1973 PLP 197 (PTD)

"(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 25,000 was assessable in the hands of the assessee as its income ? (2) If the answer to question No. 1 is in the affirmative, whether the said sum is an allowable deduction from the assessee's income assessable under section 10 ?" These two questions have arisen under the following circumstances: The assessee, Messrs H. G. Gupta & Sons, Delhi, is a registered firm deriving income from managing agency and financing business. The assessment year under reference is 1954‑55 and the corresponding previous year is the year ending on March 31, 1954. The assessee‑firm was appointed as manag?ing agent to Messrs H. G. Gupta & Sons Ltd., under an agreement, dated January 6, 1948. By that agreement, Lala Hans Raj Gupta, the managing partner of the managing agency ?firm (assessee), was appointed as the permanent chairman of the board of directors of the managed company. The remuneration of the managing agent was fixed by clause 2 of the agreement which included, inter alia, "15 % commission on the net profits of the company (within the meaning of section 87(c)(3) of the Indian Companies Act, 1913) with a minimum profit of Rs. 25,000 (Rupees twenty‑five thousand only) in a year in case of inadequacy of profits." The above provision is in clause 2(b) of the agreement. The assessee‑firm contended before the Income‑tax Officer that the minimum commission of Rs. 25,000 could be claimed by the assessee only if there was no loss to the managed company after charging such commission in the profit and loss account of the managed company, that in the assessment year in question, i.e., 1954‑55, the managed company did not make any profit, and that no commission was, therefore, paid to the assessee‑firm. But, on a scrutiny of the profit and loss account of the managed company, the Income‑tax Officer found that the managed company made in the relevant year a profit of Rs. 5,571 before charging any commission payable to its managing agent, i.e., the assessee‑firm. The Income‑tax Officer, therefore, held in his assessment order dated March 30, 1959, that, according to clause 2(b) of the managing agency agree?ment, the managing agency firm (assessee‑firm) was entitled to a minimum commission of Rs. 25,000 from the managed company, that the assassee‑firm hid earners the commission, and that if the assessee‑firm chose not to claim the minimum commission of Rs. 25,000 from the managed company, it only meant a voluntary surrender of the amount by the assessee‑firm for extra‑commercial consideration. He, accordingly, included the sum of Rs. 25,000 in the total income of the assessee‑firm. Against the said assessment order of the Income‑tax Officer, the assessee‑firm preferred an appeal to the Appellate Assistant Commissioner, and contended that, on a correct interpretation of clause 2(b) of the managing agency agreement, the assessee? firm was entitled to a minimum commission of Rs. 25,000 only when the profit of the managed company exceeded Rs. 25,000, that since in the relevant year the managed company made a profit of only Rs. 5,571 before charging any commission payable to the assessee‑firm, no commission bad at all accrued to the assessee‑firm, and that, therefore, the said amount ought not to have been included in the total income. The Appellate Assistant Commissioner by his order dated September 4, 1961, rejected the said contention, and held that on a plain reading of clause 2(b) of the managing agency agreement, it was clear that, in case of inadequacy of profits, the assessee‑firm was entitled to the minimum commission of Rs. 25,000 and that as these was a profit of Rs. 5,571 In the profit and loss account of the managed company for the relevant year, the assessee‑firm was entitled to the minimum commission of Rs. 25,

000. A second contention was urged before the Appellate Assis?tant Commissioner that, even if it was held that the minimum commission of Rs. 25,000 had accrued to the assessee‑firm under clause 2(b) of the agreement, the said sum should have been held to be an admissible deduction, as the amount was surrendered or waived by the assessee‑firm on grounds of commercial expediency. By his aforesaid order, dated September 4, 1961, the Appellate Assistant Commissioner rejected this contention also on the ground that the surrender of managing agency commission was merely a gratuitous act in the circum?stances of the case. Against the order of the Appellate Assistant Commissioner, the assessee‑firm preferred a second appeal to the Income‑tax Appellate Tribunal, Delhi Bench "B". The aforesaid two conten?tions were again urged before the Tribunal. But, the Tribunal rejected the said contentions and dismissed the appeal by its order, dated March 31, 1963, holding that, under clause 2(b) of the agreement, the assessee‑firm was entitled to Rs. 25,000 as commission and that there was no actual waiver in respect of the sum of Rs. 25,000 by the assessee‑firm, and, therefore, there could not be any question of the said sum being allowed as a deductible expenditure under section 10(2)(xv) of the Income‑tax Act, irrespective of the fact whether it was on grounds of commercial expediency or otherwise. Therefore, the assessee‑firm, by an application under sec?tion 66(1) of the Indian Income‑tax Act, 1922, required the Tribunal to refer the two questions of law, already set out above, to this Court. The Tribunal, agreeing that the two questions of law did arise out of its order, dated May 31, 1963, referred the said questions to this Court. The first question for consideration is as to whether, on the facts and to the circumstances of the case, the sum of Rs. 25,000 was assessable in the hands of the assessee as its income. It was provided in clause 2(b) of the managing agency agreement that the managing agent shall be entitled towards remuneration, inter alia, 15 % commission on the net profits of the company (within the meaning of section 87(c)(3) of the Indian Companies Act, 1913) with a minimum profit of Rs. 25,000 (Rupees twenty‑five thousand only) a year in case of inadequacy of profits. Admittedly, there was no credit on account of commission for the relevant financial year ending on March 31, 1954, in the books of she assessee‑firm. The contention of Shri Yogeshwar Dayal, the learned counsel for the assessee‑firm, was that in the aforesaid relevant financial year the managed company made a profit of only Rs.5,571 before charging any commission payable to the managing agent, that under clause 2(b) of the agreement the minimum commission of Rs. 25,000 could be claimed by the assessee‑firm only if there was no loss to the managed company after charging the commission payable to the managing agent (asses see‑firm), i.e., the assessee‑firm was entitled to a minimum commission of Rs. 25,000 only if the profit of the managed company had exceeded Rs. 25,000, that since the profit of the managed company was only Rs. 5,571 before charging the commission of the managing agent, no commission was payable to the assessee firm, and that, therefore, no commission had accrued to the assessee‑firm and was, in fact, paid to the assessee‑firm. On the other hand, Shri A. N. Kirpal, the learned counsel for the Commissioner of Income‑tax, contended that the words "minimum profit" used in clause 2(b) of the agreement meant that, under clause 2(b) of the agreement, the assessee‑firm was entitled to a minimum commission of Rs. 25,000 and the same had accrued to the firm in the year in question. In our opinion, the contention of Shri Kirpal is correct. On a plain reading of clause 2(b) of the agreement, it is apparent that the expression "minimum profit" used in the clause refers to the minimum amount of commission which the managing agency firm (assessee‑firm) is to receive by way of remuneration of profit, while the expression "inadequacy of profits" used In the last portion of the clause refers to the inadequacy of the profits of the managed company. Reading the clause as a whole, the stipulation appears to be that the managing agency firm (assessee‑firm) was to receive towards remuneration 15 of the net profits of the managed company or Rs. 25,000, whichever is larger. This view gains confirmation from the admitted fact that the minimum commission of Rs. 25,000 was actually paid by the managed company to the managing agency firm (assessee‑firm) in the financial year ending March 31, 1955, i.e., assessment year 1955‑56, even though there was a loss of Rs. 1,11,846 suffered by the managed company before charging the commission of Rs. 25,

000. Moreover, as pointed out by the Appellate Tribunal, if the contention of Shri Yogeshwar Dayal on behalf of the assessee‑firm is accepted as correct, it would lead to the anomalous position that the managing agency firm (assessee‑firm) will be entitled to the full amount of the minimum commission of Rs, 25,000 if the profit of the managed company before charging commission is Rs. 25,000, but it will not get any amount of commission if the profit of the managed company is a rupee or two less than Rs. 25,

000. In the above view, it follows that the assessee‑firm was entitled to a minimum commission of Rs. 25,000 towards remuneration, and that the said amount had accrued to the assessee‑firm in the accounting year in question. Our answer to the first question referred to us is that the sum of Rs. 25,000 was assessable in the hands of the assessee‑firm, as its income. The second question referred to us relates to the contention of the assessee that the sum of Rs. 25,000 should be allowed as deductible expenditure under section 10 (2)(xv) of the Act. This question would arise only if there was a conscious waiver of the sum, on considerations of commercial expediency by the assessee‑firm. On a consideration of the facts and circumstances of the case, the Appellate Tribunal held that there was no actual waiver in respect of the sum of Rs. 25,000 by the assessee‑firm. This is a finding of fact, and in view of the same, the question of deduction does not arise. The second question must, therefore, be answered in the negative and against the assessee. The questions referred to us are answered as above against the assessee‑firm. The assessee‑firm shall pay the costs of the Department. Counsel's fee is fixed at Rs.

250. KAPUR, J.‑I agree. Reference answered accordingly.