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TMI Blog1979 (1) TMI 12X X X X Extracts X X X X X X X X Extracts X X X X ..... eaning of section 28 of the Income-tax Act, 1961 ? (4) If the answer to question No. (3) is in the affirmative, whether the amounts of Rs. 10,000, Rs. 12,000 and Rs. 12,000 claimed by the assessee in the respective assessment years 1962-63, 1963-64 and 1964-65 were permissible deductions either under section 28 or under section 37(1) of the Income-tax Act, 1961 ? (5) Whether the supervision charges received by the assessee were' income from other sources' within the meaning of section 56 of the Income-tax Act, 1961 ? (6) If the answer to question No. (5) is in the affirmative, whether the amounts of Rs. 10,000, Rs. 12,000 and Rs. 12,000 claimed by the assessee in the respective assessment years 1962-63, 1963-64 and 1964-65 were permissible deductions under section 57(iii) of the Income-tax Act, 1961 ? (7) Whether the amounts of Rs. 10,000, Rs. 12,000 and Rs. 12,000 claimed by the assessee in the respective assessment years were not the income of the assessee, there being an overriding title in respect thereto under the agreement dated December 20, 1961 ? (8) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er services to the managing agency company. This company was to receive the balance of 60% of such fixed remuneration. As a corollary to the above agreement dated 20th December 1961, an agreement was made at Bombay on 15th January, 1962, between the assessee and his son, Shri Kirit Babubhai Chinai, which was also to become operative from 10th February, 1961, on which date Ruia Chinai Co. Pvt. Ltd. became entitled to a fixed remuneration under the managing agency agreement and the period was to end with that of the agreement dated December 20, 1961, i.e., the one in which, inter alia, the two supervisors were appointed. Under the agreement between the assessee and his son, Kirit, Kirit agreed to render assistance to the assessee in the management and affairs of the Bombay Oxygen Corporation Ltd. and Ruia Chinai Co. Pvt. Ltd. for which he was to be paid remuneration of Rs. 1,000 per month with effect from March 1, 1961. He further agreed not to render assistance to any other company in its management or affairs during the operation of the agreement except with the consent of M/s. Ruia Chinai Co. Pvt. Ltd., given in writing. A copy of the managing agency agreement has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under s. 16(v) if the remuneration paid to him was regarded as " salary " was also rejected. According to the ITO, the amount to be claimed as deduction under s. 16(v) was one which was spent by the assessee in the performance of his duties which was equivalent to doing the work of the office. In the view of the ITO, the work of the assessee as a supervisor began when the assessee arrived at the office and ceased when he left the office and, therefore, the payment of Rs. 1,000 p.m. to his son could not be considered as expended wholly, necessarily and exclusively in the performance of his duties. The assessee proceeded in appeal to the AAC. The AAC held that the amount paid to the assessee under the supervision agreement was income by way of salary and no deduction therefrom was allowable under s. 16(v) of the Act. The assessee carried the matter in further appeal to the Tribunal. Before the Tribunal submissions were made by the assessee on a four-fold footing, each footing being by way of an alternative to the previous one. In the first place, it was submitted that the income earned by the assessee under the agreement dated December 20, 1961, was income from business to whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal was right in treating the remuneration paid to the assessee as salary and further in allowing the amount paid to Kirit by the assessee as a necessary deduction under s. 16(v) of the said Act. We will briefly advert to the reasons for this view. In view of the conclusion reached by us, in our opinion, it is unnecessary to deal with the other alternative submissions made on behalf of the assessee and we will proceed only to briefly give reasons for the view expressed above and to answer questions Nos. 1, 2 and 8 holding that in view of the answers given to the said questions, it is not necessary to answer questions Nos. 3 to 7. In our opinion, the nature of the income earned by the assessee must necessarily turn upon the agreement between the managing agency company, viz., Ruia Chinai Co. Pvt. Ltd., and the assessee. This agreement is annex. " B " to the statement of the case and the said managing agency company is the party of the first part, Kamalnayan Bajaj is indicated as the party of the second part and M. Ramnarain Pvt. Ltd. and Babubhai Maneklal Chinai (the assessee) are jointly designated as the parties of the third part to the said agreement. The private limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is entitled to the deductions which are provided for under s. 16 and in particular s. 16(v). Section 16(v) has been deleted with effect from 1st April, 1975, by the Finance Act, 1974, but was operative for the three assessment years under consideration and read as follows: " 16. The income chargeable under the head 'Salaries' shall be computed after making the following deductions, namely: (v) any amount actually expended by the assessee, not being an amount expended on the purchase of books or other publications, or on entertainment or on the maintenance of a conveyance, which, by the conditions of his service, he is required to spend out of his remuneration wholly, necessarily and exclusively in the performance of his duties." A scrutiny of the clause indicates that three conditions are required to be satisfied for its application: (i) The amount claimed for deduction should have been actually expended by the assessee, (ii) the assessee should be required by the conditions of his service to incur the expenditure out of his remuneration, and (iii) the expenditure should be incurred wholly, necessarily and exclusively in the performance of his duties. Now, as far as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as s. 16(v), it is clear that the agreement between Babubhai and Kirit dated January 15, 1962, under which Babubhai was to pay remuneration of Rs. 1,000 p.m. to Kirit is made directly in pursuance of the agreement between the managing agency company and Babubhai and is by way of satisfaction of an obligation incurred by Babubhai under the latter agreement. Under the agreement, annex. " B " to the statement of the case, the managing agency company has undertaken to pay 40% of the fixed minimum remuneration after meeting expenses to Babubhai and one of the obligations incurred by Babubhai which constitutes the consideration for such payment of remuneration is to secure the assistance of Kirit for which Babubhai agrees with the managing agency company to pay Kirit a remuneration, of Rs. 1,000 p.m. Thus, we have the case of an employer engaging an employee who is to perform certain duties and who, in addition, is to get and procure the services of his son for the employer and who has agreed with the employer that out of the total remuneration received by him under his agreement with the employer he would pay Rs. 1,000 p.m. to the other person whose services he is to procure. In our ..... X X X X Extracts X X X X X X X X Extracts X X X X
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