1973 (4) TMI 2 - SC - Income Tax

Whether the sum of Rs. 1, 11, 779 said to have been forgone by the assessee as managing agency commission was allowable as a revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act 1922 - commission given up by the assessee cannot be considered as its real income

Issues Involved:
1. Allowability of managing agency commission forgone as revenue expenditure.
2. Allowability of office allowance forgone as revenue expenditure.

Detailed Analysis:

1. Allowability of Managing Agency Commission Forgone as Revenue Expenditure:

The primary issue in Civil Appeal No. 242 of 1970 was whether the sum of Rs. 1,11,779 forgone by the assessee as managing agency commission was allowable as a revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922, for the assessment year 1954-55. Similar questions were raised for the assessment years 1955-56 and 1956-57.

The Income-tax Officer and the Appellate Assistant Commissioner concluded that the deductions claimed were not allowable because the commission had accrued at the end of each financial year. The assessee's giving up the commission subsequent to those dates did not bring the case under section 10(1) of the Act, and no case was made out under section 10(2)(xv).

The Tribunal, however, differed and concluded that the commission given up could not be considered as the real income of the assessee-company. It opined that the commission given up was allowable under section 10(2)(xv) due to commercial expediency. The High Court agreed with the Tribunal's view.

The Supreme Court noted that the assessee maintained its accounts on a mercantile system and gave up the commission after the end of the financial year but before the managed company made up its accounts. The Court rejected the revenue's contention that the commission had accrued before it was given up, citing the Bombay High Court's decision in H. M. Kashiparekh & Co. Ltd. v. Commissioner of Income-tax. The Court emphasized the principle of "real income," stating that the real income could not be arrived at without considering the amount forgone by the assessee. The Court held that the commission did not accrue to the assessee by the end of the relevant accounting year and thus could not be considered as its real income.

The Court also distinguished the case from Morvi Industries Ltd. v. Commissioner of Income-tax, where the commission had accrued before it was given up, and the Tribunal had found no commercial expediency in the relinquishment.

2. Allowability of Office Allowance Forgone as Revenue Expenditure:

In Civil Appeals Nos. 243 and 244 of 1970, an additional question was whether the sum of Rs. 30,000 forgone by the assessee as office allowance receivable from Gwalior Rayon and Silk Manufacturing Co. Ltd. was allowable as a revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922, for the assessment years 1955-56 and 1956-57.

The Tribunal found that the office allowance was given up on the ground of commercial expediency to stabilize the finances of the managed company, which was not financially sound during the relevant accounting years. This finding was binding on the High Court, which agreed with the Tribunal's view that the expenditure incurred came within the scope of section 10(2)(xv). The Supreme Court upheld this conclusion, noting that the Tribunal's finding was supported by the decision in Commissioner of Income-tax v. Chandulal Keshavlal & Co.

The Supreme Court dismissed the revenue's contention that the office allowance was paid to meet certain expenses incurred by the assessee-company, stating that it made no difference in law whether the office allowance was paid solely for that purpose or partly as remuneration.

Final Judgment:

The Supreme Court concluded that the High Court was justified in refusing to answer the first question regarding the managing agency commission in all three cases and upheld the High Court's decision in favor of the assessee regarding the office allowance. The appeals were dismissed with costs, affirming the Tribunal's and High Court's findings.

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