1974 (7) TMI 45 - HC - Income Tax

Summary

Issues Involved:
1. Justification of the disallowance of Rs. 62,144 out of the remuneration paid to the managing agent.
2. Entitlement of managing agents to remuneration upon cessation of their term before the end of the accounting year.
3. Basis for calculating the remuneration of managing agents for the period they served.

Detailed Analysis:

1. Justification of the Disallowance of Rs. 62,144:
The primary issue was whether the disallowance of Rs. 62,144 from the remuneration paid to the managing agents for their services from January 1, 1960, to August 15, 1960, was justified in law. The Income-tax Officer allowed only Rs. 32,361 as a deduction, reasoning that the remuneration should be based on the minimum remuneration fixed under the agreement, proportionate to the period of service (7 1/2 months), and disallowed the balance as excessive. The Tribunal upheld this view, but the High Court disagreed, stating that the managing agents were entitled to remuneration for the period they served, calculated on a reasonable basis, having regard to the terms of the agreement.

2. Entitlement of Managing Agents to Remuneration:
The Tribunal's decision was influenced by precedents like E.D. Sassoon & Co. Ltd. v. Commissioner of Income-tax and Cotton Agents Ltd. v. Commissioner of Income-tax, which suggested that remuneration accrues only at the end of the accounting year. The High Court, however, distinguished these cases, emphasizing that the managing agents were entitled to remuneration for the period they rendered services, even though they ceased to be managing agents before the end of the accounting year. The Court noted that the managing agents were prevented from continuing their services by statute (section 330 of the Companies Act), and this should not disentitle them to remuneration for the period they did serve.

3. Basis for Calculating the Remuneration:
The High Court found that the Income-tax Officer's calculation, based on the assumption that the company had not earned profits as of August 15, 1960, was unjustified. The Court agreed with the assessee's counsel that the remuneration should be calculated based on the actual profits earned by the company during the accounting year. The remuneration payable to the managing agents had to be worked out on the alternative basis given under the agreement, i.e., 10% of the net profits of the company. The Court held that the reasonable basis for calculating the remuneration was to adopt the proportion of the period of service to the entire year on the 10% of the net profits. The sum of Rs. 94,505, calculated on this pro rata basis and actually paid to the managing agents, was deemed allowable as it was an expenditure incurred for the purpose of the business of the company.

Conclusion:
The High Court answered the referred question in the negative and in favor of the assessee, allowing the entire sum of Rs. 94,505 as a deductible expenditure. The assessee was also entitled to costs, with counsel's fee set at Rs. 250.