- (1.) The question that arises for decision in this appeal is whether a sum of Rs. 1,23,719 paid by the respondent as commission to its managing agents on account of profits of its Karachi Branch can be allowed as deduction against the Indian profits. The respondent is a company registered under the Indian Companies Act, 1913, and is carrying on business in cotton. Its head office is in Bombay, and it maintains a branch at Karachi for purchasing cotton for shipment to Bombay or export direct to other places. Separate accounts are maintained and separate profits and loss statements are prepared for the business at Bombay and at Karachi. By an agreement dated 22-12-1947 the respondent appointed Messrs Parakh Cotton Company Ltd., as its managing agents, and under Cl. 4 of the agreement, the remuneration payable to them was fixed at 20 per cent. of the net annual profits.
(2.) During the accounting year 1-10-1947 to 30-9-1948 the respondent made a total profit of Rs. 15,63,504, of which Rs. 9,44,905 was earned in the business at Bombay and Rs. 6,18,599 at Karachi. On this, the commission payable to the managing agents as per Cl. 4 of the agreement was Rs. 3,12,699. The respondent debited a sum of Rs. 1,88,980 out of this amount in the profit and loss statement of the Bombay head office, being the 20 per cent. apportionable to the profits shown therein, and deducting this sum out of the total profits of Rs. 9,44,905 showed a sum of Rs. 7,55,925 as the net profits of the business at Bombay. It likewise debited a sum of Rs. 1,23,719 to the profit and loss statement of the Karachi branch, and deducting it out of the total profits of Rs. 6,18,599 earned by the branch, showed a sum of Rs. 4,94,879 as its net profits.
(3.) The respondent is resident and ordinarily resident in India, and therefore it would be chargeable to income-tax on its total world income. Accordingly, the Income-tax Officer took into account the profits earned both in India and in Karachi, deducted therefrom the entire commission paid to the managing agents, and after making certain adjustments, which are not material for the present purpose, determined the total income at Rs. 13,09,375. The correctness of this figure is not now in dispute.;