1968 (11) TMI 30 - HC - Income Tax

Managing agency agreement - managing agency remuneration - expenditure - British Indian IT Act

Summary

Issues:
Interpretation of managing agency agreement for calculating managing agency remuneration.

Analysis:
The judgment of the High Court of Andhra Pradesh involved the interpretation of a managing agency agreement dated April 18, 1937, for calculating managing agency remuneration. The agreement specified that the managing agents were entitled to 10% of the net profits of the company or a minimum payment of Rs. 1,000 a month if there were no profits. The dispute arose regarding the calculation of profits and depreciation on fixed assets and other assets of the company as per the agreement. The Income-tax authorities interpreted the agreement to allow depreciation based on the British India Income-tax Act in force from time to time, resulting in reduced profits. However, the Tribunal disagreed with this interpretation, holding that the depreciation should be calculated based on the Income-tax Act in force on the date of the agreement. The Tribunal also confirmed that the managing agency commission claimed was a deductible expenditure and a bona fide payment. The department contended that the Tribunal's interpretation was incorrect, emphasizing the need to consider depreciation in accordance with the Income-tax Act in force from time to time. On the other hand, it was argued that when a deed or statute adopts another statute by reference, the provisions of the statute as existing on the date of the deed should apply, not subsequent amendments.

The High Court analyzed the language of the agreement, particularly clause 2(b, which defined "Net profits" of the company. The clause specified that profits should be calculated by allowing for depreciation on fixed assets and other assets as per the British India Income-tax Act in force at the date of the agreement. The Court agreed with the Tribunal's interpretation, emphasizing that depreciation should be allowed based on the Income-tax Act in force on the date of the agreement. The Court noted that the parties intended for the Income-tax Act in force at the date of the agreement to govern the calculation of profits throughout the agreement period. The Court rejected other contentions raised by the department and the assessee, except for a preliminary objection regarding the academic importance of the question. Despite the objection, the Court answered the question in favor of the assessee, affirming that the managing agency remuneration should be calculated based on the Income-tax Act in force at the date of the agreement. The Court awarded costs and advocate's fee to the assessee, concluding the judgment in their favor.