TMI Blog1938 (11) TMI 18X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessees. For the financial year 1936-37, the assessees were assessed by the income-tax Officer, Companies Circle, on a total income of ₹ 3,71,600. In arriving at the aforesaid total income, the Income-tax Officer disallowed three payments aggregating in all to ₹ 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 need of funds for its business the assessees requested Mr. F.E. Dinsha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 2,94,308 to the co-sharers F.E. Dinshaw and Messrs. F.E. Dinshaw Ltd., out of the commission of ₹ 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) of the Act requires me to give my opinion while submitting this statement of the Case, I beg to state that the assessees claim a de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 or to prevent any deterioration in its earning power, an agreement to share the profit with the financing party had to be made. In other words, but for this arrangement, this source of income of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputing the assessees' income from their business as Managing Agents of the Tata Iron and Steel Co., Ltd., the payment of ₹ 2,94,308 to the co-shares F.E. Dinshaw and Messrs. F.E. Dinshaw Ltd., out of the commission of ₹ 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 ₹ 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 that the assessees were bound in law to procure finance for the Tata Iron and Steel Co., Ltd., but for practical purposes the finance would have to be provided by them, if it was to be procured at all. Accordingly, the assessees approached Mr. F.E. Dinshaw and arrange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 whether the payment of part of a commission to a third person can be regarded as expenditure incurred solely for the purpose of earning that commission is a question which must be answered on the facts of each case and on a commercial basis. Now, it is to my mind cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 50,000 whether the company made any profits or not, or whether any dividends were declared or not. Clause 3 provides that in consideration of the remuneration thus granted the agents will use their best endeavours to promote the interests and business of the company. Under Clause 4 of the agreement the managing agents are given the general conduct and the sole m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 come. The Master of the Rolls further observed as follows(1): That he was doing that, is I think, abundantly clear from the nature of the contract there in question, which was merely a contract under which a percentage of profits was payable by the Railway Company to the French Government. There was no q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 payments to F.E. Dinshaw, Ltd., and Richard Tilden Smith as being expenditure incurred solely for the purpose of earning their profits or gains. So far as I can see the principle there laid down by Lord Macmillan was that the question whether a payment, made in the circumstances such as we have in this case, is an expenditure incurred solely for the purpose of earning profits or gains, must be determined in a commercial sense and the real question was whether the payment became necess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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