TMI Blog1963 (9) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... oda Spinning and Weaving Co. Ltd., Baroda. The entity composed of the then members of the said association of persons was appointed as managing agents under an agreement entered into on January 21, 1906. Under that agreement, it was provided that the managed company should pay to the managing agents three pies per every pound of yarn and cloth manufactured and sold by the company and further, ten per cent, commission of the amount of bills for all other work done by the managed company, except that of yarn and cloth. The said agreement further provided that if, in any year, the managed company's profits were less than six per cent, payable on its paid up capital, the managing agents should forgo their commission to the extent of one-third in order to make up the six per cent. The capital of the managed company at that time was made up of 5,839 ordinary shares of ₹ 100 each. Thereafter, certain changes took place in the entity of the managing agents, as a result of which a fresh agreement of managing agency was entered into on April 25, 1921. Clause 3 of that agreement provided that the managed company should pay to the agents four per cent, on the profits of yarn and clot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant for our purposes, as translated, ran as follows: In consideration of the party of the other part working as secretary, treasurers and agents of the company of the first part the company of the first part shall pay to the agents of the other part commission at the rate of (4%) four per cent, of the value of the yarn and piece goods, which will be sold after being manufactured in the factory of the company of the first part as also commission at the rate of ten per cent, on the net profits made in respect of the work of ginning cotton as well as for any other kind of work. But it is further provided that, for the year, during which the company is not able to distribute ₹ 58,390 by way of dividends, the company of the first part shall pay to the agents less commission at the most to the extent of one-third, that is to say, up to one-third share, in order to make up deficit amount during that year and the agents shall receive less commission to that extent . During the calendar year 1950, the gross profit of the managed company, without deducting depreciation and the managing agent's commission, came to ₹ 5,96,938 and under clause 3 of the said agreeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum of ₹ 2,95,651. Aggrieved by this order, the assessees applied to the Tribunal to refer the question of law arising from clause 3 in the managing agency agreement, and the question thereupon referred to us by the Tribunal is as follows: Whether, on the facts and in the circumstances of the case, and on a true interpretation of the provisions of clause 3 of the managing agency agreement dated August 2, 1950, between the assessee-company and the Baroda Spinning and Weaving Mills Co. Ltd., Baroda, the assesse-ecompany is liable to be assessed on an amount of ₹ 56,784 in addition to the remuneration of ₹ 2,95,661? On the question as to the proper interpretation of clause 3 of the managing agency agreement, the contention placed before us on behalf of the assessees was that the minimum amount of dividend guaranteed under that clause was for dividend on 5,839 ordinary shares and that the Tribunal was not correct in considering that provision to be for the minimum dividend for both the kinds of shares, namely, preference and ordinary shares. Therefore, the managed company was right in deducting ₹ 26,275 as dividend which it was liable to pay in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence shares according to the terms and conditions of the issue of those shares. A reasonable view of clause 3 of the managing agency agreement, therefore, would be that when the amount of ₹ 58,390 was provided as minimum dividend in that clause, it was intended as a total minimum for both the types of shares. This conclusion is fortified by the fact that the managing agents would not ordinarily agree, and cannot be taken to have agreed, to increase their burden of recoupment under the provisions of clause 3 unless there is some indication in the agreement or otherwise to an increase in the minimum amount of dividends which, in its turn, would increase their obligation under the clause as to recoupment by them of any deficit in the profits. If it was intended that the managed company was to guarantee ₹ 58,390 as dividend for its ordinary shares and in addition was to guarantee to pay dividend on its preference shares and that the managing agents were to recoup any deficit by forgoing to the extent of that deficit, not exceeding of course one-third of their total commission, such a clause would obviously increase their obligation and, in such a case, it is inconceivable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cent, and the total would make up ten per cent, on the subscribed capital. That appears to be the object when clause 3 of the managing agency agreement stated that the managing agents should recoup any deficit from their commission if the managed company was not able in any year to pay at least ₹ 58,390 as and by way of dividend. The recoupment clause, in our view, therefore applies to the dividends for both the types of shares. The shareholders would have no grievance because they continue to receive ten per cent. On the capital actually subscribed by them, namely, ₹ 100 each on the 5,839 ordinary shares, they not having contributes to the value of the preference shares. Apart from these factors, clause 3 of the agreement merely provides ₹ 58,390 to be the minimum amount to be distributed by the managed company by way of dividend. No distinction is made in that clause between the ordinary shares and the preference shares and there is no indication either in that clause or in any other clause of the managing agency agreement to show that the minimum amount of dividend distributable by the managed company was over and above the amount of ₹ 58,390 mentioned in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the normal depreciation is only ₹ 1,86,143 according to the departmental representative. The depreciation in excess of the normal depreciation is not strictly depreciation but an inducement to set up new machinery. We consider that normal depreciation is alone allowable in the computation of profits. In our view, the Tribunal was not correct in the way it looked at this question, and the error was in not appreciating the distinction between the depreciation calculated on the basis of the statutory provisions of the Income-tax Act for the purpose of computing assessable profits on the one hand and depreciation computed by a business concern for the purpose of arriving at its true commercial profits. It is the latter which has to be taken into account for the purpose of computing divisible profits, and not the former. This distinction has been well brought out in Commissioner of Income-tax v. Bipinchandra Maganlal and Co. Ltd. [1961] 41 ITR 290 ; [1961] 2 SCR 493, where it has been observed that there is no definable relation between assessable income and profits of a business concern in a commercial sense and that the computation of income for the purposes of assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is, the standard provided in the Income-tax Act, and not the one for computing true commercial profits, would not mean that the assessees would be entitled to the whole of the depreciation permissible under the Income-tax Act by way of different types of depreciations calculated on fictional and artificial notions provided for in the statute. In this view of the matter, it does not become necessary for us to go into the argument advanced by the learned Advocate-General before us, namely, that depreciation other than normal depreciation, i.e., initial and additional depreciation, is the only depreciation; in the real sense of the term. That being the position, we would not be justified in interfering with the amount of ₹ 1,86,143 allowed by the Tribunal as depreciation. The learned advocate for the assessees then contended that the assessees had actually received only the amount of ₹ 2,95,651, that the managed company has actually debited in its profit and loss account that amount only and it was only that amount that was deducted in the assessment of the managed company as commission paid by it to its managing agents. His contention was that these three facts would c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we must also come to the conclusion that the real income in the present case was only ₹ 2,95,651, the rest of the amount having been forgone by the assessees from out of the total commission payable by them under clause 3 of the agreement. At page 720 of the report, the learned judges, however, emphasized that if the fact of forgoing or surrendering the amount of ₹ 57,000 and odd were to be regarded as of cogency in the context of the question as to the real income and if it were remembered that the surrender was made at the time of ascertaining the quantum of the commission payable to the assessee-company and further if it were to be remembered, as was actually found by the Tribunal in that case, that the surrender was made bona fide and on grounds solely of commercial expediency, it appeared difficult to see how the revenue would be justified in contending that the real income of the assessee was something different than the amount of ₹ 20,000, which was shown by it at the time of assessment as its income from the managing agency commission. At page 722, the learned judges again stressed the fact that the surrender of commission in that case had been made bona ..... X X X X Extracts X X X X X X X X Extracts X X X X
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