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TMI Blog1956 (3) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... in Bombay, and it maintains a branch at Karachi for purchasing cotton for shipment to Bombay or export direct to other places. Separate accounts are maintained and separate profit and loss statements are prepared for the business at Bombay and at Karachi. By an agreement dated 22nd December, 1947, the respondent appointed Messrs. Parakh Cotton Company Ltd., as its managing agents, and under clause 4 of the agreement, the remuneration payable to them was fixed at 20 per cent. of the net annual profits. During the accounting year 1st October, 1947, to 30th September, 1948, the respondent made a total profit of Rs. 15,63,504, of which Rs. 9,44,905 was earned in the business at Bombay and Rs.6,18,599 at Karachi. On this, the commission payabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement with Pakistan ... for the avoidance of double taxation of income, profits and gains under this Act ". And in exercise of the powers conferred under this section, a notification was issued on the 10th December, 1947, providing for relief being granted against double taxation of income in the manner and to the extent provided therein. The Income-tax Officer having ascertained the total income assessable to tax under the law of this country at Rs. 13,09,375 proceeded to determine the extent of the relief to be awarded to the respondent in respect of the profits earned in Karachi and chargeable under the law of Pakistan. For this purpose, he accepted as correct the sum of Rs. 4,94,879 which the respondent had shown as the net profits in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the circumstances of the case, the amount of Rs. 1,23,719 paid to the managing agents as commission at 20 per cent. of the net profits of the Karachi branch, is allowable as a revenue deduction against the Indian profits of the assessee company for the year of account? " This reference was heard by Chagla, C.J. and Tendolkar, J. They observed that there was considerable force in the contention on behalf of the Commissioner that the abatement to which the assessee would be entitled under the Agreement between this country and Pakistan would only be with reference to the net profits earned in Pakistan, which alone would be assessable to income-tax, and that the assessee firm itself having deducted a sum of Rs. 1,23,719 as managing agency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim relief in respect of that very amount under the terms of the Agreement between the two Dominions. For the respondent, Mr. Kolah contended that under the provisions of the Income-tax Act the respondent was not entitled to deduct Rs. 1,23,719, in the profits earned at Karachi, that in deducting that amount in the profit and loss statement for Karachi the assessee had made a mistake, and that, in fact, the Income-tax authorities in Pakistan who had originally admitted the deduction on the basis of the profit and loss statement had subsequently revised the assessment on the ground of error, and had disallowed it. He further contended that the question as to the relief to which the assessee was entitled under the Agreement between the two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits earned in Karachi. What has therefore to be determined is whether, notwithstanding the apportionment made by the respondent in the profit and loss statements, the deduction is admissible under the law. Section 10(2)(xv) of the Indian Income-tax Act provides that in computing the profits of a business, allowance is to be made for any expenditure laid out or expended wholly and exclusively for the purpose of such business. Now, the respondent is carrying on business in cotton both in India and in Karachi. When an assessee carries on the same business at a number of places, there is for the purpose of section 10, only one business, and the net profits of the business have to be ascertained by pooling together the profits earned in al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en that the business at Bombay results in profit, while that at Karachi ends in loss. In that event, what the managing agents would be entitled to would be commission not on the profits made in Bombay but on the net profits after setting off the loss in the Karachi branch against the profits of the Bombay business. And that would also be the position if the business at Bombay resulted in loss, while that at Karachi ended in profit. The appropriation, therefore, of Rs. 1,23,719 as proportionate commission in respect of the profits of Rs. 6,18,599 earned at Karachi in the profit and loss statement for that branch is not in accordance either with the terms of the managing agency agreement, or with the rights of the respondent under the law. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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