Bombay v. The Income-tax Commissioner, Bombay Presidency and Aden. But, with respect I think, he has failed to appreciate the distinction between that case and the present case, the distinction which was admitted by Counsel for the Crown in that case and pertinently mentioned by Lord Macmillan in his judgment. In that case the facts up to a certain point, were very similar to the facts in the present case, the only distinction being that, there, the assessees were not originally the managing agents of the Tata Power Co., Ltd. They had acquired the managing agency business from the present assessees who were the original managing agents of the Tata Power Co., Ltd., and who had assigned a part of their commission to them. In the course of the judgment it is pointed out by Lord Macmillan himself that "it was not questioned by Counsel for the Crown that if the present question had arisen with Tata Sons, Ltd., they would, under Section 10, sub-section 2 (ix), have been entitled on the facts stated to deduct their paymen....