1969 (6) TMI 11 - HC - Income Tax

Summary

Issues:
Interpretation of managing agency commission deduction under Income-tax Act, 1922.

Analysis:
The case involved an assessee, a limited company with a sugar mill and agricultural operations, claiming a deduction of managing agency commission amounting to Rs. 48,735. The managing agents were entitled to a commission of 10% of the net profits, subject to a minimum payment. The Income-tax Officer disallowed a portion of the commission as it included profits from agricultural operations not assessable to income tax.

The Appellate Assistant Commissioner and the Tribunal upheld the disallowance, stating that any income attributable to profits from agricultural operations could not be deducted under section 10 of the Income-tax Act. The Tribunal reasoned that as the profit from agricultural activities was not taxable, the related expenditure could not be allowed in computing the profits of the sugar mill.

The matter was brought before the High Court, where the counsel for the assessee argued that no part of the managing agency remuneration could be linked to agricultural operations, citing precedents like Commissioner of Income-tax v. Indian Bank Ltd. and Commissioner of Income-tax v. Maharashtra Sugar Mills Ltd. These cases emphasized that if part of the income is exempt, the related expenditure cannot be disallowed. The counsel contended that the business expenses incurred should not be scrutinized based on their direct or indirect income-producing capacity.

The counsel for the revenue argued that the Supreme Court's decision in Commissioner of Income-tax v. Indian Bank Ltd. was based on the business being indivisible, which was not the case in the present scenario. However, the High Court, considering the terms of the managing agency agreement and the precedents cited, concluded that the disallowance made by the Tribunal was incorrect. The High Court held in favor of the assessee, citing the decisions of the Supreme Court and the Bombay High Court, and answered the referred question in the negative.

The judgment was delivered by SABYASACHI MUKHARJI J., with agreement from SANKAR PRASAD MITRA J., who concurred with the decision to answer the question in the negative. Each party was ordered to bear its own costs.