TaxTMI 
TaxTMI 
TaxTMI 
1972 (12) TMI 19
X X X X Extracts X X X X
X X X X Extracts X X X X
....aidu in his capacity as manager of the company had received remuneration of Rs. 24,900, Rs. 26,100 and Rs. 27,300 respectively. The company claimed allowance for the remuneration paid to the managing agency firm and also for the salary paid to the manager. The Income-tax Officer allowed the remuneration paid to the managing agency firm but disallowed the salary paid to the said R. Doraiswamy Naidu on the ground that the salary paid to him amounted to remuneration paid to the managing agent and that as it was in excess of ten per cent. of the net profits of the company during the years of account, the payment is prohibited by section 348 of the Indian Companies Act. His view was that R. Doraiswamy Naidu, being a partner of the managing agency firm, could not receive any remuneration apart from the ten per cent. of the net profits fixed under the said section as payable to the managing agent even though he functioned as a manager of the company. In disallowing the salary paid to the manager on the ground set out above, the Income-tax Officer purported to follow the decision of the Bombay High Court in Ramaben A. Thanawala v. Jyoti Ltd. The company appealed to the Appellate Assistan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that the difference between the stock declared to the bank and the stock as per the books of the assessee did not represent any excess and undisclosed stock. The Tribunal was of the view that it only showed that the stock declarations made to the bank were not accurate, that the Income-tax Officer was not justified in taking the company's stock declarations given to the bank as representing the true position of the stocks especially when the company had a very good reason for giving an inflated statement of the stock to the bank for obtaining a higher overdraft facility. In that view the Tribunal held that the Income-tax Officer was not justified in adding the sum of Rs. 93,456 as income from undisclosed source and deleted the same from assessment. At the instance of the revenue the Tribunal has referred to this court the following first question in T.C. No. 45/1967 and the only question in T.C. No. 122 of 1968: " Whether, on the facts and in the circumstances of the case and in view of the provisions of the Companies Act, 1956, the salaries paid to the manager in the three assessment years 1958-59, 1959-60 and 1960-61 were allowable expenditure under section 10(2)(xv) of the Indi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ter its amendment in the year 1960, clearly treats the remuneration received by a partner of a managing agency firm in any capacity as a remuneration paid to the managing agent and states that the aggregate sum should not exceed ten per cent. of the net profits of the company in the financial year. But this amendment is not retrospective. If this amendment were to be retrospective, the learned counsel for the assessee concedes that the payment made to the manager would violate that section. The revenue submits that though the amendment is not expressly made retrospective, it is only declaratory or clarificatory in nature and, therefore, the principle of the amended section would have to be applied even in respect of the assessment years in question. We are not inclined to hold that the amendment made in the year 1960 to section 348 is merely declaratory or clarificatory. It is true that declaratory or clarificatory statutes must be presumed to be retrospective unless a contrary intention appears therefrom. In our view, the amendment is remedial or curative in nature. It is only by creating a fiction a partner of the managing agency firm is treated as a managing agent for the purpos....
X X X X Extracts X X X X
X X X X Extracts X X X X
....muneration payable to the managinagents. The word " ordinarily " occurring in section 348 suggests that it is permissible to pay additional remuneration in special circumstances. That view is also fortified by section 352 which provides that additional remuneration in excess of the limit specified in section 348 may be paid to the managing agent if such remuneration is authorised by a special resolution of the company and is approved by the Central Government as being in public interest. The infringement of section 348 was not also made penal before 1960. The word " managing agent " has been defined in section 2(25) as meaning any individual, firm or body corporate entitled to the management of the whole or substantially the whole of the affairs of the company by virtue of an agreement with the company or by virtue of its memorandum or articles of association. This shows that an individual, firm or body corporate can be a managing agent. The question is whether a partner of a managing agency firm by himself will come under the definition of " managing agent " so as to attract section 348. The position has been made clear after the amendment of section 348 in 1960 by introduction su....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... company either in his capacity as managing agent or in any other capacity and that the remuneration which a partner of a managing agency firm receives from the company managed by it, as a technical expert, has to be taken into account for the purpose of limiting the remuneration of the managing agency firm to 10 per cent. as per the section. The basis of the said decision is that a partner of a managing agency firm is himself a managing agent and, therefore, the remuneration received by him for services rendered to the company in his individual capacity should also be treated as a remuneration to the managing agency firm. The relevant observations therein are these : " Now, a firm has no legal existence ; it is not a legal entity ; it is merely a compendious manner of describing partners carrying on a business. Therefore, the argument of Mr. Desai comes to this that although the company in law could not pay A and B jointly, it could pay A and B separately and individually. In our opinion, full, effect must be given to the clear and emphatic language used by the legislature in section 348 that a managing agent cannot receive more than 10 per cent. of net profits either in his capa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndments to effectuate that intention. But it is the legislature and the legislature alone which can do so. A court cannot, in the guise of interpretation, an interpretation based on a supposed intention of the legislature, in reality embark to legislate and usurp the functions of the legislature. " With respect, we are inclined to agree with the observations of the Bench in the latter case. The definition of " managing agent " in section 2(25) cannot include a partner in a managing agency firm, even though the firm is composed of partners. It is true that a firm has no legal existence and that it is only a compendious name of describing all partners carrying on a business. But when the definition refers to the firm, the collective body of partners entitled to manage the affairs of the company as managing agent, it cannot be said that every one of the partners of the firm is himself a managing agent entitled to manage the company. As already stated, that is the position after the amendment of section 348. Even there it is only for the purpose of that section a partner of a managing agency firm has himself been treated as a managing agent and not for all purposes. We are, therefore,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ught to be deducted in this case are inevitable if the assessee has to carry on its business. Learned counsel for the revenue addressed arguments to us on the assumption that the expenditures sought to be deducted constituted improper or illegal acts and that expenditures incurred even in a lawful business are not eligible for deduction. One view may be that if profits derived from an illegal business are chargeable to tax, by the same logic the expenditure, be it illegal or improper, incurred in order to make such profits may legitimately be allowed as deduction. If the acts involved in the expenditure are in contravention of law, even so it may be a matter for consideration whether, for purposes of revenue, it should really matter in considering and allowing deductions as business expenditure." The view taken in that case seems to be that wherever expenses which are claimed as deductions have a direct and proximate connection with the business which has earned the income, whether they are in contravention of any law or otherwise, they will be allowable deductions as business expenditure. In Commissioner of Income-tax v. S. C. Kothari's the Supreme Court had to consider the quest....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of the trade cannot be described as such. Penalties which are incurred for infraction of the law are not a normal incident of business and they fall on the assessee in some character other than that of a trader." In Commissioner of Income-tax v. Piara Singh, it was again held that even an illegal business is a business within the meaning of the Indian Income-tax Act, 1922, and if profits from illegal business are assessable to tax there is no reason either on principle or on authority for refusing to take into account losses from illegal business. In that case the assessee was carrying on a regular smuggling activity which consisted of taking out of Indian currency notes and exchanging them with gold in Pakistan and smuggling that gold into India. At one stage he was caught by the customs authorities and cash amounting to Rs. 65,500 was confiscated from him. That amount was claimed as a trade loss. The court held that as the hazard of losing the money with which the gold had to be acquired was inherent in the activity and, therefore, the confisc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tatutory provision such expenditure cannot be brought in under section 10(2)(xv). In that case a consignment of dates which was imported by steamer was confiscated by the customs authorities under section 167 of the Sea Customs Act. The assessee was given an option under section 183 of that Act to pay a fine in lieu of confiscation. The assessee paid the fine and had the dates released. The assessee sought a deduction of the amount of fine paid as allowable expenditure under section 10(2)(xv) of the Income-tax Act. The Supreme Court held that a sum which was paid by way of penalty for a breach of the law cannot be said to be an amount wholly and exclusively laid out for the purpose of the business within the meaning of section 10(2)(xv) and, therefore, it was not an allowable deduction. In the course of the judgment, their Lordships of the Supreme Court said : "Infraction of the law is not a normal incident of business, and, therefore, only such disbursements can be deducted as are really incidental to the business itself. They cannot be deducted if they fall on the assessee in some character other than that of a trader. Therefore, where a penalty is incurred for the contravention....