1956 (3) TMI 1 - SC - Income Tax

Whether a sum of Rs. 1, 23, 719 paid by the respondent as commission to its managing agents on account of profits of its Karachi branch can be allowed as deduction against the Indian profits? Held that - 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. Appeal dismissed.

Summary

Issues:
1. Deductibility of commission paid to managing agents against Indian profits.

Analysis:
The case involved a dispute regarding the deductibility of a commission paid by the respondent to its managing agents against its Indian profits. The respondent, a company engaged in the cotton business with branches in Bombay and Karachi, paid a commission to its managing agents based on the net annual profits. The commission amount was apportioned between the Bombay and Karachi branches in the profit and loss statements. The Income-tax Officer allowed the deduction of the commission against the Indian profits, leading to a total income assessment of Rs. 13,09,375. The respondent appealed, arguing that the entire commission should be debited to the Bombay branch and not to Karachi. The Tribunal partially allowed the appeal, leading to a reference to the High Court.

The High Court held that the entire commission should be debited to the Bombay branch, following a previous decision. The court granted a certificate to appeal to the Supreme Court. The appellant contended that the commission should not be added to the Karachi profits for taxation purposes as it had already been deducted from the total income. The respondent argued that the deduction was allowable under the law, irrespective of how it was allocated in the profit and loss statements. The Supreme Court analyzed the provisions of the Income-tax Act, specifically Section 10(2)(xv), which allows for deduction of expenses incurred wholly and exclusively for the business.

The Supreme Court held that when a business operates in multiple locations, the net profits are calculated by pooling profits from all branches and deducting expenses. Therefore, the commission paid to managing agents, including the amount apportioned to the Karachi branch, was deductible against Indian profits. The court emphasized that the apportionment in the profit and loss statement was not in line with the managing agency agreement terms, which entitled the agents to commission based on overall net profits. The court affirmed the decision of the lower court, dismissing the appeal and ordering costs to be paid by the appellant.