Skip to content


Commissioner of Income-tax Vs. Nizam Sugar Factory Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Referred No. 18 of 1965
Judge
Reported in[1969]74ITR647(AP)
ActsIncome Tax Act
AppellantCommissioner of Income-tax
RespondentNizam Sugar Factory Ltd.
Appellant AdvocateT. Ananta Babu, Adv.
Respondent AdvocateT. Ramachandra Rao, Adv.
Excerpt:
direct taxation - calculation of depreciation - income tax act - managing agency agreement entered - managing agents entitled to specified percentage of net profit of company as per clause 2 (b) of agreement - depreciation to be calculated for ascertaining profits - depreciation to be calculated under british act as was in force on date and period of agreement and if there were any changes in type of depreciation deduction to be made accordingly. - .....etc., has to be allowed in accordance with the british india income-tax act as in force from time to time. on this interpretation the income-tax officer computed the profits of the company by deducting the depreciation according to law in the relevant accounting year which in effect reduced the profits. accordingly, he disallowed payment of profits made by the company through the managing agent either wholly as no profits had accrued or to the extentcomputed by him as in his view payment of such amount was not allowable as expenditure. in appeal against this order the appellate assistant commissioner confirmed the orders of the income-tax officer. the tribunal, however, disagreed with the interpretation placed both by the income-tax officer and the appellate assistant commissioner......
Judgment:

Jaganmohan Reddy, C.J.

1. The Income-tax Appellate Tribunal has referred the following question for our consideration, viz. :

'Whether on a proper interpretation of the managing agency agreement dated April 18, 1937, the calculation of the managing agency remuneration as adopted by the company and accepted by the Tribunal is correct '

2. The question arises out of assessments made for the years 1952-53 and 1953-54 on the assessee, which is a limited company growing sugarcane and manufacturing sugar. The company, which originally entered into a managing agency agreement between itself and Raja Dhanrajgir, subsequently appointed the Industrial Trust Fund of H.E.H. the Nizam's Government as managing agents. Under the original managing agency agreement entered into between the company and Raja Dhanrajgir, dated April 18, 1937, who by an indenture of transfer dated October 17, 1937, appointed the Industrial Trust Fund, the managing agents were entitled to 10% of the net profits of the company as provided in Clause 2(b) of the agreement and if in any year there were no profits they were entitled to a minimum payment of Rs. 1,000 a month, viz., Rs. 12,000 a year. It is in respect of the said clause that this reference arises. The income-tax authorities, while construing the depreciation on the fixed assets and other assets of the company for calculating the profits, which, under the agreement, were to be calculated in accordance with the depreciation on the fixed assets, etc., allowed under the British India Income-tax Act as in force on the date of the agreement, construed Clause 2(b) as meaning that the depreciation, etc., has to be allowed in accordance with the British India Income-tax Act as in force from time to time. On this interpretation the Income-tax Officer computed the profits of the company by deducting the depreciation according to law in the relevant accounting year which in effect reduced the profits. Accordingly, he disallowed payment of profits made by the company through the managing agent either wholly as no profits had accrued or to the extentcomputed by him as in his view payment of such amount was not allowable as expenditure. In appeal against this order the Appellate Assistant Commissioner confirmed the orders of the Income-tax Officer. The Tribunal, however, disagreed with the interpretation placed both by the Income-tax Officer and the Appellate Assistant Commissioner. It held that Clause 2(b) must be construed as incorporating the provisions of the British India Income-tax Act in force on the date of the managing agency agreement for the purpose of calculating depreciation and therefore the amounts paid by the company to its managing agents was a deductible expenditure. It also held that the managing agency commission as claimed has been actually paid to the managing agents and the said payment was a bona fide payment. On behalf of the department the learned advocate, Sri Ananta Babu, contends that the Tribunal is wrong in interpreting Clause 2(b) in the manner it did, because it ignored the term which according to him emphasised that depreciation to be allowed is in accordance with the Indian Income-tax Act in force from time to time. Sri Ramachandra Rao, on the other hand, not only supports the interpretation given by the Appellate Tribunal, but contends by reference to Odger's Construction of Deeds and Statutes and several decisions of the Privy Council and the Supreme Court that when a deed or statute adopts by reference another statute the provisions of that statute as existing on the date of the deed are alone applicable and not the subsequent amendments. Even where the statute has subsequently been repealed, there is authority for the proposition that the original Act which was prevalent at the time when the deed or statute had adopted it, will continue to govern unless there has been variation in the agreement or amendment in the statute whereby that reference was deleted. Sri Ananta Babu, in reply, relies on Section 8 of the General Clauses Act and certain other decisions for the proposition that reference to an enactment in a certain context may mean a reference to an enactment as amended from time to time.

3. In order to appreciate the rival contentions it is necessary to examine the language and terms of the clause itself. The relevant portion of Clause 2(b) of the agreement is as follows :

' ' Net profits ' of the company .....means the profits of the company after allowing for all the usual working charges, interest on loans and advances, repairs and outgoing depreciation on the fixed assets and other assets of the said company, as would have been from time to time allowed in calculating profits, had the British India Income-tax Act (in force at the date hereof) been in force in Hyderabad for the whole period of this agreement .....'

4. On a prima facie reading of this clause, we are inclined to agree with the interpretation placed by the Tribunal. The contention before theTribunal was that the words ' from time to time ' referred to the depreciation that would be allowed from time to time under the Income-tax Act and that if there are any changes in the types of depreciation deduction should be made accordingly. The Tribunal in our view quite properly insisted on placing the construction and giving full force and effect to the subsequent words in the brackets in relation to the Indian Income-tax Act (in force at the date hereof) as meaning that depreciation to be allowed from time to time would be in accordance with the depreciation allowable under the Income-tax Act (in force at the date thereof), i.e., in force on the date of the agreement. We may further add that if the subsequent words 'for the whole period of this agreement' are taken into account in interpreting the meaning to be given to the previous words, it would appear to us that on the language of the clause itself, the true import would be that ' had the British India Income-tax Act in force at the date hereof been in force in Hyderabad for the whole period of this agreement ', implying that the parties intended that the British India Income-tax Act in force on the date of the agreement should be in force for the whole period of the agreement. In other words, the depreciation on fixed assets and other assets of the said company as would have been from time to time allowed in calculating profits have to be calculated as if the British India Income-tax Act in force on the date of the agreement had been in force in Hyderabad for the whole of the period of the agreement. It is equally clear that this is how the parties had understood the agreement because they have been complying with the terms of that clause. Once we have come to the aforesaid conclusion, it is unnecessary for us to go into the other contentions advanced by the learned counsel for the department and of the assessee, except the preliminary objection raised by Mr. Ramachandra Rao that this question is of academic importance, viz., having regard to the fact that the Tribunal had held that the payment was in fact made and it was a bona fide payment, the expenditure has to be allowed and that therefore no question of law would arise for us to answer. Whether the question is of academic interest or otherwise, at the time of the reference, the respondent was given an opportunity because a draft statement of the case was communicated to him and, since there were no objections raised, we do not think at this stage we can refuse to answer the question. Our answer to the question under reference is in the affirmative in favour of the assessee with costs. Advocate's fee Rs. 250.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //