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TMI Blog1973 (9) TMI 27X X X X Extracts X X X X X X X X Extracts X X X X ..... han six months' notice in writing. On the expiration of such notice, the partnership was to stand determined. Unfortunately, before the expiry of the period of 20 years, Harchandmull died on June 14, 1959. The partnership business, which was carried on under the name and style of H.M. Jain Co., after the death of Harchandmull, could not be so carried on, as the partnership stood dissolved under section 42(c) of the Partnership Act, because in the partnership deed there was no term to the contrary. In such a situation, the assessee started a business under the name and style of Jain Industries as its sole proprietor. It may be mentioned here that Harchandmull died leaving behind Srimati Pushpa Devi Jain as his widow and six minor children. Bimal Prasad entered into an agreement with Pushpa Devi on November 19, 1959. A copy of the memorandum of agreement is annexure "B" to the statement of the case. In pursuance of the terms of this agreement, the assessee had to part with four annas share in the income which he got from his business of managing agency carried on under the name and style of Jain Industries. In the accounting year, corresponding to the assessment year 1961-62, on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 92 of 1971 arises out of the assessment proceeding for the assessment year 1963-64, and the question of law referred to this court is in the following terms: "Whether, on the facts and circumstances of the case, the payment of Rs. 21,294 to Pushpa Devi is an admissible deduction under section 39 or section 37(1) of the Income-tax Act, 1961?" Similarly, in the following two accounting years, corresponding to the assessment years 1964-65 and 1965-66, payments were made by the assessee to Pushpa Devi. Eventually, the Tribunal did not allow any deduction, following its earlier decision. In the assessment year 1964-65, the amount paid to Pushpa Devi is Rs. 24,648, and in the assessment year 1965-66, the amount is Rs. 18,865. The question of law referred in Tax Cases Nos. 117 and 118 of 1971, arising out of the assessment proceedings for the assessment years 1964-65 and 1965-66, is in the following terms : "Whether, on the facts and circumstances of the case, the payments of Rs.24,648 in the year 1964-65 and Rs. 18,865 in the year 1965-766 are admissible deductions under section 39 or section 37(1) of the Income-tax Act, 1961 ?" It would be convenient at the outset to ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 39 of the 1961 Act. But since in respect of assessment year 1961-62, a declaration, as required by section 12A of the 1922 Act, was not filed, the argument to allow it as a deduction either under section 10(2)(xv) or not to treat it as an income of the assessee under section 10(1) of the 1922 Act was strenuously pressed. It may be stated here that at one time learned counsel for the assessee endeavoured to argue that the statement made in the return along with which the agreement dated November 19,1959, was filed, was sufficient compliance, with the requirement of filing the declaration under section 12A, but feeling the difficulty in pursuing this matter any further, as no such question arises out of the Tribunal's order, he gave up this point and conceded that in the assessment year 1961-62, the sum of Rs. 14,228 could not be deducted from the assessee's income under section 12A of the 1922 Act. And that led him to strenuously press for deduction either under section 10(2)(xv) or under section 10(1). Section 12A was introduced in the 1922 Act after the decision of the Privy Council in Tata Hydro-Electric Agencies Ltd. v. Commissioner of Income-tax . The corresponding pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent shall be chargeable to income-tax only on the share to which he would be entitled under the agreement, and the third party with whom he shared the commission shall be chargeable on his share to which he would be entitled under the agreement. In my opinion, section 39 makes no difference between the two types of cases, whether the liability is at the source or the liability is there to part with the income after it has become the income of the assessee. Both types of cases are covered by section 12A or section 39 of the Acts, provided the other requirements of the sections are fulfilled. Thus it becomes a special provision for bifurcating the charging of the tax on the total managing agency commission in two hands, according to the respective shares of the recipients. This being a special provision in respect of the sharing of the managing agency commission, an assessee must fulfil the requirements of the special provision. If he fails to do so, he cannot fall back upon the general provision contained in section 10(1) or section 28(i) of the Income-tax Acts. As I read the language of the section, it is plain that both kinds of liabilities to share the managing agency commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment years, declarations, as required by section 39 of the 1961 Act, were filed. Payments had been made by the assessee to Pushpa Devi, there is no doubt about it, out of the managing agency commission earned by the assessee. The only question for consideration is whether the managing agent has made himself liable under the agreement to share the managing agency commission for adequate consideration. Before I come to deal with the specific relevant provisions of the agreement, it should be pointed out that the partnership had come to an end on June 14, 1959, on the death of Harchandmull. The assessee alone could not carry on the business of managing agency with the property of the firm. If he would have done so, he would have been liable to pay the share of the profits made by him to Pushpa Devi and her minor children who were the heirs of Harchandmull under section 37 of the Partnership Act. I will presently show that Bimal Prasad Jain needed the help of the voting power which was under the control of Pushpa Devi as also the sum of Rs. 50,000 which she agreed to invest for the purpose of obtaining or carrying on the managing agency business in the name of Jain Industries. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anaging agency business separately for each company, but the entire business has to be judged as a whole. The advancement of Rs. 50,000 on interest at 6 per cent. per annum only was also a good contribution of capital for carrying on the business. The return of 6 per cent. interest on the advancement of Rs. 50,000 could not be treated as adequate return. Moreover, it is well-known in the commercial world that the capital pushes up the business and the payment of interest, and that also at a low figure of 6 per cent. per annum is not an adequate consideration for the financier. In this background, I now refer to some of the terms of the agreement. In the preamble it has been provided: "And whereas on the death of the said Harchandmull Jaini the said firm, H. M. Jaini Co. was dissolved. And whereas the first party has started business under the name and style of Jain Industries (hereinafter referred to as "the said firm") as its sole proprietor inter alia with the object of the said firm being appointed to act as managing agents of the said 4 companies. And whereas the said Pushpa Devi Jain is a shareholder in the said 4 companies and holds and controls in the capacity of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere was adequate consideration for the agreement, whereby the assessee bound himself to part with four annas share in the managing agency commission. From the language of the preamble as also from the terms of clause,; (3), (6) and (8), it is clear that Bimal Prasad made himself liable to part with a portion of the managing agency commission after it has become his income and the liability was not incurred at the accrual stage. In clause (3) it is recited that : "The first party shall pay to the 2nd party 25% of its net annual profits derived only from the business of the Jain Industries by acting as managing agents of the said 4 companies or any other company of which the said firm may be appointed as managing agent... " Clause (8) is not correctly printed in the paper book of Tax Cases Nos. 15 and 16 of 1968, the correct version is to be found at page 14 of the paper book of Tax Case No. 92 of 1971. Srimati Pushpa Devi had no right to dispute the audited balance-sheet which was to be treated as conclusive on the quantum of profits; she had no right to interfere with the business. Reading the document as a whole, it is clear that the liability incurred by Bimal Prasad was to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eant for her but also for the maintenance of the minor children and they had been adequately benefited by them. The other reason given by the Tribunal is that 6 per cent. interest on the sum of Rs. 50,000 invested by Pushpa Devi was an adequate consideration and for that parting with a portion of the managing agency commission was not necessary. I have already referred to this aspect of the matter and, in my opinion, the Tribunal has misdirected itself in law in saying so. It is, thus, clear that the Tribunal recorded the finding on the question of adequacy or inadequacy of the consideration in the agreement on wrong, illegal and irrelevant matters and left out of consideration the valid and relevant materials. Hence, the finding is vitiated in law and not binding on this court in the reference. For the four assessment years, viz., 1962-63 to 1965-66, therefore, there is no difficulty in holding that all the requirements of section 39 were fulfilled and the various amounts paid by the assessee in those years to Pushpa Devi must be deducted from his income from the managing agency. In respect of the year 1961-62, the requirement of filing the declaration was not fulfilled. Hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after its receipt, then cases, some of which will be referred to hereinafter, have taken the view that such a claim cannot be allowed under section 10(2)(xv) of the Act as this is merely an application of income after its receipt and not obliging the assessee to part with it at the source. It is, therefore, difficult to uphold the contention put forward on behalf of the assessee that year after year the parting of the income by the assessee in favour of Pushpa Devi is an expenditure laid out or expended wholly and exclusively for the purpose of the business of the managing agency. By capturing the voting rights of the shares held by Pushpa Devi, the assessee did not only facilitate the obtaining of the managing agency business but also added to his power of carrying on the business of the company in the manner he liked to carry it on. In that view of the matter also, it is difficult to accept that the parting of the portion of the commission was wholly and exclusively for the purpose of the managing agency business. It is no doubt true that expediency for incurring an expenditure has to be viewed from the business point of view, as held by the Supreme Court in Eastern Investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , (1) that the assessee must fail if he fails under section 12A, and (2) that on the facts of this case the overriding obligation to part with the income was not there. In Commissioner of Income-tax v. Sitaldas Tirathdas, Hidayatullah J. (as he then was), pointed out very succinctly, if I may say that with utmost respect, the difference between the two types of obligation. At page 374 runs a passage thus: "In our opinion, the true test is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 of the Indian Income-tax Act, 1922, imposes a charge on the profits and gains of a business which accrue to the assessee while sub-section (2) of the said section enumerates various items which are admissible as deduction. Where income which accrues to the assessee is not his income, the question of admissible deductions would not arise. Therefore, where income is diverted at source so that when it accrues it is really not his income but is somebody else's income the question as to whether that income falls under sub-section (2) of section 10 does not arise. Again, income can be said to be diverted only when it is diverted at source so that when it accrues it is really not the income of the assessee but is somebody else's income. It is thus clear that where by the obligation income is diverted before it reaches the assessee, it is deductible. But where the income is required to be applied to discharge an obligation after such income reaches the assessee, it is merely a case of application of income to satisfy an obligation of payment and is, therefore, not deductible." On the facts and in the circumstances of that case, it was held that the sum in question was either a reven ..... 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