TMI Blog1982 (4) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... agent of Platt Bros. (Sales) Ltd. in India. Section 20 of the Finance Act, 1953, of the United Kingdom makes provision for a subvention payment to one associated company, in respect of losses that may be incurred by it, by other associated companies. Under the provisions of s. 20 of the Finance Act, 1953 (U.K.), Textile Machinery Makers Ltd. (parent company) entered into an agreement dated February 22, 1957, with its subsidiary companies for the making of subvention payments as recognised under s. 20 of the Finance Act, 1953 (U.K.). Under cl. 1 of the agreement it is provided as follows : "1. The subsidiary companies hereby jointly and severally mutually COVENANT and AGREE with themselves and with the parent company that when and if directed by the parent company they will bear the losses incurred by any one or more of them and will make or receive a subvention payment in accordance with the provisions of section 20, Finance Act, 1953 (or any statutory modification or re-enactment thereof). " This agreement was in operation for the assessment year 1966-67. During that assessment year Platt Bros. (Sales) Ltd. made a provision of pounds 3,30000 for bad and doubtful debts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be deducted in computing the total income of Platt Bros. (Sales) Ltd. under r. 10(ii). The ITO further held that the receipt of pounds 3,00,000 by Platt Bros. (Sales) Ltd. as a subvention payment under the terms of the agreement dated 22nd February, 1957, was income of that company and so was liable to be included in its total income. As a result, pounds 3,00,000 was treated as a part of the income of Platt Bros. (Sales) Ltd., and they were not allowed to deduct the sum of pounds 3,30,000 as a permissible deduction for computing the total income of the company. The decision of the ITO was upheld by the AAC. The Tribunal, however, held that the receipt of pounds 3,00,000 by Platt Bros. (Sales) Ltd., being a subvention receipt, could not be treated as an income in the hands of that company. This receipt, therefore, should be excluded while calculating the total income of the company. There was no dispute that the deduction of pounds 3,30,000 for doubtful debts was not a permissible deduction under the I.T. Act. From this decision, at the instance of the Commissioner of Income-tax the following question has been referred to us for our opinion: "Whether, on the facts and in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hall be disregarded for the purposes of this section; and, where payments to or from more than one company are in question, the payments shall be treated as abating in such manner as may be agreed between all the companies concerned or, in default of agreement, determined by the Commissioners of Inland Revenue..." Under s. 20 of the Finance Act, 1953 (U.K.), a subvention payment relates to a deficit which the company has for tax Purposes. It receives this subvention payment from an associated company having a surplus for tax Purposes. Under sub-s. (2) it is further stated that the amount which is received by the payee-company as a subvention payment is an amount which would not be ordinarily taken into account in computing the profits or losses of the payee-company, but for the express provisions of s. 20. Section 20 expressly provides that in computing the profits or losses of these companies for the purpose of income-tax, subvention payment shall be treated as a trading receipt in the hands of the payee-company and as an allowable deduction to the paying-company, as if it were a trading expense. Thus, a subvention payment is a payment of an amount, which would not, but for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come. From the language of s. 20 of the U.K. Act also it is clear that a subvention payment is not ordinarily treated as a trade receipt. In fact, the section lays down that such a payment must be of such a nature as would not ordinarily qualify as a trade receipt. The section, therefore, further provides that such a payment, though not ordinarily a trading receipt, would be treated as such. There is no such deeming provision under our I.T. Act. Hence, bearing in mind the nature of the payment, it cannot be treated as a trade receipt. Looked at from a slightly different point of view, the receipt is under the agreement dated 22nd February, 1957. Under this agreement I Platt Bros. (Sales) Ltd. may, in future, be called upon to make a payment to another associate company in respect of a loss which such a company may suffer. Any sum which Platt Bros. (Sales) Ltd. may pay to such a company would not be considered as business expenditure deductible under our I.T. Act. If an amount paid by the company as a subvention payment under the agreement dated 22nd February, 1957, cannot be treated as business expenditure, then any receipt of such payment by the company also cannot be consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the manufacturers to carry on their business profitably. Ostime (H. M. Inspector of Taxes) v. Pontypridd and Rhondda Joint Water Board [1946] 28 TC 261 ; [1946] 14 ITR (Suppl.) 45 (HL), is a leading case on this topic. In that case certain sums paid to the water board by the District Councils which were its constituent authorities to meet an estimated deficiency of the water board were considered as a part of the trading profit of the board. Similarly, in the case of Ratna Sugar Mills Co. Ltd. v. CIT [1958] 33 ITR 644, the Allahabad High Court held that a subsidy given to the sugar factories to compensate for an increase in the wages of the workers was a trade receipt of the sugar mills and was included in the income of the company for tax purposes. In the case of Ahmadpur Katwa Railway Co. Ltd., In re [1935] 3 ITR 277 (Cal), a subsidy paid by the State for the payment of a guaranteed percentage of interest on share capital was also treated as income of the company . In all these cases relied upon by Mr. Joshi the subsidy, which was paid, was paid in order to assist the company in its trading activities, either for ensuring a certain guaranteed return or for compensating the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diary companies to make any subvention payment nor do they have any legal right to receive any subvention payment. It is only when the parent company, in its discretion, directs such payment to be made, that the payment is made. He submitted that such payment must be looked upon as a casual and non-recurring payment. Mr. Joshi, learned counsel for the Department, however, submitted that subvention payment made and received under an agreement: is a payment which cannot be considered as casual or non-recurring because it arises on account of certain obligations which are undertaken by the subsidiary companies by virtue of the agreement. The payments made under the agreement cannot be considered as non-recurring. Prima facie, looking to the nature of the payment, and in view of the fact that the obligation to make and receive such payments is regulated under the agreement dated 22nd February, 1957, it is not possible to consider such a payment as purely casual or non-recurring. It is not necessary, however, to examine this aspect of the matter further, since we are of the view that the payment made is not a part of the company's income at all. Mr. Dastur, learned counsel for the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India. This submission appears to us to be a very sweeping submission not warranted by the language of r. 10(ii). It is true that this rule must be interpreted bearing in mind its object of arriving at an accurate ascertainment of the income of a non-resident in India. But it would not be possible, in our view, to interpret r. 10(ii) in such a manner that a transaction of the non-resident, which may have taken place outside India, and which may be unconnected with the business activities of the company in India, can be eliminated in calculating its total world income. Rule 10(ii) requires that one should first ascertain the ratio of an assessee's receipts in India to its total world receipts. This ratio must be applied to the assessee's total world income in order to arrive at the assessee's income in India. To ascertain the world income of the assessee, one must necessarily take into account receipts and outgoings outside India. They cannot be ignored. It is possible that in a given case a non-resident company may carry on diverse business activities which are separable and in respect of which it has kept separate accounts. Out of its several businesses, it may carry on only one ..... X X X X Extracts X X X X X X X X Extracts X X X X
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