Malik, C.J. - (1.) THESE are two connected references, one of them being under Section 66(2), Income-tax Act and the other under Section 21, Excess Profits Tax Act. The facts given in the statement of the case as also in the Appellate Order of the Tribunal related only to the Income-tax reference and no facts have been given as regards the reference made under Section 21, Excess Profits Tax Act.
(2.) THE two questions that have been referred to us for decision are as follows : "1. Whether on the facts and in the circumstances of this case the sum of Rs. 34,582/- could be claimed by the assessee company as an expenditure laid out and expended wholly and exclusively for the purpose of the business? 2. Whether on the facts and in the circumstances of this case the expense so claimed was an expenditure in the nature of capital and hence not admissible under Section 10(2) (xv), Income-tax Act?" The assessee is a company known as Central Distillery and Chemical Works Limited, Meerut, incorporated under the Indian Companies Act on 14-10-1935, on 1-2-1937, the assessee company entered into a managing agency agreement with Messrs. Krishna, Gupta and Devalal. The managing agency agreement recited that "Whereas Mr. Sam Ernest Devalal, sole proprietor of M/S Devalal andamp; Co., and now one of the partners of the said firm Krishna, Gupta and Devalal, secured the sanction of the Government of the U. P. for a licence for the manufacture of industrial Alcohol, Chemicals etc., and whereas in consideration of the services rendered by him in having promoted and brought about the formation of the said company that the firm of M/S Devalal and Co., as the same is now or may hereafter be constituted shall be the first Managing Agents of the Company......" The remuneration payable to the Managing Agents was a fixed amount and besides the remuneration mentioned in the agreement they were also probably entitled to some commission. What exactly the remuneration was does not. appear either from the Appellate Order or the Statement of the Case and the copy of the agreement that has been placed before us does not appear to be a correct copy of the deed. Under the Defence of India Rules -- Rule 81, Sub-rule (3)-- the Governor issued a notification on 27-3-1942, authorising the Excise Commissioner, U. P., to exercise control over the work of the company with effect from 1-4-1942. The functions of the Controller were set out in detail in this notification and they amounted to his seeing that the company was worked efficiently so that there might be maximum production of Power Alcohol and it might be available at the cheapest rate. The Controller was also given power of control over the staff and had the power to replace the staff working in the company by making fresh appointments. There was nothing in the notification terminating the managing agency agreement, nor did it expressly provide that the Managing Agents would no longer be entitled to the remuneration fixed in the said agreement.
(3.) IN the relevant assessment year 1945-46, the corresponding accounting period of which was 1-10-1943 to 30-9-1944, a sum of Rs. 34,582/- was payable to the Managing Agents as remuneration and commission. The question arose whether the assessee company could claim deduction of this amount as amount "wholly and exclusively" expended for the purpose of the business. The ground on which the claim' was disallowed was that since there was a Controller appointed by the Government the Managing Agents had no work to do and, therefore, it could not be said that the amount was wholly and exclusively spent for the purpose of the business. It is not denied that the agreement being for a fixed period of 20 years and the notification issued under Rule 81(3), Defence of India Rules, not having in any way terminated the agreement between the Managing Agents, the assessee company was liable to pay the remuneration and commission at the rate fixed in the agreement. The mere fact that by reason of the necessity arising out of the prosecution of the war the Government appointed a Controller to supervise the working of the concern and the Controller took charge and did the work which the Managing Agents would normally have done the Managing Agents could not be deprived of the commission and remuneration legally payable to them. That being the position, we see no reason why this amount was not an admissible expenditure under Section 10(2) (xv), Income-tax Act.;