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TMI Blog1962 (9) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... eting of the shareholders of the company held on March 21, 1950) in the following terms : Resolved unanimously that Messrs. B. Nagi Reddy and A. V. Subba Rao shall be entitled to a remuneration of 25 per cent. of the net profits of the company payable to them as under 12+ per cent. to B. Nagi Reddy, 12+ per cent. to A. V. Subba Rao, in consideration of their services as producers of the company's pictures. The aforesaid remuneration to Mr. Nagi Reddy shall be without prejudice to the terms and conditions as set out in the managing director's agreement, dated August 3, 1949. 3. Under another agreement, dated August 27, 1951, the assessee was appointed managing director of B. N. K. Press Limited on a remuneration of ₹ 500 per month plus a commission equal to 10 per cent. of the net profits of the company. For the calendar year 1954, as the previous year for the assessment year 1955-56, the assessment was completed as follows : Profits Loss Rs. Rs. Property 2,292 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s ' in his return for the assessment year 1955-56. Hence the income is rightly chargeable under this head only. 6. The assessment completed by him is as follows : Rs. Property4,535 Salary 13,712 Other sources : (a) Sitting fees 125 (b) Additional remuneration 77,569 ----- 95,941 Loss under business 40,360 -----Total income 55,581 ----- 7. The assessee appealed to the Appellate Assistant Commissioner contending as follows : The services rendered by your petitioner to the company in the production of films constitute carrying on of business. The learned Income-tax Officer has overlooked the decision of the Supreme Court in Lakshminarayan Ramgopal and Sons Limited v. Government of Hyderabad (1). (1); [1955] 1 S. C. R. 393. Page No: 0182 Their Lordships of the Supreme Court have observed that the activities which constitute business need not necessarily consist of activities by way of trade, commerce or manufacture and that they may even consist of rendering services to others, though either by chance or design they may be restricted to one concern. The view of the learned Income-tax Officer is directly opposed to these observations of their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ggest a business. It is no doubt true that the directors' voting of the extra remuneration covers an equal payment to Subba Rao also. In our opinion, this feature relied up by Mr. Krishnamurthi, the learned counsel for the assessee, cannot make any difference to the character of extra remuneration received by the assessee ; so far as he is concerned this is an extra to his salary as the managing director and assessable under section 7. The proper analogy will be a salaried employee remunerated by a share of profit also as an extra inducement to him to devote his full time and attention to the business or for any special services that he is capable of rendering to the business. In such a case there can be no doubt that the percentage of profit received extra can only form part of his salary and emoluments. (7) For the foregoing reasons, we direct the Income-tax Officer to amend the assessment by deducting therefrom only ₹ 29,485, being the depreciation carried forward referred to in paragraph 5 supra. The rest of ₹ 20,524 shall not be available for set off in this assessment. The Appellate Assistant Commissioner's order is modified on these lines. 10. Fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was the managing director of a company, Vijaya Productions Ltd., which carried on the business of producing films. He was also the managing director of another concern, called B. N. K. Press Ltd. It appears that he was deriving income from another film producing company called Vauhini Productions Ltd. He was appointed the managing director of Vijaya Productions Ltd., under an agreement dated August 3, 1949. By the terms of that agreement, he became entitled to a monthly remuneration of ₹ 500. The board of directors of the company, Vijaya Productions Ltd., passed a resolution on December 8, 1949, entitling the assessee to a remuneration of 12+% of the net profits of the company. This was stated to be in consideration of his services as producer of the company's pictures. The resolution expressly mentioned that this remuneration of 12+% would be without prejudice to the terms and conditions set out in the managing director's agreement aforesaid. This resolution was ratified by the shareholders of the company at an extraordinary general meeting held on March 21, 1950. The assessee entered into an agreement on August 27, 1951, with B. N. K. Press Ltd. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part to claim such income as business income in the subsequent year. He completed the assessment as follows : Assessment completed by him is as follows : Property ₹ 4,535 Salary 13,712 Other sources : Sitting fees 125 Additional remuneration 77,569 Total 95,941 Loss under business 40,360 Total income 55,581 The Appellate Assistant Commissioner differed from the Income-tax Officer and was of the opinion that the additional remuneration was business income which fell to be taxed under section 10 of the Act. The appellate authority rightly took the view that any admission made by the assessee with regard to the nature of the additional remuneration in the prior assessment year would not prevent the assessee from urging the true nature of the income in the subsequent year of assessment. Undoubtedly each year is a separate entity by itself, and the assessee cannot be bound by his act or cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the powers of and functions exercised by him vis-a-vis the two companies. We shall first refer to the deed of agreement dated August 3, 1949, between the assessee and Vijaya Productions Ltd. It provides that the assessee shall be the managing director of the company for a period of ten years from August 3, 1949, and for such period thereafter as may become necessary or till another managing director is appointed by the company. It confers an option on the assessee to resign his office at any time by giving the company six months' notice of his intention to do so. The company however is bound not to revoke or cancel the assessee's appointment as managing director for the stipulated period of ten years except in the event of the managing director being found guilty, by a competent court of law, of the offence of fraud, misrepresentation or breach of trust, in his duties as such managing director. The assessee became entitled to a monthly remuneration of ₹ 500. He covenanted and agreed that during the term of his office as managing director he will endeavour his best to promote the interest and the business of the company and would not divulge any of the secrets of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee did carry on business considerable reliance has been placed by the learned counsel for the assessee on the decision of the Supreme Court in Lakshminarayan Ram Gopal v. Government of Hyderabad ([1954] 25 I. T. R. 449 ; [1955] 1 S. C. R. 393). The question that arose for consideration in that case was whether the assessee came within the ambit of section 2, clause (iv), of the Excess Profits Tax Regulation, Hyderabad. Under that regulation business was defined as including any trade, commerce or manufacture or any adventure in the nature of trade, commerce or manufacture or any profession or vocation, but not including a profession carried on by an individual or by individuals in partnership, if the profits of the profession depended wholly or mainly on his or their personal qualifications. The assessee was a limited company incorporated under the Indian Companies Act. They were appointed as managing agents of another company called Ramgopal Mills Co. Ltd. There was an agency agreement between the Mills Co. and the assessee appointing them as agents for a period of thirty years on certain terms and conditions. The assessee throughout worked only as agents of the Mills Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court at page 455. Bhagwati J. observed thus : If on the construction of these documents we arrive at the conclusion that the position of the appellants was not that of servants but the agents of the company, the further question would have to be determined whether the activities of the appellants amounted to the carrying on of business. If they were not the servants of the company the remuneration which they received would certainly not be wages or salary but if they were agents of the company the question would still survive whether their activities amounted to the carrying on of business in which case only the remuneration which they received from the company would be income, profits or gains from business. The Supreme Court points out that in order to constitute a business the activities of the assessee need not necessarily be concerned with several individuals or concerns, but that they would constitute business in spite of their being restricted to only one individual or concern. The test to be applied is thus formulated ; what is relevant to consider is what is the nature and scope of these activities though either by chance or design these might be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... managing agent of a limited company. But as pointed out by the Supreme Court, the establishment of the jural relationship of a principal and agent would not be sufficient to hold that the remuneration received by the agent from the principal was in the nature of a business income. Section 2(4) of the Indian Income-tax Act gives an inclusive definition of the word business. It reads : 2. (4) ' Business ' includes any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The words trade and business are practically interchangeable for income-tax purposes. But as is explicit in the definition of business that term is of wider import than the term trade . Trade is defined in the Oxford Dictionary as involving a pecuniary risk, adventure, a speculation, commercial enterprise. Construing the expression trade in the Industrial Courts Act, 1919, in National Association of Local Government Officers v. Bolton Corporation ([1943] A. C. 166 ; [1942] 2 All E. R. 425), Lord Wright observed at page 184 : . . . . . trade is not only in the etymological or dictionary sense, but in legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of the company and, therefore, the remuneration that he received was salary and not business income. On a reference to the High Court, it was held that it could not be said that there were no materials on which the Tribunal could come to the finding that the remuneration received by the assessee was salary and not income from business. In Commissioner of Income-tax v. L. Armstrong Smith ([1946] 14 I. T. R. 606 ; [1946] 16 Comp. Cas. 172) it was held by a Division Bench of the Bombay High Court that a director of a company, though not a servant of the company, is not prevented from entering into a contractual relationship with the company. In that case the articles of association of the company provided that the assessee was to be the chairman and managing director of the company until he resigned the office or died or ceased to hold at least one share in the capital of the company, that all the other directors were to be under his control, and that his remuneration was to be voted by the company at its annual general meeting. The assessee devoted his whole time to the management of the company's affairs. He received a sum of ₹ 48,000 as remuneration in the year of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but only the powers and duties of the office holder under the terms of the agreement with the company. We do not think that, in the instant case, the assessee was carrying on any business under the terms of the two agreements referred to above. It is unnecessary for us to decide whether the additional remuneration is taxable under section 7 or under section 12. Suffice it to say that it is not business income under section 10 of the Act. In our opinion, question No. 1 has to be answered against the assessee. The second question relates to the assessee's right to depreciation allowance of ₹ 29,485 (which remained unabsorbed in the assessment of the year 1955-56) to be adjusted against and absorbed in the profits from the business for the assessment year 1956-57. It is a sound principle of accountancy that charges for depreciation of plant and machinery should be debited in casting the profit and loss account of a business. From the commercial standpoint such depreciation allowance is just and necessary as undoubtedly the value of the plant and machinery gets diminished progressively by wear and tear. The expenditure for the acquisition of plant and machinery is of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeding years. . . . . Section 24(2), to which section 10(2)(vi), proviso (b) is subject to, reads : 24. (2) Where any assessee sustains a loss of profits or gains in any year, being a previous year not earlier than the previous year for the assessment for the year ending on the 31st day of March, 1940, in any business, profession or vocation, and the loss cannot be wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no other head of income shall be carried forward to the following year. . . . . Provided that-. . . . . (b) Where depreciation allowance is, under clause (b) of the proviso to clause (vi) of sub-section (2) of section 10, also to be carried forward, effect shall first be given to the provisions of this sub-section. Section 24(1) provides that where any assessee sustains a loss of profits or gains in any year under any of the heads mentioned in section 6, he shall be entitled to have the amount of the loss set off against his income, profits or gains under any other head in that year. This means that in the same year business loss can be set off against income from property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion allowance being thus a charge on the profits or gains which are brought to tax, it is necessary that there should be first the computation of such profits or gains before ever the question of making allowance for depreciation can at all arise. In Ambika Silk Mills Co. Ltd. v. Commissioner of Income-tax ([1952] 22 I. T. R. 58), construing the provisions of section 10(2)(vi), Chagla C. J. observed thus at page 64 : . . . . . it is clear that profits or gains in this context mean profits or gains without taking into consideration the depreciation referred to in clause (vi). If on a calculation of profits or gains of a business excluding the debit for depreciation allowance it is found that there is no profit at all or that the business has suffered a loss, then the depreciation allowance cannot be added to swell the loss. If on a casting of the profit and loss account without bringing the debit of depreciation allowance it is found that there is an amount of profit which is however less than the permissible quantum of depreciation allowance, then it is only the excess of such allowance over the resulting profits that should be adjusted against the profits-whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available profits. If the profits, however, are ₹ 15,000 there will remain a surplus profit of ₹ 5,000 after setting off the carried forward loss of ₹ 10,000. To the extent of this ₹ 5,000, the depreciation allowance can be adjusted. The balance of ₹ 10,000 of the depreciation allowance would remain unabsorbed. In our opinion, the statute leads one to the irresistible conclusion that the depreciation allowance must be a charge only on the profits. The limit of the charge is the limit of the profits. The non-existence of profits will prevent the absorption of the allowance. There is no warrant for taking in and absorbing the depreciation allowance in the profit and loss account to work out a loss. If that were the true position, the provision for carrying forward the unabsorbed depreciation allowance would be wholly redundant, if not meaningless, in view of the specific provision for the carrying forward of losses. We shall now refer to the decisions cited by the learned counsel for the assessee. The earliest case is that in Suppan Chettiar Co. v. Commissioner of Income-tax (1). The assessee was an unregistered firm called Suppan Chettiar Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f treating the charge ; that so much of it as cannot be neutralised by profits must not figure as an actual loss, but must be carried forward into the next year's account. But neither from the language used, nor from any general considerations arising from the nature of the charge are we satisfied that this construction is correct. But for the proviso, depreciation stands upon the same footing, and should, so far as any intention to the contrary appears, be dealt with in the same way, as the other charges enumerated in the section. . . . . We do not think, therefore, that upon the terms of the section an assessee is precluded from adding the whole charge for depreciation to his other business charges, even though the result is to show a loss, and then claiming under section 24 to set off the loss against profit from other sources. The decision of the Bombay High Court in Ambika Silk Mills Co. Ltd. v. Commissioner of Income-tax ([1952] 22 I. T. R. 58) lends support to the contention that the depreciation allowance can be placed on the debit side of the profit and loss account and be treated as a component which may entail a loss to the assessee and that such a loss can b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trued as a whole giving effect to all its parts ; provisos are not less important than the main provisions. The proper course is to apply the broad general rule of construction which is that a section of an enactment must be construed as a whole, each portion throwing light if need be on the rest. (Jennings v. Kelly ([1940] A. C. 206, 229 ; [1939] 4 All E. R. 464) ; Curtis v. Maloney ([1951] 1 K. B. 736). A proviso is a useful guide in the selection of one or other of two possible constructions of words in the enactment (Craies on Statute Law, fifth edition, page 202). We do not think that it is a sound rule of construction to disregard the plain terms of a proviso, because it is a proviso and because it does not harmonise with the main scheme of an enactment. To ignore a proviso, with a view to give effect to the supposed general scheme of an enactment, would, in our opinion, result in misconstruction. The second consideration relied upon by the learned Chief Justice was the comity of judicial views taken by the different High Courts in the country and the desirability of an all India Statute , like the Indian Income-tax Act, receiving an uniform interpretati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eries v. Commissioner of Income-tax ([1929] 4 I. T. C. 255). At page 927, the learned judges observed as follows : There is no reason why the allowance for depreciation in clause (vi) should be treated differently for the purpose of computing from that given in other clauses. Section 24 provides for the set-off which is allowable to an assessee and the whole income is to be determined after the profits and losses including allowances in section 10(2) have been all added together. . . . . With great respect to the learned judges, we must observe that this view does not give due weight to the language of the proviso. We are unable to agree with this decision either. Learned counsel for the assessee has placed before us a typed copy of the judgment of the Calcutta High Court in Income-tax Reference No. 72 of 1957 (Since reported as Jaiporia China Clay Mines Private Ltd. v. Commissioner of Income-tax [1962] 46 I. T. R. 707). This decision does not appear to have been reported in any of the law reports. It is unnecessary to refer to the facts of the case. Suffice it to say that the Calcutta High Court has followed the decision of the Bombay High Court in Am ..... X X X X Extracts X X X X X X X X Extracts X X X X
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