TATA HYDRO ELECTRIC AGENCIES LTD, BOMBAY Vs. COMMISSIONER OF INCOME TAX, BOMBAY PRESIDENCY AND ADEN

JUDGEMENT

(1.) The appellants are a private limited company who carry on the business of managing agents of the Tata Power Company Limited and of certain other hydro-electric companies in India. They acquired this agency business from their predecessors, Tata Sons Limited, under an assignment dated 21 November 1929 whereby Tata Sons Limited transferred to the appellants their whole rights and interest as agents of the hydro-electric companies under their subsisting agreements with these companies, but subject, as to their rights and interest under their agreement; with the Tata Power Company Limited, to their obligations under two agreements with F. E. Dinshaw Limited and Richard Tilden Smith respectively. The assignment was declared to be to the intent that the appellants should thenceforth be and act as the agents of the hydro- electric companies and be entitled to all benefits and advantages contained in and conferred by the agreements between Tata Sons Limited and these companies and should perform and be bound by all the obligations and duties thereby imposed, and further that the appellants should receive all commissions and other remuneration to which Tata Sons Limited were entitled thereunder. The appellants for their part covenanted to carry out and perform the terms and conditions of the agreements with F. E. Dinshaw Limited and Richard Tilden Smith and to indemnify Tata Sons Limited against any consequences of the non- observance thereof. They further undertook, if so required, to enter into separate agreements in their own names with F. E. Dinshaw Limited and Richard Tilden Smith in the same terms.

(2.) Under the agency agreement between Tata Sons Limited and the" Tata Power Company Limited, which was dated 24 September 1919 and the benefit of which the appellants thus acquired, the remuneration of Tata Sons Limited for their services consisted of a commission of 10 per cent. on the annual net profits of the Tata Power Company Limited, with a minimum of Rs. 50,000 whether that company should make any profits or not, and they were also entitled to have their expenses reimbursed. In return for this remuneration Tata Sons Limited undertook to use their best endeavours to promote the interests of the Tata Power Company Limited. The agreement was declared to be assignable and the Tata Power Company Limited undertook to recognize any assignees as their agents and, if required, to enter into an identical agency agreement with such assignees. It was also declared to be lawful for Tata Sons Limited to assign the whole or any part of their earnings under the agreement. It appears that in 1926 the Tata Power Company Limited were urgently in need of financial assistance to the extent of over a crore of rupees. Tata Sons Limited, their then managing agents, who, as the Commissioner of Income-tax puts it in his statement of facts, "had to find the money," approached F. E. Dinshaw Limited and Richard Tilden Smith who agreed to provide the necessary funds. One of the conditions on which they agreed to do so was that, in addition to the interest payable by the Tata Power Company Limited for the loan, they should each receive from Tata Sons Limited two annas in the rupee, or 12? per cent. of the commission earned by Tata Sons Limited under their agency agreement with the Tata Power Company Limited. Two agreements embodying this obligation were entered into between Tata Sons Limited and F. E. Dinshaw Limited and Richard Tilden Smith respectively, dated 15 and 19 October 1926 being the agreements referred to in the assignment by Tata Sons Limited of their agency business to the appellants. It will be observed that as the remuneration of Tata Sons Limited depended, subject to a minimum, on the prosperity of the Tata Power Company Limited, they had an interest in assisting the Tata Power Company, Limited to obtain the financial accommodation required for the conduct of their business.

(3.) After the acquisition of the agency business by the appellants the Tata Power Company Limited, in fulfilment of their obligation under their agreement with Tata Sons Limited, entered into a new agency agreement with the appellants dated 17 December 1929 in terms identical with those of their previous agreement with Tata Sons Limited, and the appellants also entered into agreements with F. E. Dinshaw Limited and the administrator of the estate of Richard Tilden Smith (who had meantime died), dated 23rd February and 19 May 1932 respectively, in terms identical with those of the previous agreements between Tata Sons Limited and these parties. By this series of transactions complete-novation was effected with the result that the appellants came in room and place of Tata Sons, Ltd. in all respects both as regards the right to receive from the Tata Power Co., Ltd. the stipulated agency remuneration and as regards the obligation to pay out of that remuneration 12? per cent. to F. E. Dinshaw Ltd. and 12? per cent. to Richard Tilden Smith's administrator. In the year 1932 the appellants duly earned and received payment from the Tata Power Co. of their commission of 10 per cent. on the net profits of that company and duly paid over to F. E. Dinshaw Ltd. and to Richard Tilden Smith's administrator 12? per cent. thereof each, or 25 per cent. in all. The assessment of the appellants' income for tax purposes for the fiscal year to 31 March 1934, which is in question in the present appeal, is based on their income, profits and gains for the year 1932 and the question is whether in the computation for tax purposes of their income, profits and gains for that year they are entitled to deduct a sum representing the 25 per cent. of the commission earned and received from the Tata Power Co., Ltd. which they paid over to F. E. Dinshaw Ltd. and Richard Tilden Smith's administrator under the agreements above mentioned. The gross commission received by the appellants was Rs. 5,17,288 and the one-fourth thereof which they claimed to deduct was Rs. 1,29,322. Under S. 10 (2), Income-tax Act the profits or gains of any business carried on by the assessee are to be computed after making allowance for : IX. any expenditure (not being in the nature of capital expenditure) incurred solely for the purpose of earning such profits or gains.