1968 (10) TMI 15 - HC - Income Tax

Managing agency firm (assessee-firm) was to receive towards remuneration 15% of the net profits of the managed company or Rs.25, 000 whichever is larger - there was no actual waiver in respect of the sum of Rs.25, 000 by the assessee firm - sum of Rs. 25, 000 was assessable in the hands of the assessee as its income

Summary

Issues:
1. Assessment of Rs. 25,000 as income in the hands of the assessee.
2. Allowability of Rs. 25,000 as a deductible expenditure under section 10.

Analysis:
1. The first issue revolves around the interpretation of clause 2(b) of the managing agency agreement, which stipulates a minimum commission of Rs. 25,000 in case of inadequacy of profits. The Income-tax Officer included the sum of Rs. 25,000 in the total income of the assessee firm, as the managed company made a profit before charging any commission payable to the assessee firm. The Appellate Assistant Commissioner and the Tribunal upheld this decision, emphasizing that the minimum commission was payable regardless of the actual profit earned by the managed company. The court concurred, stating that the clause entitles the assessee firm to the minimum commission irrespective of the profit earned, as confirmed by the actual payment of Rs. 25,000 in a subsequent year with a loss suffered by the managed company.

2. The second issue pertains to the deductibility of the Rs. 25,000 as an expenditure under section 10(2)(xv) of the Act. The Appellate Tribunal found no actual waiver of the sum by the assessee firm on grounds of commercial expediency. As this finding was deemed a fact, the court concluded that the question of deduction does not arise. Therefore, the second question was answered in the negative against the assessee, indicating that the sum of Rs. 25,000 could not be allowed as a deductible expenditure.

In conclusion, the court held that the sum of Rs. 25,000 was assessable as income in the hands of the assessee firm, as per the terms of the managing agency agreement. Additionally, the court ruled against allowing the Rs. 25,000 as a deductible expenditure, as there was no actual waiver of the amount by the assessee firm. The reference was answered in favor of the department, with costs awarded to them.