1953 (3) TMI 46 - HC - Income Tax

Summary

Issues Involved:
1. Deductibility of legal expenses incurred for prosecuting a person in relation to a business that had not started.
2. Deductibility of managing agency commission attributable to profits earned in Karachi from the taxable income in India.

Issue 1: Deductibility of Legal Expenses
The assessee company, a public limited company resident in India, claimed a deduction of Rs. 8,150 spent on prosecuting an individual for cheating related to an advance payment for jeeps. The Tribunal disallowed this deduction, concluding that the jeep business had not started, and thus the expenditure was not incurred in the carrying on of its cotton business. The High Court upheld this decision, stating, "It is difficult to understand how the assessee company can claim this sum as a permissible deduction in respect of carrying on a business when that business had not been started at all." The Court likened this expenditure to preliminary expenses, which are not permissible deductions.

Issue 2: Deductibility of Managing Agency Commission
The assessee company had a branch in Karachi and maintained separate profit and loss accounts for its Bombay and Karachi businesses. The company sought to deduct managing agency commission attributable to Karachi profits from its taxable income in India. The Income-tax Officer allowed a partial deduction but rejected the claim for Rs. 1,10,006. The Tribunal allowed the deduction, leading the Commissioner to seek a reference.

The High Court examined the Indo-Pakistan agreement under Section 49AA of the Income-tax Act, which aims to avoid double taxation. The Court noted that the agreement exempts net profits earned in Pakistan from Indian tax, not gross profits. The Court emphasized that managing agency commission should be considered an overhead expense and not apportioned between Karachi and Bombay businesses. The Court referred to the Calcutta High Court decision in Messrs. Birla Bros. v. Commissioner of Income-tax, which held that directors' fees could not be apportioned between businesses in different regions.

The High Court concluded that the managing agency commission accrued and was paid in Bombay, and thus, it should not be apportioned. The Court stated, "It is impossible to accept the contention of the Department that the remuneration of the managing agents should be apportioned between Karachi and Bombay." The decision of the Tribunal was upheld, and the questions were answered as follows: the first question in the affirmative and the second question in the negative.