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Interpretation of Section 15(2)(c) of the Indian Income-tax Act regarding deduction of proportionate expenses in managing Jajieerao Cotton Mills Limited for tax exemption. Analysis: The judgment pertains to a reference under Section 66(1) of the Indian Income-tax Act regarding the deduction of proportionate expenses incurred by an applicant company in British India in managing Jajieerao Cotton Mills Limited, Gwalior, to determine the profits of the Gwalior Mills exempted from taxation under Section 15(2)(c) of the Act. The case involves assessments for the years 1943-44, 1944-45, and 1945-46, with the central issue revolving around whether the entire directors' fees can be considered legitimate expenses for tax calculation purposes. The assessees, a company residing in British India, were managing agents of a cotton mill in Gwalior State. The taxing authorities contended that as part of the company's income was not taxable due to Section 14(2)(c) of the Act, the entire directors' fees could not be considered legitimate expenses for calculating taxable income. The argument was made for allowing only a proportion of directors' fees attributable to earning taxable income in India. However, the assessees argued that the directors' fees were legitimate expenses of a company resident in Calcutta and should be fully deductible against gross income. The judgment extensively discussed the case of McMillan v. Guest to support the argument that directors' fees can be considered legitimate expenses even if activities are conducted outside the jurisdiction. The court emphasized that unless there is a statutory provision or agreement for apportionment of directors' fees, the entire fees should be deductible as an expense incurred in earning taxable income. The judgment highlighted the impracticality and potential injustice of apportioning fees based on activities in different locations without a clear agreement. Ultimately, the court held that the directors' fees, being earned and payable in Calcutta, must be regarded as legitimate expenses of the company for tax calculation purposes. It concluded that the taxing authorities should have allowed the entire remuneration payable to the directors without disallowing any proportion attributable to earning income in Gwalior. The question posed was answered in the negative, indicating that the entire directors' fees should be deductible against the gross income for tax assessment purposes. In agreement with the Chief Justice's judgment, Banerjee, J., concurred with the decision.
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