ZAVERCHAND LAXMICHAND AND COMPANY Vs. COMMISSIONER OF INCOME TAX
LAWS(GJH)-1963-9-21
HIGH COURT OF GUJARAT
Decided on September 12,1963

ZAVERCHAND LAXMICHAND And CO. Appellant
VERSUS
COMMISSIONER OF INCOME TAX Respondents

JUDGEMENT

SHELAT, J. - (1.) THIS is a reference under S. 66(1) of the IT Act at the instance of the assessees. Two questions arise in this reference. The first is as to the proper interpretation of cl. 3 of the managing agency agreement dated August 2, 1950, entered into between the assessees and the Baroda Spinning and Weaving Co. Ltd., Baroda, and the second is whether the assessees were right in claiming the sum of Rs. 2,32,234 as depreciation for deducting that amount from the profits of the managed company while calculating the commission due to the assessees under the said managing agency agreement.
(2.) THE assessment year is 1950 51 of which the relative previous year is the calendar year 1950. The assessees, assessed in the status on an association of persons, were at the relevant time the managing agents of the Baroda Spinning and Weaving Co. Ltd., Baroda. The entity composed of the then members of the said association of persons was appointed as managing agents under an agreement entered into a January 21, 1906. Under that agreement, it was provided that the managed company should pay to the managing agents three pies per every pound of yarn and cloth manufactured and sold by the company and further, ten per cent. commission of the amount of bills for all other work done by the managed company, except that of yarn and cloth. The said agreement further provided that if, in any year, the managed company's profits were less than six per cent. payable on its paid up capital, the managing agents should forgo their commission to the extent of one third in order to make up the six per cent. The capital of the managed company at that time was made up of 5,839 ordinary shares of Rs. 100 each. Thereafter, certain changes took place in the entity of the managing agents, as a result of which a fresh agreement of managing agency was entered into on April 25, 1921. Clause 3 of that agreement provided that the managed company should pay to the agents four per cent. on the profits of yarn and cloth manufactured in the company's factory, and ten per cent. commission on the net profits arising from the work of ginning cotton and any other work. That clause further provided that if, in any year, the income of the managed company did not amount to ten per cent. of the paid up capital, that is, in the year in which the dividends to the shareholders fell short of ten per cent., the managed company should pay to the agents less commission to the extent of onethird and the agents should accept such lesser commission. These provisions were also incorporated in sub cl. (14) of cl. 7 of the articles of association. On September 10, 1948, the relevant clause, i.e., sub cl. (14) of cl. 7 of the articles of association, was further amended and the amendment was to the effect that the managing agents were to be paid as their commission four per cent. on the sales of yarn and cloth manufactured and sold by the managed company and further, commission at the rate of ten per cent. on the net profits of the work of cotton ginning or any other work done by the managed company. The amended clause further provided that, in any year, if the managed company did not distribute dividend of Rs. 58,390, the commission payable to the managing agents should be paid less, so as to make up the deficit and that such recoupment should be only to the extent of one third of the commission. A resolution to the same effect was also passed on that very day in an extraordinary general meeting of the managed company. On the same day, i.e., on September 10, 1948, the managed company passed a resolution transferring a sum of Rs. 2,50,000 from the reserve fund and Rs. 9,17,800 from the depreciation fund, totaling to Rs. 11,67,800 to the share capital, and 5,839 ordinary shares of the face value of Rs. 100 each were, by that resolution, converted into shares of the face value of Rs. 200 each and 5,839 preference shares of the face value of Rs. 100 each were issued to the existing shareholders of ordinary shares. This was done without calling for any capital from the shareholders. After this variation in the capital structure was brought about, a fresh agreement of managing agency was entered into on August 2, 1950, between the assessees on the one hand and the managed company on the other. Clause 3 of that agreement, which is the only clause which is relevant for our purposes, as translated, ran as follows : "In consideration of the party of the other part working as secretary, treasurers and agents of the company of the first part the company of the first part shall pay to the agents of the other part commission at the rate of (4per cent) four per cent. of the value of the yarn and piece goods, which will be sold after being manufactured in the factory of the company of the first part as also commission at the rate of ten per cent. on the net profits made in respect of the work of ginning cotton as well as for any other kind of work. But it is further provided that, for the year, during which the company is not able to distribute Rs. 58,390 by way of dividends, the company of the first part shall pay to the agents less commission at the most to the extent of one third, that is to say, up to one third share, in order to make up the deficit amount during that year and the agents shall receive less commission to that extent". During the calendar year 1950, the gross profit of the managed company, without deducting deprecation and the managing agent's commission, came to Rs. 5,96,938 and under cl. 3 of the said agreement, the commission payable to the managing agents came to Rs. 4,43,346. The balance profit, therefore, came to Rs. 1,53,592. The case of the assessees was that out of this balance of Rs. 1,53,592, certain deductions had to be made in order to find out whether under the provision as to recoupment by the managing agents, the managing agents had to forgo their commission and, if so, the extent thereof. The deductions claimed were :
(3.) THE total being Rs. 3,16,900. It was claimed that as these deductions exceeded one third of the managing agent's commission, the managing agent had to forgo their commission to the extent of the maximum, namely, one third, and, therefore, the assessees offered for assessments Rs. 2,96,651 as and by way of their commission, and not the amount of Rs. 4,43,476. The assessees were actually paid the amount of Rs. 2,95,461 only by the managed company and that was also the amount which was deducted from the assessment of the managed company as commission paid to the managing agents. . Rs. 1. Depreciation as originally allowed in the case of the managed company by the IT Department 2,32,234 2. Provision for dividend on preference shares 26,276 3. Provision for dividend on ordinary shares as per cl. 3 58,390 ;


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