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High Court Of Calcutta
Harrier, Banerjee, J.
Birla Brothers Ltd. : Appellant
Versus
Commissioner Of Income Tax : Respondent
IT Ref. No. 33 of 1950
Decided On : Dec 06, 1950
INCOME TAX - Deduction of expenses - Proportionate expenses incurred in management of branch in Indian State - Whether deductible - Indian IT Act, 1922, s. 14(2)(c).
Fact of the Case:
The assessee, a company residing in British India, had a number of directors who were paid a remuneration. The company also had a branch in the Indian State of Gwalior, the profits of which were not taxable in British India by reason of s. 14(2)(c) of the Indian IT Act, 1922. The assessee claimed to deduct the whole of the directors' fees as a legitimate expense for earning the income taxable in India. The taxing authorities contended that only a proportion of the directors' fees could be allowed as a legitimate expense for earning the income taxable in India.
Finding of the Court:
The court held that the whole of the directors' fees were legitimate expenses of the company which could be deducted from the gross income for the purposes of arriving at the taxable income. The court reasoned that the directors carried on their activities in Calcutta, where the company was headquartered, and that their remuneration was therefore an expense incurred in earning the income upon which the company was taxed.
Issues: Whether the assessee was entitled to deduct the whole of the directors' fees as a legitimate expense for earning the income taxable in India.
Ratio Decidendi: The court held that the directors' fees were legitimate expenses of the company which could be deducted from the gross income for the purposes of arriving at the taxable income. The court reasoned that the directors carried on their activities in Calcutta, where the company was headquartered, and that their remuneration was therefore an expense incurred in earning the income upon which the company was taxed.
Final Decision: The court answered the question submitted in the negative, holding that the assessee was entitled to deduct the whole of the directors' fees as a legitimate expense for earning the income taxable in India.
HARRIES, C.J.
1. THIS is a reference under s. 66(1) of the Indian IT Act made by the Tribunal, Calcutta Branch, for the opinion of this Court upon the following question :
"In the circumstances of these cases is the Tribunal right in deducting proportionate expenses incurred by the applicant company in British India in the management of Jiajeerao Cotton Mills Limited, Gwalior, in order to determine the profits of the Gwalior Mills which are to be exempted from taxation under s. 14(2)(c) of the Indian IT Act ?"
2. THE case is concerned with assessments made on the assessees in respect of the years 1943- 44, 1944-45 and 1945-46. THE point raised is the same in respect of all three assessments and therefore only one question of law has been formulated.
The assessees, M/s Birla Brothers Limited, are a company residing in British India which have business activities in Calcutta, Delhi, Bombay and in the Indian State of Gwalior. The company's activities consist of banking, money-lending, trading in commodities, dealing in shares and securities and conducting the business of managing agents of various concerns all over India. As part of the managing agency business the assessees were the managing agents of a cotton mill in Gwalior State known as the Jiajeerao Cotton Mills.
3. THE assessees had a number of directors who were appointed under the Articles of Association of the company and were paid a remuneration which had been fixed under those articles. THEre is no suggestion in this case and no finding that any portion of the fees payable to the directors or any of them was appropriated to any particular work in India or outside India. THE articles provide for the payment of fees to the directors for the work of directors of the assessee-company.
4. IT is conceded that the profits arising to the assessees from the managing agency connection in Gwalior were not brought into British India or received here and were therefore not taxable in British India by reason of s. 14(2)(c) of the Indian IT Act. That sub-section is in these terms :
"The tax shall not be payable by an assessee in respect of any income, profits or gains accruing or arising to him within a Part B State (formerly an Indian State), unless such income, profits or gains are received or deemed to be received in or are brought into the taxable territories in the previous year by or on behalf of the assessee or are assessable under s. 12B or s. 42."
In arriving at their assessable income in India the assessees set off as against their gross income their legitimate expenses or outgoings including the total amount paid to their directors as fees. Ordinarily of course the directors' fees are legitimate expenses which can be set off against the earnings for the purposes of arriving at the net income.
5. THE taxing authorities however contended that as part of the income of M/s Birla Brothers was not liable to tax by reason of s. 14(2)(c) of the Indian IT Act the whole of the directors' fees could not be treated as legitimate expenses which could be deducted from the gross income for the purposes of arriving at the taxable income.
6. IT was suggested that only a proportion of the directors' fees could be allowed as a legitimate expense for earning the income taxable in India and therefore it was said that the proportion of the directors' fees which could be properly attributable to earning the income at Gwalior which was excluded for the purposes of taxation would have to be excluded from the total of directors' fees for the purposes of assessing the taxable income.
Dr. Gupta who has appeared on behalf of the taxing authorities has argued that before the deduction from the total income of this company can be made as provided by s. 14(2)(c) of the Indian IT Act, an estimate must be made of the amount of the directors' fees which could be attributed to earning the income of the company in Gwalior, and as that had to be done the whole of the directors' fees could not be regarded
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