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Issues Involved:
1. Admissibility of compensation payments to ex-agents as deductions against assessee's profits. 2. Whether the compensation payments were an appropriation of profits. 3. Applicability of the real income theory. 4. Whether the compensation payments were capital expenditure. 5. Interpretation of the agreement between the assessee and I.C.I. (Exports) Ltd. Detailed Analysis: 1. Admissibility of Compensation Payments to Ex-Agents as Deductions Against Assessee's Profits: The Income-tax Officer disallowed the deductions of compensation payments made to ex-agents, amounting to Rs. 2,03,503, Rs. 5,41,526, Rs. 5,29,284, and Rs. 4,00,052 for the assessment years 1949-50 to 1952-53, respectively. The officer held that these payments were not admissible deductions against the assessee's profits. The Appellate Assistant Commissioner and the Tribunal upheld this decision. The court examined the agreement between the assessee and I.C.I. (Exports) Ltd. and determined that the assessee's income was the difference between the commission at normal rates and the compensation payable to the ex-agents. 2. Whether the Compensation Payments Were an Appropriation of Profits: The court evaluated whether the payments to ex-agents were an appropriation of profits. It was argued that the compensation payments were made from the profits already earned by the assessee. However, the court found that the compensation payments were not an appropriation of profits but were part of the agreement between the assessee and I.C.I. (Exports) Ltd. The court concluded that the payments were made before the profits reached the assessee and thus could not be considered an appropriation of profits. 3. Applicability of the Real Income Theory: The court discussed the real income theory, which states that tax is levied on the actual income that reaches the assessee. The court noted that the assessee's income should be determined based on the agreement, which specified that the assessee would receive a reduced commission for the first three years. The court held that the compensation payments to ex-agents were not part of the assessee's real income, as they were diverted by an overriding title before reaching the assessee. 4. Whether the Compensation Payments Were Capital Expenditure: The Commissioner of Income-tax argued that the compensation payments were capital expenditure and not deductible under section 10(2)(xv) of the Income-tax Act, 1922. The court examined the nature of the payments and concluded that they were not capital expenditure. The payments were made to fulfill the terms of the agreement and were necessary for the assessee to carry on its business. Therefore, the court held that the payments were deductible as business expenditure. 5. Interpretation of the Agreement Between the Assessee and I.C.I. (Exports) Ltd.: The court analyzed the agreement between the assessee and I.C.I. (Exports) Ltd., which specified that the assessee would receive a reduced commission for the first three years. The court found that the agreement was valid and binding. The court held that the assessee's income should be calculated based on the reduced commission specified in the agreement and not on the full commission. The court concluded that the compensation payments to ex-agents were made in accordance with the agreement and should not be included in the assessee's total income. Conclusion: The court answered the reference question in the negative, stating that the inclusion of Rs. 2,03,503, Rs. 5,41,526, Rs. 5,29,284, and Rs. 4,00,052 in the assessment for the years 1949-50, 1950-51, 1951-52, and 1952-53, respectively, in the computation of the total income of the assessee, was not justified. The court emphasized that the assessee's income during the first three years should be determined strictly in accordance with the agreement between I.C.I. (Exports) Ltd. and its former agents, and not based on the book entries maintained by the assessee. The respondent was ordered to pay the costs of the reference to the appellant.
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