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Commissioner of Income-tax, Bombay City-iii Vs. Babubhai M. Chinai - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 19 of 1970
Judge
Reported in[1981]130ITR525(Bom); [1979]2TAXMAN79(Bom)
ActsIncome Tax Act, 1961 - Sections 15, 16, 28, 37(1), 56 and 57
AppellantCommissioner of Income-tax, Bombay City-iii
RespondentBabubhai M. Chinai
Appellant AdvocateR.J. Joshi, Adv.
Respondent AdvocateS.J. Mehta, Adv.
Excerpt:
.....satisfied or not. in our view, reading the agreement dated december 20, 1961, between the managing agency company and the supervisors together with the agreement between the assessee and kirit, it would have to be held that both the second and the third conditions mentioned above were fully satisfied. the assessee was clearly required by the conditions of his service (under the agreement dated december 20, 1961) to incur the expenditure out of his remuneration and the expenditure was obviously incurred wholly, necessarily and exclusively in the performance of his duties. perusing the two agreements, it is clear to us that the remuneration paid to the assessee by the managing agency company under clause 4 of the agreement dated december 20, 1961, fell under under the head 'salaries'.it is..........a company called ruia chinai & co. pvt. ltd. the chinai group held 40% shares in the said managing agency company, the remaining 60% being held by the ruia group. ruia chinai & co. pvt. ltd., were appointed managing agents by bombay oxygen corporation ltd. under an agreement dated may 15, 1961, which agreement was to run for a period of ten years commencing from february 10, 1961. under clause 2 of the said agreement the managing agents were to be paid by way of remuneration for the services rendered a commission at the rates mentioned in the said clause. there was, however, provision for a minimum remuneration of rs. 35,000 per annum which would stand raised to rs. 50,000 in certain cases. clause 5 of the said agreement specified the duties of the managing agents. the other terms of the.....
Judgment:

Desai, J.

1. As many as eight questions have been referred to us in this reference at the instance of the Commissioner under s. 256(1) of the I. T. Act, 1961. However, all the questions may not be required to be answered. Indeed, this is so in the view that we take of the answers to be given to questions Nos. 1, 2 and 8. The questions referred to us are as follows :

'(1) Whether the supervision charges received by the assessee were 'Salaries' within the meaning of section 15 of the Income-tax Act, 1961

(2) If the answer to question No. (1) is in the affirmative, whether the amounts of Rs. 10,000, Rs. 12,000 and Rs. 12,000 claimed by the assessee in the respective assessment years 1962-63, 1963-64 and 1964-65 were permissible deductions under section 16(v) of the Income-tax Act, 1961

(3) Whether the supervision charges received by the assessee were 'profits and gains of business or profession' within the meaning of section 28 of the Income-tax Act, 1961

(4) If the answer to question No. (3) is in the affirmative, whether the amounts of Rs. 10,000, Rs. 12,000 and Rs. 12,000 claimed by the assessee in the respective assessment years 1962-63, 1963-64 and 1964-65 were permissible deduction either under section 28 or under section 37(1) of the Income-tax Act, 1961

(5) Whether the supervision charges received by the assessee were 'income from other sources' within the meaning of section 56 of the Income-tax Act, 1961

(6) If the answer to question No. (5) is in the affirmative, whether the amounts of Rs. 10,000, Rs. 12,000 and Rs. 12,000 claimed by the assessee in the respective assessment years 1962-63, 1963-64 and 1964-65 were permissible deductions under section 57 (iii) of the Income-tax Act, 1961

(7) Whether the amounts of Rs. 10,000, Rs. 12,000 and Rs. 12,000 claimed by the assessee in the respective assessment years were not the income of the assessee, there being an overriding title in respect thereto under the agreement dated December 20, 1961

(8) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of remuneration by the assessee to his son, Shri Kirit Chinai, under the terms of the agreement dated January 15, 1962, was an expenditure required to be made by him under the conditions of his serve and that it was incurred wholly, necessarily and exclusively for the performance of his duties and was thus an admissible deduction under section 16(v) of the Income-tax Act, 1961 ?'

2. The assessee before us is an individual and we are concerned with the assessment years 1962-63, 1963-64 and 1964-65, for which the respective accounting years were Samvat years 2017, 2018 and 2019, respectively. The assessee, as the head of what may be designated as Chinai group, was interested in the formation of a company called Bombay Oxygen Corporation Ltd., along with the Ruia group. The managing agents of the said company was a company called Ruia Chinai & Co. Pvt. Ltd. The Chinai group held 40% shares in the said managing agency company, the remaining 60% being held by the Ruia group. Ruia Chinai & Co. Pvt. Ltd., were appointed managing agents by Bombay Oxygen Corporation Ltd. under an agreement dated May 15, 1961, which agreement was to run for a period of ten years commencing from February 10, 1961. Under clause 2 of the said agreement the managing agents were to be paid by way of remuneration for the services rendered a commission at the rates mentioned in the said clause. There was, however, provision for a minimum remuneration of Rs. 35,000 per annum which would stand raised to Rs. 50,000 in certain cases. Clause 5 of the said agreement specified the duties of the managing agents. The other terms of the agreement are not material for the purposes of this reference.

3. A separate agreement dated December 20, 1961, was entered into between the said managing agency company of the one part, Shri Kamalnayan Bajaj of the second part and M Ramnarain Pvt. Ltd. and Babubhai Maneklal Chinai (the assessee) jointly of the third part. In the said agreement, the parties of the third part were appointed as supervisors. The duties of the supervisors were described in cls. (1) and (2) of the agreement. Under clause (4) of the agreement 40% of the fixed managing agency remuneration was to be paid to the assessee for doing his duties as joint supervisor, along with M. Ramnarain Pvt. Ltd. for whom its two directors, Shri Madanmohan R. Ruji and Smt. Kanta Madanmohan R. Ruia, were to render services to the managing agency company. This company was to receive the balance of 60% of such fixed remuneration.

4. As a corollary to the above agreement dated 20th December, 1961, an agreement was made at Bombay on 15th January, 1962, between the assessee and his son, Shri Kirit Babubhai Chinai, which was also to become operative from 10th February, 1961, on which date Ruia Chinai & Co. Pvt. Ltd. became entitled to a fixed remuneration under the managing agency agreement and the period was to end with that of the agreement dated December 20, 1961, i.e., the one in which, inter alia, the two supervisors were appointed. Under the agreement between the assessee and his son, Kirit, Kirit agreed to render assistance to the assessee in the management and affairs of the Bombay Oxygen Corporation Ltd. and Ruia Chinai & Co. Pvt. Ltd. for which he was to be paid remuneration of Rs. 1,000 per month to any other company in its management or affairs during the operation of the agreement except with the consent of M/s. Ruia Chinai & Co. Pvt. Ltd., given in writing.

5. A copy of the managing agency agreement has been annexed as annex. 'A' to the statement of the case. A copy of the agreement dated December 20, 1961, between the managing agency company and Kamalnayan Bajaj and the supervisors is annexed as annex. 'B' to the statement of the case. A copy of the agreement between the assessee and his son, Kirit, is annexed as annex. 'C' to the statement of the case.

6. In each of the three assessment years, the assessee received supervision charges under the agreement dated December 20, 1961, out of which the assessee paid remuneration to his son, Kirit, in terms of the agreement dated January 15, 1962, as under :

--------------------------------------------------------------------Assessment Supervision charges Remunerationyear received paid--------------------------------------------------------------------Rs. Rs.1962-63 12,005 10,0001963-64 14,000 12,0001964-65 14,000 12,000

7. The amount shown in the last column was claimed by the assessee as a deduction from the income shown in col. 2 in the respective assessment years. It was the assessee's case that supervision charges were income from business under s. 28 of the I. T. Act, 1961, and the deduction claimed was required to be allowed under s. 37(1) of the said Act. The ITO, however, was of the view that on the facts the income of the assessee as supervisor was income received by way of salaries under s. 15 of the Act. He had that under the agreement the assessee was subject to the superintendence, control and direction of the managing agency company and was, therefore, in the same position as an executive. In the view of the ITO, therefore the true relationship between the managing agency company and Babubhai (the assessee) was that of employer and employee and the amount paid to Babubhai M. Chinai under the said agreement dated December 20, 1961, was required to be assessed under the head 'Salaries'.

8. It may be mentioned that the assessee had in the alternative contended that the remuneration paid to his son, Kirit, amounted to diversion of income at its very source in view of the terms of the agreement dated December 20, 1961. This was also negatived by the ITO. The assessee's case that he was entitled to deduction under s. 16(v) if the remuneration paid to him was regarded as 'salary' was also rejected. According to the ITO, the amount to be claimed as deduction under s. 16(v) was one which was spent by the assessee in the performance of his duties which was equivalent to doing the work of the office. In the view of the ITO, the work of the assessee as a supervisor began when the assessee arrived at the office and ceased when he left the office and, therefore, the payment of Rs. 1,000 p.m. to his son could not be considered as expended wholly, necessarily and exclusively in the performance of his duties. The assessee proceeded in appeal to the AAC. The AAC held that the amount paid to the assessee under the supervision agreement was income by way of salary and no deduction therefrom was allowable under s. 16(v) of the Act.

9. The assessee carried the matter in further appeal to the Tribunal. Before the Tribunal submissions were made by the assessee on a four-fold footing, each footing being by way of an alternative to the previous one. In the first place, it was submitted that the income eared by the assessee under the agreement dated December 20, 1961, was income from business to which s. 28 applied and the deduction claimed was either permissible under that very section or in any case under s. 37(1) of the Act. In the alternative, it was submitted that if the income was not income from business, it had to be properly regarded as income from 'other sources' and to such income the provisions of s. 56 were applicable. it was contended, then, that the deduction was required to be allowed under s. 57(iii) of the I. T. Act, 1961. In the further alternative it was submitted that the remuneration payable to Shri Kirit Babubhai Chinai was diversion of income under an overriding title and, therefore, could not constitute part of the taxable income of the assessee. Lastly, it was submitted that even if the amount received by the assessee under the agreement dated December 20, 1961, was to be treated as salary income as contended by the department and, therefore, fell under s. 15 of the I. T. Act, 1961, the deduction claimed was permissible under s. 16(v) of the said Act. The Tribunal considered the agreement between the assessee and the company and held that the remuneration paid to the assessee was required to be considered as salary paid to him. The tribunal, however, disagreed with the view of the ITO which was subsequently confirmed by the AAC that the remuneration paid to Kirit under the agreement between the assessee and Kirit was not allowable as a deduction under s. 16(v). According to the Tribunal the amount paid to Kirit had been actually expended by the assessee which by the conditions of his service he was required to spend out of the remuneration received by him (the assessee). According to the Tribunal, further, this was an amount wholly, necessarily and exclusively expended by the assessee for the performance of his duties and thus fully satisfied the requirements of s. 16(v) of the Act. The Tribunal went on to consider the other claims of the assessee. It rejected the contention that this was a diversion of income at the initial stage itself under an overriding title. Thus, this contention of the assessee was not accepted, but on both the other footings, viz., that if the remuneration may be regarded as income from business or as income from other sources, the Tribunal was of the opinion that the amount paid to Kirit was allowable as deduction under s. 37(1) or s. 57(iii), respectively, as the case may be.

10. In out opinion, the tribunal was right in treating the remuneration paid to the assessee as salary and further in allowing the amount paid to Kirit by the assessee as a necessary deduction under s. 16(v) of the said Act. We will briefly advert to the reasons for this view. In view of the conclusion reached by us, in our opinion, it is unnecessary to deal with the other alternative submissions made on behalf of the assessee and we will proceed only to briefly give reasons for the view expressed above and to answer questions Nos. 1, 2 and 8 holding that in view of the answers given to the said questions, it is not necessary to answer questions Nos. 3 to 7.

11. In our opinion, the nature of the income earned by the assessee must necessarily turn upon the agreement between the managing agency company, viz., Ruia Chinai & Co. Pvt. Ltd., and the assessee. This agreement is annex. 'B' to the statement of the case and the said managing agency company is the party of the first part, Kamalnayan Bajaj is indicated as the part of the second part and M. Ramnarain Pvt. Ltd. and Babubhai Maneklal Chinai (the assessee) are jointly designated as the parties of the third part to the said agreement. The private limited company and the assessee are designated as supervisors and after reciting the circumstances under which the Bombay Oxygen Corporation Ltd. came to be constituted and came to appoint the managing agency company as its managing agents, the agreement recites that M. Ramnarain Pvt. Ltd. and Babubhai M. Chinai (the assessee) have rendered and will be rendering in future services to the company. Clauses 1 and 2 of the said agreement provide for what services are to be rendered by the supervisors and the manner in which the supervisors are to act. Clause 4 provides for the remuneration paid to the supervisors and the same may be fully set out :

'4. With effect from 10th February, 1961, being the date from which the managing agents are entitled to remuneration until such time as the company does not earn managing agency commission other then the fixed minimum remuneration specified in the agreement, the company shall divide the said fixed minimum remuneration (after meeting the expenses) between M. Ramnarain Pvt. Ltd. and the said Babubhai who agree to accept the same as remuneration for services rendered by them in the proportions following, viz., the company shall pay 60% of the fixed minimum remuneration (after meeting the expenses) to M. Ramnarain Pvt. Ltd. and 40% of the said remuneration (after meeting the expenses) to the said Babubhai; out of the remuneration payable to Shri Babubhai, Shri Babubhai shall pay a sum of Rs. 1,000 (rupees one thousand) per month to his son, Kirit Babubhai Chinai, with effect from 1st March, 1961, for having assisted in the past and for rendering assistance in future to Shri Babubhai in the management and affairs of the company.'

12. If cls. 1, 2 and 4 of the aforesaid agreement are properly read and appreciated, it is clear that the supervisors are to perform some of the managerial duties in respect of the Bombay Oxygen Corporation Ltd. and other executive duties for which each of them is to receive the remuneration prescribed by clause 4. It would appear that although the commission paid to the managing agency company under its managing agency agreement with the Bombay Oxygen Corporation Ltd. may constitute its business income, the remuneration paid to the supervisors under this agreement would be required to be regarded as salary at least so far as the assessee is concerned. The question now is whether from such income the assessee is entitled to the deductions which are provided for under s. 16 and in particular s. 16 (v). Section 16(v) has been deleted with effect from 1st April, 1975, by the Finance Act, 1974, but was operative for the three assessment years under consideration and read as follows :

'16. The income chargeable under the head 'Salaries' shall be computed after making the following deductions, namely :-

(v) any amount actually expended by the assessee, not being an amount expended on the purchase of books or other publications, or on entertainment or on the maintenance of a conveyance, which, by the conditions of his service, he is required to spend out of his remuneration wholly, necessarily and exclusively in the performance of his duties.'

13. A scrutiny of the clause indicates that there conditions are required to be satisfied for its application : (i) The amount claimed for deduction should have been actually expended by the assessee, (ii) the assessee should be required by the conditions of his service to incur the expenditure out of his remuneration, and (iii) the expenditure should be incurred wholly, necessarily and exclusively in the performance of his duties. Now, as far as the first of the said three conditions is concerned, it is not in dispute that the amount which is claimed as deduction has been paid by the assessee to his son, Kirit. The question, however, is whether the other two conditions can be said to have been satisfied or not.

14. Before giving our conclusions on these points we may refer to the agreement between the assessee and his son, Kirit, a copy whereof is annexed as annex 'C' to the statement of the case. The agreement recites that Babubhai is to pay Rs. 1,000 p.m. to Kirit with effect from 1st March, 1961, for having assisted in the past and for rendering assistance in future to Babubhai in the management and affairs of the Bombay Oxygen Corporation Ltd., of which Ruia Chinai & Co. Pvt. Ltd. are the managing agents. Obligations incurred by Kirit and the duties to be performed by him are indicated in cls. 2 and 4 of the said agreement. Under clause 2, Kirit is to assist Babubhai as an assistant in the management and the affairs of the Bombay Oxygen Corporation Ltd. Under clause 4, he is to render assistance, in addition, to Ruia Chinai & Co. Pvt. Ltd. (the managing agency company) and is debarred from rendering any assistance to any other company in its management and affairs except with the written consent of the managing agency company. There are other undertakings given and obligations incurred by Kirit which will not be material for our purposes. It is for these obligations that Babubhai agrees to pay to Kirit a sum of Rs. 1,000 p.m. It may be mentioned further that in the recital to this agreement dated January 15, 1962, express reference is made to the term of the agreement between the managing agency company and the supervisors under which it is expressly provided that Babubhai was required to pay the remuneration of Rs. 1,000 to Kirit for having secured and for securing Kirit's assistance in the management and affairs of the managing agency company.

15. In our opinion, clause 4 of the agreement between the managing agency company and Kamalnayan Bajaj and the supervisors is a complete answer to the case of the revenue and the view taken by the ITO which was confirmed later by the AAC. It is true that the provisions of a clause similar to s. 16(v) have been considered by courts as notoriously rigid, narrow and restricted in its operation. But, however narrow a view one may take of the provisions of a clause such as s. 16(v), it is clear that the agreement between Babubhai and Kirit dated January 15, 1962, under which Babubhai was to pay remuneration of Rs. 1,000 p.m. to Kirit is made directly in pursuance of the agreement between the managing agency company and Babubhai and is by way of satisfaction of an obligation incurred by Babubhai under the latter agreement. Under the agreement, annex. 'B' to the statement of the case, the managing agency company has undertaken to pay 40% of the fixed minimum remuneration after meeting expenses to Babubhai and one of the obligations incurred by Babubhai which constitutes the consideration for such payment of remuneration is to secure the assistance of Kirit for which Babubhai agrees with the managing agency company to pay Kirit an remuneration of Rs. 1,000 p.m.

16. Thus, we have the case of an employer engaging an employee who is to perform certain duties and who, in addition, is to get and procure the services of his son for the employer and who has agreed with the employer that out of the total remuneration received by him under his agreement with the employer he would pay Rs. 1,000 p.m. to the other person whose services he is to procure. In our view, reading the agreement dated December 20, 1961, between the managing agency company and the supervisors together with the agreement between the assessee and Kirit, it would have to be held that both the second and the third conditions mentioned above were fully satisfied. The assessee was clearly required by the conditions of his service (under the agreement dated December 20, 1961) to incur the expenditure out of his remuneration and the expenditure was obviously incurred wholly, necessarily and exclusively in the performance of his duties. Once it is realised that procuring the services of Kirit was a part and parcel of the assessee's duties as an employee of the managing agency company, then the question does not involve any elaborate discussion and the answers given to the question by the ITO and the AAC must be decisively rejected and the view taken by the Tribunal approved. Perusing the two agreements, it is clear to us that the remuneration paid to the assessee by the managing agency company under clause 4 of the agreement dated December 20, 1961, fell under under the head 'Salaries'. It is equally clear that the deduction claimed by the assessee was allowable since it satisfied all the requirements of s. 16(v) as it stood for the three relevant years. In this view of the matter, we will proceed to answer questions Nos. 1, 2 and 8 observing that it is unnecessary to answer questions Nos. 3 to 7.

17. In the result, the three questions are answered as follows :

Question No. 1 - In the affirmative.

Question No. 2 - In the affirmative and in favour of the assessee.

Question No. 8 - In the affirmative and in favour of the assessee.

Question Nos. 3 to 7 need not be answered in view of the answers given to questions Nos. 1, 2 and 8.

18. The Commissioner will pay the costs of the reference to the assessee.


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