TaxTMI 
TaxTMI 
TaxTMI 
1963 (6) TMI 35
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....uting the profits of the company, is justified in law? (2) Whether, on the facts and circumstances of the case, the income-tax authority was right in holding that the expenditure towards the construction of huts and camps was not a proper revenue deduction under section 7(2)(e) of the Hyderabad Agricultural Income-tax Act?" For a proper appreciation of the issues involved in this reference, it is necessary to advert to the material provisions of the Act and the Rules framed thereunder, and also to the relevant facts of the case. The Act came into force on April 1, 1950, and provided for the levy by the erstwhile Hyderabad State, of a tax on agricultural income derived from land situated within that State. Section 2(a) defines what "agricultural income" is, and under section 2(a)(2)(i) it means any income derived from land by agriculture. Rule 4 of the Hyderabad Agricultural Income-tax Rules, 1950 (which will be referred to as "the rules") clarifies that if the agricultural produce of the land has been sold, the actual sale prices shall be deemed to be the gross agricultural income of such land; if, however, instead of such produce being sold it is utilise....
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....aid under any law of the Hyderabad State on the cultivation or sale of the crop from which such agricultural income is derived; (g) (i) any expense incurred on the maintenance of any irrigation or protective work constructed exclusively for the benefit of the land from which such agricultural income is derived; (ii) any expense incurred exclusively on the maintenance of any capital asset purchased or constructed before the 1st day of April, 1950, if such maintenance is required for the purpose of deriving such agricultural income from such land; Explanation.--Maintenance includes current repairs and includes also in the case of protective dykes and embankment all such work as may be necessary from year to year for repairing any damage or destruction caused by flood or other natural causes; (iii) interest paid on any amount borrowed and actually spent on any capital expenditure incurred after the commencement of this Act exclusively for the benefit of the land from which such agricultural income is derived or for the purpose of deriving such agricultural income from such land: Provided that the interest allowable under this clause shall not exceed the interest which the assesse....
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....ad Companies Act in April, 1937. Its main objects, as they appear from the memorandum of association, are: "(1) To carry on the business of manufacturers of and dealers in all kinds of sugar, gur, and sugar and gur preparations, and their by-products. (2) To carry on the business of planters and cultivators of sugar plants." Thus, the company has a manufacturing side and an agricultural side. Here in this case we are concerned with the agricultural operations of the company for the three assessment years 1950-51, 1951-52 and 1952-53. The company owns about 13,500 acres of land, which is used for raising sugarcane, and the sugarcane is utilised as raw produce for manufacturing sugar in the factory owned by the company. About 15,000 labourers are employed for performing the various agricultural operations in growing sugarcane. During the agricultural season, large sums are expended by the company for providing accommodation to the workmen by erecting huts and running camps near the plantations, as it would be very difficult and costly to transport a large labour force to the work-spot day after day throughout the agricultural season. Contemporaneously with the formation....
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....ch expenses as also the rent of the office premises of the said company at Hyderabad used for the purpose of the business of the company shall be paid by the said company. (d) The said commission shall be paid immediately after the annual accounts of the company have been passed by the shareholders." Clause 4 prescribes the duties of the managing agent as under: "The said Dhanrajgir shall, unless prevented by ill-health, throughout the said terms devote the whole of his time, attention and abilities to the business of the said company, and shall obey the orders from time to time of the board of the said company and in all respects conform to and comply with the directions and regulations made by such board and shall well and faithfully serve the said company and use his utmost endeavours to promote the interest thereof, provided that the said Dhanrajgir shall be at liberty to appoint an agent on his behalf to perform all or any of the duties entrusted to him for the time being under these presents, such agent to be approved of in writing previous to his appointment by the board of directors of the said company. Such agent shall be paid by the said Dhanrajgir and the sa....
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....onveyance of foodgrains, oil stores 3,500 0 0 Drainage & sanitation (salaries) 16,888 6 0 Schools (salaries) 3,925 6 6 Road repairs 7,242 15 5 Miscellaneous expenses 1,551 12 11 Club expenses 1,058 13 0 Postal expenses 702 8 0 Gardening 975 11 3 1,16,558 1 7 Less: Cattle grazing fees 1,031 8 0 1,15,526 9 7 (b) Bamboos, mats, ropes, etc. for labour huts 85,346 11 8 (c) Bamboos, mats, ropes, etc. for staff huts 25,649 4 10 2,26,522 10 1 To this statement, the following certificate issued by the general manager of the company, was appended: "THE NIZAM SUGAR FACTORY LTD. P.O. Box No. 109, Abid Road, Hyderabad-Deccan. We hereby certify that the expenditure of ₹ 25,649-4-10 on staff huts, and ₹ 85,346-11-8 on labour huts, incurred during the year ended 30th June, 1950, wholly represents expenses of maintenance and replacements and that no part of it relates to expenses on the erection of new huts. (Sd.) G.K. Tatake, 29-2-1953 for GENERAL MANAGER." It will be observed that according to the above statement, about onehalf of the amount claimed as deduction, represented the amounts spent towards providing ame....
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.... stated a case and referred the two questions set out supra. The same questions arise in respect of the other two assessment years, viz., 1951-52 and 1952-53, although the actual figures vary. Since there is no dispute about the figures, it is not necessary to refer to them in detail. It may, however, be noted that for the year 1952-53 the Agricultural Income-tax Officer himself disallowed the managing agency commission. But the net result is that, as in the case of 1950-51, so also for the succeeding two years, the company's claim for deduction in respect of the managing agency commission and the claim in respect of hutting and camp expenses for labour were disallowed. It is apparently for this reason that the questions referred to the High Court are general in nature and do not relate to any particular year. We may now notice the arguments advanced on behalf of the assessee company on the one side and on behalf of the department on the other. Upon the first question referred to us, the learned advocate for the company contended that the departmental authorities were in error in refusing to allow the managing agency commission as a permissible deduction under section 7(2)(e)....
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....ging agent had really devoted for supervising and managing the agricultural operations of the company. That, however, is beside the point, because it is not disputed that the managing agency commission was actually paid to the managing agent. From the duties prescribed by the terms of the agreement, it is reasonable to suppose that the commission had been paid in return for services rendered by the managing agent. We are also of the opinion that the view taken by the departmental authorities in respect of the assessment years 1950-51 and 1951-52 that because under the agency agreement, commission has to be paid to the agent from out of the net profits of the company, it should not be regarded as an item of revenue expenditure, is the result of a confusion of thought. The calculating of the remuneration to be paid to the managing agent is one thing; the computation of the net assessable agricultural income for the purpose of levying agricultural income-tax under the Act, is quite another. The former depends on the terms of the agency agreement; the latter, on statutory provisions which provide for certain deductions. So the real question is: Was the 10% commission paid to the agent....
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....ivisible profits, and for that purpose, to take another account which not only would bring in depreciation, but would also take into account the sum that had been paid out to the companies as remuneration. The Master of the Rolls observed: "It seems to me that the circumstance that those two accounts have to be made out throws a very clear light upon the real nature of this transaction, and, looking at the clause in question as a whole, it seems to me clear beyond any reasonable doubt that the agreement is merely an agreement under which, before ascertaining the divisible profits of this company at all, the Skoda Works and the Corporation are to receive upon a particular conventional basis a commission sum as remuneration for their services." He added*, "Once you realise that as a matter of construction the word 'profits' may be used in one sense for one purpose and in another sense for another purpose, I think you have the real solution of the difficulties that have arisen in this case." In a concurring judgment, Romer L.J. elucidated the position thus [1939] 7 I.T.R. 101, 108: "It appears to me that in all cases similar to the one with which w....
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.... based on 5 per cent. of the gross proceeds. That proportion of this payment, namely, ₹ 8,48,235 which related to the undertakings in Burma, was not allowed as business expenditure by the income-tax authorities in calculating the profits and gains of the assessee on the ground that it was payment of a share of the profits of the assessee. The court, however, held that the payment of this sum of ₹ 8,48,235 was an expenditure incurred by the assessee "solely for the purpose of earning such profits or gains" within the meaning of section 10(2)(ix) of the Indian Income-tax Act, 1922, and the assessee company was entitled to claim that this sum should be deducted in computing its profits and gains. Roberts C.J. pointed out that [1941] 9 I.T.R. 155, 174, 175 "...the taxable profits, or really net profits, can only be discovered when every outlay has been provided for, including expenditure out of income which has been incurred solely for the purpose of earning the profits or gains". Dunkley J. observed that* "the 'net profits' calculated under the articles of the company are not the same as the taxable profits for the purpose of the Income-tax....