AGARWAL BROTHERS Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a case stated by the, Appellate Tribunal under Section 66(1) of the Income-tax Act, 1922, hereinafter referred to as "the Act". The statement of the case relates to the assessment year 1957-58, the relevant previous year being the calendar year ended on December 31, 1956. The question referred is :

(2.) THE material facts are these. THE assessee in the relevant year was a firm of two partners with equal shares and it was accorded registration in the year of account. THE assessee-firm was appointed as the managing agent of Messrs. Dhplpur Glass Works Ltd., a public company, under an agreement dated. February 18, 1945. In terms of this agreement the assessee-firm was entitled to receive an office allowance of Rs. 1,000 per mensem and a managing agency commission of 12 1/2% of the net profits per annum of the company. During the calendar years 1946 and 1947 the managed-company, namely, Messrs. Dholpur Glass Works Ltd., earned considerable profits, and in the next three years, 1948, :1949 and 1950, it incurred losses. Again, in the years 1951, 1952 and 1953 the profits were insufficient. In consideration of the fact that the managed-company had incurred losses and earned inadequate profits during the six years from 1948 to 1953, the assessee-firm relinquished the office allowance to which it, was entitled at Rs. 1,000 per mensem. THE total amount relinquished by the assessee-firm on this account aggregated to Rs. 72,000. THE assessee-firm also relinquished the managing agency commission to which it was entitled during the six years aforesaid aggregating to Rs. 3, 117. Moreover, the assessee-firm had advanced a total sum of Rs. 43,075 as loan to the managed-company during the said period of six years and in consideration of the fact that the managed-company was in a bad state, the assessee-firm relinquished the interest on the loan which it was entitled to receive. It appears, however, that subsequently, i.e., on and from 1954, the managed-company began to make profits and on the 8th of July, 1958, the managed-company passed a special resolution at an extraordinary general meeting of the shareholders to the following effect:

(3.) IT further appears from the report of the case that Messrs. Dholpur Glass Works Ltd., preferred an appeal against the disallowance before the Assistant Commissioner but the appeal was rejected on the ground that the payment had been made for something which had happened in the past and which had not been incurred for the purpose of the business carried on during the year under consideration. Thereupon, Messrs. Dholpur Glass Works Ltd. filed a second appeal before the Appellate Tribunal. The Tribunal confirmed the decision of the Appellate Assistant Commissioner holding that the payment of Rs. 60,000 amounted to double remuneration for the same set of services, once under the terms of the agreement and again as special remuneration and that it could not be covered by Section 10(2)(xv) of the Act. The Tribunal further held that even if it were assumed that the payment was a permissible expenditure, it was permissible for the year in which the obligation to remunerate the managing agents for the services rendered was incurred, as the managed-company maintained its accounts on mercantile system.