9911796707
TMI Blog1972 (1) TMI 30X X X X Extracts X X X X X X X X Extracts X X X X ..... 14,520 by the assessee to the Kerala Government under the agreements dated June 18, 1937, and January 28, 1947, was allowable under section 10 of the Indian Income-tax Act, 1922? (3) Whether, on the facts and in the circumstances of the case, the payment of Rs. 1,21,578 by the assessee to the Kerala Government under the agreements dated June 18, 1937, and January 28, 1947, was allowable under section 10 of the Indian Income-tax Act, 1922 ? (4) Whether, on the facts and in the circumstances of the case, the payment of Rs. 65,682 by the assessee to the Kerala Government under the agreements dated June 18, 1937, and January 28, 1947, was allowable under section 37 of the Income-tax Act, 1961?" The assessee is a public limited company incorporated under the Travancore Companies Act carrying on the business of manufacturing sugar, running a distillery and a tincture factory, in the State of Kerala. In the Travancore Sugars Ltd., Thuckalai, incorporated under the Travancore Companies Act, the Travancore Government owned the largest number of shares. Steps were taken to wind up this company and to transfer all the shares to the Government. One of the objects of the assessee was to purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee. For the assessment year 1958-59, the assessee claimed deduction of Rs. 42,480 paid to the Government under clause (7) of annexures "A" and "B" under section 10(2)(xv) of the Indian Income-tax Act, 1922. The income-tax authorities disallowed the claim of the assessee while the Tribunal upheld the same. At the instance of the Commissioner of Income-tax, Kerala, the sustainability of the claim of the assessee for deduction was referred to this court under section 66(1) of the Indian Income-tax Act, 1922. This court by its decision reported in Commissioner of Income-tax v. Travancore Sugars & Chemicals Ltd., answered the question in favour of the revenue taking the view that payment under clause (7) of annexures "A" and "B" is a part of the purchase price and will constitute an expenditure not of a revenue but of a capital nature and the payment is made not for the purpose of carrying on the business of the assessee but for the purpose of acquiring the assets of the assessee. This court, therefore, held that the assessee was not entitled to the deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922. The assessee filed an appeal against the decision of this cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount to diversion of profits by title paramount, and (2) whether the assessee is entitled to deduction of the amounts in question under section 10(2)(xv) of the Indian Income-tax Act, 1922, and under section 37 of the Income-tax Act, 1961. Counsel for the revenue pleaded for the acceptance of the view of Isaac J. on both the aspects in preference to the majority view expressed by Raghavan J. and Mathew J. We shall take up the first question whether the payment of the amounts to the Government is a diversion of profits by title paramount. Counsel for the revenue relied on the principle of law stated by Lord Macmillan in Pondicherry Railway Co. v. Commissioner of Income-tax. There the assessee who was a company incorporated in England constructed a railway line within the French territory in India. Under the agreement the assessee was to pay to the French Government a portion of the net profits in return for the land given by the French Government in the French territorry in India for the construction of the railway line. The question arose whether the assessee is entitled to claim deduction of the portion of the profits paid to the French Government for calculating the assessabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of profits preceded the coming into operation of the obligation to pay, and when the profits had been ascertained the obligation was to make over one-half thereof to the French Colonial Government. The obligation was conceived in language entirely different from the language which your Lordships have been considering in the present appeal, where there is a common form obligation in a lease to pay rent. When therefore, in the passage referred to by the Attorney-General in the Pondicherry case, I said that a 'payment out of profits and conditional on profits being earned cannot accurately be described as a payment made to earn profits', I was dealing with a case in which the obligation was, first of all, to ascertain the profits in a prescribed manner, after providing for all outlays incurred in earning them, and then to divide them. Here, the question is whether or not a deduction for rent has to be made in ascertaining the profits, and the question is not one of the distribution of profits at all." The revenue, therefore, cannot derive much assistance from Pondicherry Railway Company v. Commissioner of Income-tax. At this stage we shall examine the two decisions of the judicial C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied the above mentioned decisions of the Judicial Committee in diverse manner. It is not necessary, in our view, to examine all of them. Suffice it to say that the Supreme Court in Commissioner of Income-tax v. Sitaldas Tirathdas, after reviewing the decisions of the Judicial Committee and some of the decisions of the High Courts, has enunciated the principles that should guide us for the decision of the point mooted before us. In the Supreme Court decision the assessee in computing his total income for purposes of income-tax sought to deduct amounts paid by him as maintenance to his wife and children under decree of court passed by consent. There was no charge created in favour of the wife and children for their maintenance in the properties of the assessee. Hidayatullah J. (as he then was), speaking for the court, enunciated the guiding principles in the following words : "In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r a manager of a commisson on the profits of a company. It may, however, be worth pointing out that an apparent difficulty here is really caused by using the word 'profits' in more than one sense. If a company having made an apparent net profit of pound 10,000 has then to pay pound 1,000 to directors or managers as the contractual recompense for their service during the year, it is plain that the real net profit is only pound 9,000. A contract to pay a commission at 10 per cent. on the net profits of the year must necessarily be held to mean on the net profits before the deduction of the commission, that is, in the case supposed, a commission on the pound 10,000." There is a decision of the Court of Appeal in British Sugar Manufacturers Ltd. v. Harris (Inspector of Taxes) , which in this connection can advantageously be referred to. In this case the assessee-company agreed with four other companies to pay them a percentage of the "net profits" in consideration of their giving to the assessee-company the full benefit of their technical and financial knowledge. "Net profits" are, according to the agreement, to be ascertained after payment of all expenses and after providing for inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a diversion of the amount even before they reached the assessee. Subba Rao J. (as he then was) in Poona Electric Supply Co. Ltd. v. Commissioner of Income-tax, after quoting with approval the decisions of the Judicial Committee in Indian Radio and Cable Communications Co. Ltd. v. Commissioner of Income-tax and British Sugar Manufacturers Ltd. v. Harris, explained the concept of "real income" for assessment in the following manner : "Income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act. The real profit can be ascertained only by making the permissible deductions. There is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case whether the outgoings fall in one or the other of the heads is a question of fact to be found on the relevant circumstances, having regard to business principles. Another distinction that shall be borne in mind is that between the real and the statutory profits, i.e., between the commercial profits and statutory profits. The latter are statutorily fixed for a specified purpose. If we bear in m ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
