COMMISSIONER OF INCOME TAX Vs. TATA SONS LIMITED

JUDGEMENT

(1.) WHETHER in the circumstances of the case, in computing the assessees income from their business as Managing Agents of the Tata Iron and Steel Co., Ltd., the payment of Rs. 2,94,308 to the co-sharers F. E. Dinshaw and Messrs. F. E. Dinshaw Ltd., out of the commission of Rs. 11,74,348 earned by them is allowable as an item of expenditure under Section 10 (2) (ix) of the Act or under any other provision thereof.

(2.) THE material facts are that by an agreement, dated the 2nd May 1918, the assessees, were appointed managing agents of the Tata Iron and Steel Co. Ltd., and under that agreement they were entitled to receive a commission based on profits, with a minimum payment of Rs. 50,000 a year, which was not dependent on profits. In the year 1924 the Tata Iron and Steel Co., Ltd., was urgently in need of funds, and the ordinary practice in this country is for the managing agents to finance the company of which they are such agents. I do not mean to suggest that the assessees were bound in law to procure finance for the Tata Iron and Steel Co., Ltd., but for practical purposes the finance would have to be provided by them, if it was to be procured at all. Accordingly, the assessees approached Mr. F. E. Dinshaw and arranged that he should lend to the Tata Iron and Steel Co., Ltd., a core of rupees at a certain rate of interest and on security. An agreement was entered into on the 23rd June 1924 between the Tata Iron and Steel Co., Ltd., the assessees and the lender of securing the loan, and by Clause 7 of the agreement it is provided that the assessees would give and assign to the lender as from the 1st of April 1924 as share of six annas in the rupees of the commission and other remuneration which they might be entitled to recover from the company under their agreement of the 2nd of My 1918. On reading that clause, it appeared to us that it operated as an assignment of a share of the commission (which, I may say, has since been reduced to four annas in the rupees), which the assessees were to receive from the main Company. That Company was a party to agreement, and Clause 7 appears to us to operate as an assignment of a portion of the commission under Section 130 of the Transfer of Property Act. If that view is right, no question of any reduction arises, because the portion of the income which has been assigner to the lender no longer forms part of the income of the assessees.

(3.) IN the case which I have already mentioned, namely, The Tata Hydro Electric Agencies case, facts up to a point were virtually the same as in the present case. IN that case also the present assessees had entered into an agreement with one of the Tata group of Companies - Tata Power Company, Ltd., - under which they were entitled to a commission; and in that case also the Tata Power Company, Limited, was in financial difficulties, and the agents had to find money; and they procured the money by agreeing to pay a portion of the commission to the lenders F. E. Dinshaw, Limited and Richard Tilden Smith. Subsequently however, they assigned their commission agreement to the Tata Hydro Electric Agencies, Bombay, who agreed to pay the proportion of the commission which had become payable to the lenders, and in those circumstances, the Privy Council held that so far as the assessees in that case, namely, the Tata Hydro Electric agencies, Bombay, were concerned, this payment to the lenders, which they had agreed to make, was not in any sense an expenditure incurred for the purpose of enabling them to earn profits. But it is to be noticed that in the judgment of the Privy Council delivered by Lord Macmillan this passage occurs at page 224 (of 64 I.A.) : It was not questioned by Council for the Crown for the Crown that if the present question had arisen with Tata Sons Ltd., they would under section 10, sub-section 2(ix) have been entitled on the facts stated to deduct their payments to F. E. Dinshaw, Ltd., and Richard Tilden smith as being expenditure incurred solely for the purpose of earning their profits or gains. So that in that case the Privy Council noticed without suggesting disapproval an admission by Counsel which exactly covers, that point which we have to determine in this case. Of course, that admission is not binding on us, but in my opinion, it was an admission well founded.