1969 (4) TMI 16 - HC - Income Tax

Whether the sum 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

Summary

Issues Involved:
1. 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.
2. Whether the Tribunal's decision to exclude the forgone commission from the assessee's real income was correct.

Detailed Analysis:

1. Allowability of Forgone Commission as Revenue Expenditure:
The core issue revolves around whether the managing agency commission of Rs. 1,11,779 forgone by the assessee qualifies as a revenue expenditure under section 10(2)(xv) of the Indian Income-tax Act, 1922, for the assessment year 1954-55. The assessee argued that the commission was forgone for reasons of commercial expediency, as the managed company had suffered losses and carried forward heavy unabsorbed depreciation. The Income-tax Officer and the Appellate Assistant Commissioner rejected this claim, stating that the commission had accrued and its voluntary forgoing amounted to a gift of income that had already accrued. The Tribunal, however, found that the forgoing was done for commercial reasons and allowed the deduction, relying on the Bombay High Court decision in the case of H. M. Kashiparekh & Co. Ltd. v. Commissioner of Income-tax.

2. Exclusion of Forgone Commission from Real Income:
The Tribunal's decision was based on the theory of real income, asserting that the real income of the assessee should not include the forgone commission. This decision was influenced by the Bombay High Court's ruling in Kashiparekh & Co., which stated that the real income could not be determined without considering the amount forgone by the assessee. The Tribunal concluded that the commission forgone for commercial expediency should not be included in the assessee's total income for the relevant years.

Tribunal's Findings:
The Tribunal's order indicated that the decision to forgo the commission was made before the accounts were finalized, and thus, the commission should not be included in the real income of the assessee. The Tribunal held that the remuneration forgone was an expenditure incurred for business purposes and allowable under section 10(2)(xv). It also emphasized that the real income theory, as supported by the Supreme Court and the Bombay High Court, justified the exclusion of the forgone amount from the assessee's income.

High Court's Decision:
The High Court noted that the Tribunal had primarily decided the issue based on the real income theory under section 10(1) of the Indian Income-tax Act, 1922. The High Court observed that the question posed to it-whether the forgone commission was deductible under section 10(2)(xv)-was academic because the Tribunal had already determined that the commission did not form part of the real income. Consequently, the High Court declined to answer the question, stating that any answer would be academic and would not resolve the controversy between the parties. The High Court also refused to reframe the question to address whether the forgone commission could be included in the real income, as this issue was not raised by the revenue in the form of a question.

Conclusion:
The High Court concluded that the Tribunal's finding that the forgone commission did not constitute the real income of the assessee was not challenged. Therefore, the question of its deductibility under section 10(2)(xv) was irrelevant. The High Court declined to answer the question referred to it, emphasizing that the answer would be purely academic. Each party was directed to bear its own costs.