BEAUMONT, CJ -
(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.
We,therefore, stood the reference over and suggested to the Commissioner that he should raise a further question directed to this point. The Commissioner has to-day put in a lengthy opinion, in which he objects to the raising of any further question but, as for as I can see, does not suggest any answer in law to the point which we had raised. As the Commissioner objects to raising a further question, and as we are satisfied that the question which he has raised must be answered against him, we do not insist upon any further question being raised, but we express the opinion that on the true construction of the agreement of the 23rd June 1924 the portion of the commission which was assigned ceased to form any part of the income of the assessees.
On the assumption that that view is wring, I will deal with the actual question raised, which is one of a character which has come before this Court on several occasions. The question is whether an agreement to pay a part of the commission in the circumstances in which it was made in this case amounts to an expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning profits or gains within Section 10 (2) (ix) of the Income-tax Act. In two previous cases, which came before this Court, namely, Commissioner of Income-Tax, Bombay v. C. Macdonald & Co. and the Tata Hydro Electric Agencies, Bombay v. Income-tax Commissioner, Bombay Presidency to which I will refer more in detail in a moment, this Court took the view that a question of this sort was determined against the assessees by virtue of the decision of the Privy Council in Pondicherry Railway Co. v. Commissioner of Income-tax. Having regard to the explanation of the principle which we understood, perhaps wrongly, to underly that case, which has now been given by the Privy Council in the Tata Hydro Electric Agencies case and the Indian Radio and Cable Communication Company v. Commissioner of Income-Tax, Bombay, and also by the English Court of Appeal in British Sugar Manufacturers Ltd. v. Harris, I think that the Pondicherry case ceases to present any difficulty. The question whether the payment of part of a commission to a third person can be regarded as expenditure incurred solely for the purpose of earning that commission is a question which must be answered on the facts of each case and on a commercial basis. Now, it is to my mind clear in this case that the assessees were bound either to lose the commission which they we getting from the Tata Iron and Steel Co., Ltd., or to arrange for financing that Company, and we must assume that the arrangement, which they made as to finance was the wisest which could be made in the circumstances. The agreement to share their commission with the lender was part of the terms on which they managed to obtain finance, and, in my opinion, therefore, in a commercial sense the payment of this share of the commission was an expenditure solely for the purpose of earning profits or gains, viz., the remainder of the commission.
(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.
I think that the agreement to share commission in this case did amount to an expenditure incurred solely for the purpose of earning the profits or gains of the assessees. We therefore, answer the question raised in the affirmative.