JUDGEMENT

Appeal (No. 46 of 1936) from a judgment of the High Court (March 27, 1935) upon a reference made under s. 66, sub-s. 2, of the Indian Income-tax Act, 1922.

The appellant company, Tata Hydro-Electric Agencies, Ld., Bombay, were a private limited company who carried on business as the managing agents of the Tata Power Co., Ld., and of three other electric power companies in India. The questions referred to the High Court arose in the course of the assessment of the income of the appellants for the year of assessment ending on March 31, 1934, and were as follows —

" (1.) Whether in the circumstances of the case and in view of the provisions of s. 4, sub-s. 1, and s. 10 of the Act, the assessee company has been correctly assessed on the total amount of Rs.5,17,288 received by it as profits and gains of the business carried on by it as the managing agents of the Tata Power Co., Ld.

(2.) Whether under the provisions of s. 10 of the Act or under any other provisions thereof, the assessee company is entitled to have a deduction from the said profits and gains amounting to Rs.5,17,288 to the extent of Rs. 1,29,322 paid by it to certain parties under the agreements, exhibits F and G [being agreements between the appellants and F. E. Dinshaw Ld. and Richard Tilden Smiths administrator respectively, as below mentioned] on the ground that this latter amount was nothing but expenditure incurred solely for the purpose of earning the said profits or gains or on any other ground."

The appellants had acquired their agency business by assignment from their predecessors, Tata Sons, Ld., subject to the above mentioned agreements by which their predecessors, who had borrowed money for the Tata Power Co., Ld., from F. E. Dinshaw Ld. and Richard Tilden Smith, had agreed to pay to the lenders, in addition to the interest payable on the loans by the Tata Power Co., Ld., 12 ½ per cent, of the commission which they, Tata Sons, Ld., received from the Tata Power Co., Ld. The question in this appeal was whether that 25 per cent, of the commission which the appellants paid was " expenditure incurred solely for the purpose of earning .... profits or gains" within the meaning of s. 10, sub-s. 2 (ix.), of the Indian Income-tax Act, 1922, so as to entitle them to deduct it in computing their profits or gains for tax purposes.

The facts appear fully from the judgment of the Judicial Committee.

The High Court (Sir John Beaumont C. J. and Rangnekar J.) answered the questions referred adversely to the appellant company.

1937. Jan. 26, 28, 29. Needham K.C., Reginald Hills and Ralph Parikh for the appellants. The payments made by the appellants to F. E. Dinshaw Ld. and the administrator of Richard Tilden Smith did not form part of the appellants income and ought not to have been taken into account in computing for the purpose of income-tax the profits of their business of managing agents. The payments were not and did not represent part of the profits of the appellants business, but were payments of or out of the gross revenue received by the appellants from one of the sources of revenue of the business— namely, a particular agency for a particular principal. What the appellants obtained under the assignment to them of the agency agreement by Tata Sons, Ld., was not the whole commission payable by the Tata Power Co., Ld., to their agents but only three-fourths of that commission. The

Law. Rep. 64 Ind. App. 215 ( 1936- 1937) Tata Hydro-Electric Agencies v. Commnr of Income Tax

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payments were in any event necessary expenditure of the appellants in carrying on their business as managing agents and earning the profits of the business. Tata Sons, Ld., could have deducted for tax purposes the amount they paid to the lenders from the remuneration they received from Tata Power Co., Ld. There must be a connecting link between the payments and the making of profits, and there is one here. The facts in Commissioner of Income-tax, Bombay v C. Macdonald & Co. (( 1934)