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TMI Blog1972 (12) TMI 55X X X X Extracts X X X X X X X X Extracts X X X X ..... e actually paid a remuneration of Rs. 35,000 in each of the assessment years 1958-59, 1959-60 and 1960-61. In the said assessment years the said R. Doraiswamy Naidu in his capacity as manager of the company had received remuneration of Rs. 24,900, Rs. 26,100 and Rs. 27,300 respectively. The company claimed allowance for the remuneration paid to the managing agency firm and also for the salary paid to the manager. The Income-tax Officer allowed the remuneration paid to the managing agency firm but disallowed the salary paid to the said R. Doraiswamy Naidu on the ground that the salary paid to him amounted to remuneration paid to the managing agent and that as it was in excess of ten per cent, of the net profits of the company during the years of account, the payment is prohibited by section 348 of the Indian Companies Act. His view was that R. Doraiswamy Naidu, being a partner of the managing agency firm, could not receive any remuneration apart from the ten per cent, of the net profits fixed under the said section as payable to the managing agent even though he functioned as a manager of the company. In disallowing the salary paid to the manager on the ground set out above, the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k with whom the stocks have been hypothecated, but that the stock as per the books of the company tallied with the declarations made from time to time by the company to the Textile Commissioner, Bombay, and that the difference between the stock declared to the bank and the stock as per the books of the assessee did not represent any excess and undisclosed stock. The Tribunal was of the view that it only showed that the stock declarations made to the bank were not accurate, that the Income-tax Officer was not justified in taking the company's stock declarations given to the bank as representing the true position of the stocks especially when the company had a very good reason for giving an inflated statement of the stock to the bank for obtaining a higher overdraft facility. In that view the Tribunal held that the Income-tax Officer was not justified in adding the sum of Rs. 93,456 as income from undisclosed source and deleted the same from assessment. At the instance of the revenue the Tribunal has referred to this court the following first question in T.C. No. 45/1967 and the only question in T.C. No. 122 of 1968: "Whether, on the facts and in the circumstances of the case and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the said section. It has, therefore, become necessary for us to consider the question whether the payment of remuneration to the said R. Doraiswamy Naidu infringed section 348 as it stood then. Section 348, after its amendment in the year 1960, clearly treats the remuneration received by a partner of a managing agency firm in any capacity as a remuneration paid to the managing agent and states that the aggregate sum should not exceed ten per cent, of the net profits of the company in the financial year. But this amendment is not retrospective. If this amendment were to be retrospective, the learned counsel for the assessee concedes that the payment made to the manager would violate that section. The revenue submits that though the amendment is not expressly made retrospective, it is only declaratory or clarificatory in nature and, therefore, the principle of the amended section would have to be applied even in respect of the assessment years in question. We are not inclined to hold that the amendment made in the year 1960 to section 348 is merely declaratory or clarificatory. It is true that declaratory or clarificatory statutes must be presumed to be retrospective unless a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation payable to directors. That section provides a maximum percentage of the net profits as payable to the directors of a company including the managing director. Then comes section 348 providing for a limit to the remuneration payable to the managing agents. The word "ordinarily "occurring in section 348 suggests that it is permissible to pay additional remuneration in special circumstances. That view is also fortified by section 352 which provides that additional remuneration in excess of the limit specified in section 348 may be paid, to the managing agent if such remuneration is authorised by a special resolution, of the company and is approved by the Central Government as being in public interest. The infringement of section 348 was not also made penal before 1960. The word "managing agent" has been defined in section 2(25) as meaning any individual, firm or body corporate entitled to the management of the whole or substantially the whole of the affairs of the company by virtue of an agreement with the company or by virtue of its memorandum or articles of association. This shows that an individual, firm or body corporate can be a managing agent. The question is whether a part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to 11 per cent, of the net profits mentioned in section 198. But as regards the scope of section 348 it was held in that ease that as the section is dear and emphatic that a managing agent cannot receive more than 10 per cent, of the net profits of the company either in his capacity as managing agent or in any other capacity and that the remuneration which a partner of a managing agency firm receives from the company managed by it, as a technical expert, has to be taken into account for the purpose of limiting the remuneration of the managing agency firm to 10 per cent, as per the section. The basis of the said decision is that a partner of a managing agency firm is himself a managing agent and, therefore, the remuneration received by him for services rendered to the company in his individual capacity should also be treated as remuneration to the managing agency firm. The relevant observations therein are these: "Now, a firm has no legal existence; it is not a legal entity; it is merely a compendious manner of describing partners carrying on a business. Therefore, the argument of Mr. Desai comes to this that although the company in law could not pay A and B jointly, it could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unless sufficient reasons exist. As we have already stated, ,such reasons do not exist here If the legislature intends that for the purposes of this disqualification every partner of a firm of managing agents should himself be treated as a managing agent, the legislature should make suitable amendments to effectuate that intention. But it is the legislature and the legislature alone which can do so. A court cannot, in the guise of interpretation, an interpretation based on a supposed intention of the legislature, in reality embark to legislate and usurp the functions of the legislature". With respect, we are inclined to agree with the observations of the Bench in the latter case. The definition of "managing agent"in section 2(25) cannot include a partner in a managing agency firm, even though the firm is composed of partners. It is true that a firm has no legal existence and that it is only a compendious name of describing all partners carrying on a business. But when the definition refers to the firm, the collective body of partners entitled to manage the affairs of the company as managing agent, it cannot be said that every one of the partners of the firm is himself a managing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as to what exactly was the nature of the tips and as to whether they were' legal or improper. All tips in one sense may be improper but not necessarily so always or are illegal. In the absence of evidence on this matter, we have to go by the factual observations of the Tribunal. As we said, the Tribunal has remarked that such expenditures as are sought to be deducted in this case are inevitable if the assessee has to carry on its business. Learned counsel for the revenue addressed arguments to us on the assumption that the expenditures sought to be deducted constituted improper or illegal acts and that expenditures incurred even in a lawful business are not eligible for deduction. One view may be that if profits derived from an illegal business are chargeable to tax, by the same logic the expenditure, be it illegal or improper, incurred in order to make such profits may legitimately be allowed as deduction. If the acts involved in the expenditure are in contravention of law, even so it may be a matter for consideration whether, for purposes of revenue, it should really matter in considering and allowing deductions as business expenditure". The view taken in that case seems to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, in the Act. (See Badridas Daga v. Commissioner of Income-tax [1958] 34 I.T.R.10; [1959] S.C.R.690 (S.C.))". The Supreme Court further observed : "It certainly seems to have been held and that view has not been shown to be incorrect that so far as the admissible deductions under section 10(2) are concerned they cannot be claimed by the assessee if such expenses have been incurred in either payment of a penalty for infraction of law or the execution of some illegal activity. This, however, is based on the principle that an expenditure is not deductible unless it is a commercial loss in trade and a penalty imposed for breach of the law during the course of the trade cannot be described as such. Penalties which are incurred for infraction of the law are not a normal incident of business and they fall on the assessee in some character other than that of a trader". In Commissioner of Income-tax v. Piara Singh [1972] 83 I.T.R.678 (Punj.) it was again held that even an illegal business is a business within the meaning of the Indian Income-tax Act, 1922, and if profits from illegal business are assessable to tax there is no reason either on principle or on authority for re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e sale of sugar, there was no necessity for the assessee to pay any commission on the sale of controlled sugar and disallowed the commission in part. That was challenged by the assessee. The court held that so long as the agency agreement between the company and the sole selling agent was in force, the commission of 2 % is payable and, therefore, it is an allowable deduction under section 10(2)( xv ). The learned counsel for the revenue places reliance on an observation of the Supreme Court in Haji Aziz and Abdul Shakoor Bros. v. Commissioner of Income-tax [1961] 41 I.T.R.350,359;[1961] 2 S.C.R.651 (S.C) and states that wherever an expenditure is incurred contrary to a statutory provision such expenditure cannot be brought in under section 10(2)( xv ). In that case a consignment of dates which was imported by steamer was confiscated by the customs authorities under section 167 at the Sea Customs Act. The assessee was given an option under section 183 of that Act to pay a fine in lieu of confiscation. The assessee paid the fine and had the dates released. The assessee sought a deduction of the amount of fine paid as an allowable expenditure under section 10(2)( xv ) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48 of the Companies Act when payment had been made to a partner of the managing agency firm and that even if there is an infringe ment, it will not disentitle the assessee to claim deduction under section 10(2( xv ). As regards the addition of Rs. 93,456, representing the undisclosed income, it is seen that the addition was made only because there was discrepancy in the stock shown in the account books and the declarations made to the banks with whom the goods had been hypothecated. But, as pointed out by the Tribunal, the entries in the books tally with the returns submitted to the Textile Commissioner at Bombay. It is true that there is some variation between the stock declarations given to the bank and in the entries in the stock books maintained by the assessee. But that is explained by the assessee saying that the stock declarations given to the banks were only rough estimates and not accurate and that those entered in the account books and those shown in the returns submitted by the assessee to the Textile Commissioner alone are to be taken as the basis. In the circumstances of this case we do not see any error in the order of the Tribunal. The Tribunal is justified in acce ..... 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