JUDGMENT T.V.R. Tatachari, J.
(1) In this reference under Section 66(1) of the Indian Income Tax Act, 1922, the following two questions of law have been referred to us: -
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 assessed as its income ?
2. If the answer to question (1) is in the affirmative, whether the said sum is an allowable deduction from the assesse's income assessable u/s 10?
(2) These two questions have arisen under the following circumstances :-
The assessed, M/s. H. G. Gupta & Sons, Delhi, is a registered firm deriving income from Managing Agensy and financing business. The assessment year under reference is 1954-55 and the corresponding previous year is the year ending on 31/3/1954. The assessed-firm was appointed as Managing Agent to M/s. H.G. Gupta & Sons Ltd., under an agreement, dated 6/1/1948. By that agreement, Lala Hans Raj Gupta, the Managing partner of the Managing Agency firm (assessed) was appointed as the per manent 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 (Rs. twenty five thousand only) in a year in case of inadequacy of profits."
The above provision is in clause 2(b) of the agreement.
(3) The assessed-firm contended before the Income Tax Officer that the minimum commission of Rs. 25,000 could be claimed by the assessed 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 nto make any profit, and that no commission was, therefore, paid to the assessed-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 assessed-firm. The Income Tax Officer, therefore, held in his assessment Order, dated 30/3/1959, that according to clause 2(b) of the Managing Agency agreement, the Managing-Agency-firm (assessed-firm) was entitled to a minimum commission of Rs. 25,000 from the Managed-Company, that the assessed-firm had earned the commission, and that if the assessed-firm chose nto to claim the minimum commission of Rs. 25,000 from the Managed-Company, it only meant a voluntary surrender of the amount by the assesee-firm for extra-commercial consideration. He accordingly included the sum of Rs. 25,000 in the ttoal income of the assessed-firm.
(4) Against the said assessment order of the Income Tax Officer,the assessed-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 assessed-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 assessed-firm, no commission had at all accrued to the assessed-firm, and that, therefore, the said amount ought nto to have been included in the ttoal income. The Appellate Assistant Commissioner by his order dated 4/9/1961, 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 inade quacy of profits, the assessed-firm was entitledi to the minimum, commission of Rs. 25,000 and that as there was a profit of Rs. 5,571 in the profit and loss account of the Managed-Company for the relevant year, the assessed-firm was entitled to the minimum commission of Rs. 25,000.
(5) A second contention was urged before the Appellate Assistant Commissioner that even if it was held that the minimum commission of Rs. 25,000 had accrued to the assessed-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 assesee firm on grounds of commercial expediency. By his aforesaid Order, dated 4/9/1961, 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 circumstances of the case.
(6) Against the order of the Appellate Assistant Commissioner, the assessed-firm preferred a second-appeal to the Income Tax Appellate Tribunal, Delhi Bench 'B'. The aforesaid two contentions were again urged before the Tribunal. But, the Tribunal rejected' the said contentions and dismissed the appeal by its order, dated 31/3/1963, holding that under clause 2(b) of the agreement, the assessed-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 assessed-firm. and therefore, there could nto be any question of the said sum being allowed as a deductible expenditure under Section 10 of the Income Tax Act, irrespective of the fact whether it was on grounds of commercial expediency or toherwise.
(7) Therefore, the assessed-firm, by an application under section 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 31/5/1963, referred the said questions to this Court.
(8) The first question for consideration is as to whether on the facts and in the circumstances of the case, the sum of Rs. 25,000 was assessable in the hands of the assessed 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 31/3/1954 in the books of assessed-firm. The contention of Shri Yogeshwar Dayal, the learned counsel for the assessed-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 sssessee-firm only if there was no loss to the Managed-Company after charging the commission payable to the Managing Agent (assessed-firm) i.e. the assessed-firm was entitled to a minimum commission of Rs. 25,000.00 only if the profit of the Managed- Company had exceeded Rs. 25,000.00, that since the profit of the Managed Company was only Rs. 5,571.00 before charging the commission of the Managing Agent, no commission was payable to the assessed-firm, and that, therefore, no commission had accrued to the assessed-firm and was nto, in fact, paid to the assessed-firm. On the toher 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 assessed-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 (assessed-firm) is to receive by way of remuneration or 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 (assessed- 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 (assessed-firm) in the financial year ending 31/3/1955, i.e. assessement 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 assessed-firm is accepted as correct, it would lead to the anomalous position that the Managing Agency-firm (assessed-firm) will be entitled to the full amount of the minimum commission of Rs. 25,000 if the profi of the Managed-company before charging commission is Rs. 25,000, but it will nto get any amount of commission if the profit of the Managed-company is a rupee or two less than Rs. 25,000.
(9) In the above view, it follows that the assessed-firm was entitled to a minimum commission of Rs. 25,000 towards remuneration, and that the said amount had accrued to the assessed- 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 assessed-firm as its income.
(10) The second question referred to us relates to the contention of the assessed 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 assessed- firm. On a consideration of the facts and the 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 assessed-firm. This is a finding of fact, and in view of the same, the question of deduction does nto arise. The second question must therefore be answered in the negative and against the assessed.
(11) The questions referred to us are answered as above against the assessed-firm. The assessed-firm shall pay the costs of the department. Counsel's fee is fixed at Rs. 250.