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Kannapiran Mills Ltd. Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 291 of 1968 (Reference No. 90 of 1968)
Judge
Reported in[1975]100ITR561(Mad)
AppellantKannapiran Mills Ltd.
RespondentCommissioner of Income-tax
Appellant AdvocateS. Swaminathan and ;K. Ramgopal, Advs.
Respondent AdvocateV. Balasubrahmanyan and ;J. Jayaraman, Advs.
Excerpt:
- .....of the company for the assessment year 1961-62, the income-tax officer held that the managing agents' remuneration did not accrue from day to day but accrued only at the end of the accounting year, and that, therefore, the managing agents were entitled only to the minimum remuneration proportionate to the period of their service. in that view, he allowed as an expenditure, only a sum of rs. 6,250 out of the remuneration of rs. 14,830 paid by the company to the first managing agency firm for the period january 1, 1960, to march 31, 1960, and disallowed the balance of rs. 8,580. similarly, out of the remuneration of rs. 19,773 paid to the new managing agency firm for the period january 1, 1960, to march 31, 1960, he allowed only a sum of rs. 8,333 being the minimum proportionate.....
Judgment:

Ramanujam, J.

1. The assessee, a limited company, was being managed by a firm, M/s. K. Venkataswamy Naidu & Co., on the strength of an agreement dated July 12, 1946. According to the said agreement, the managing agents were to be paid, as remuneration for their services, 10 per cent. of the net profits of the company. Later, by a further agreement dated December 25, 1958, the remuneration payable to the managing agents wasmade subject to a minimum of Rs. 25,000 per year. On April 2, 1960, one of the three partners of the managing agency firm died and the managing agency firm ceased to function thereafter. One of the surviving partners, one K. Ramachandran, was functioning as the managing director for the period April 2, 1960, till August 1, 1960, on which date a fresh managing agency agreement was entered into between the assessee-company and K. Venkataswamy Naidu and Co., a newly constituted firm, with the said managing director, K. Ramachandran, and the sons of the deceased partner as partners.

2. For the period January 1, 1960, to March 31, 1960, the assessee paid a remuneration of Rs. 14,830 to the former managing agency firm as per the agreement dated July 12, 1946, as modified on December 25, 1958. For the period September I, 1960, to December 31, 1960, the assessee paid a remuneration of Rs. 19,773 to the new firm, K. Venkataswamy & Co. These two amounts were assessed to tax in the hands of the respective magaging agents.

3. In the assessment of the company for the assessment year 1961-62, the Income-tax Officer held that the managing agents' remuneration did not accrue from day to day but accrued only at the end of the accounting year, and that, therefore, the managing agents were entitled only to the minimum remuneration proportionate to the period of their service. In that view, he allowed as an expenditure, only a sum of Rs. 6,250 out of the remuneration of Rs. 14,830 paid by the company to the first managing agency firm for the period January 1, 1960, to March 31, 1960, and disallowed the balance of Rs. 8,580. Similarly, out of the remuneration of Rs. 19,773 paid to the new managing agency firm for the period January 1, 1960, to March 31, 1960, he allowed only a sum of Rs. 8,333 being the minimum proportionate remuneration for the said period of service and disallowed the balance of Rs. 11,440. The company preferred an appeal to the Appellate Assistatant Commissioner objecting to the disallowance. The Appellate Assistant Commissioner took the view that the remuneration caenot be restricted to the minimum provided in the agreement and that even though the managing agents' remuneration can be ascertained only at the end of the accounting year, the managing agents were entitled to be paid remuneration on the basis of the net profits for the broken periods during which they have served the company. The revenue accepted the said decision so far as it related to the payment made to the latter managing agency firm, but challenged the same so far as it related to the payment made to the former managing agency firm by taking the matter to the Appellate Tribunal. It contended that, as the net profits accrued and could be ascertained only at the end of the accounting year, the managing agents' remuneration for the broken period can only be calculated on the basis ofminimum remuneration that the net profits cannot be accurately ascertained for the broken period and that as such the managing agents were not entitled to claim remuneration on the basis of the net profits for the broken period. In that view, the Tribunal upheld the disallowance of the sum of Rs. 8,580 out of the remuneration paid to the managing agents for the period January 1, 1960, to March 31, 1960. At the instance of the assessee the following question has been referred to this court for opinion :

' Whether, on the facts and in the circumstances of the case, the disallowance of Rs. 8,580 out of the remuneration paid to the managing agents for the period January 1, 1960, to March 31, 1960, is justified in law ?'

4. The reasoning of the Tribunal for holding that the managing agents are not entitled to the proportionate remuneration for the three months computed on the basis of the net profits is that the net profits could be ascertained only at the end of the accounting year and that it is not possible to ascertain with any precision the net profits earned by the company for the period January 1, 1960, to March 31, 1960, during which the managing agents served. Dealing with a case where the Tribunal has given such a reasoning, we have held in T.C. No. 233 of 1968, Palani Andavar Mills Ltd. v. CIT : [1975]100ITR502(Mad) , that though the company's liability to pay the remuneration can accrue or arise only at the end of the accounting year and not before, the managing agents were entitled to be paid their remuneration at the agreed percentage of the net profits of the company on a pro rata basis, after such profits are ascertained after the end of the year. In that case also, the Income-tax Officer had held as in this case that the managing agents are entitled to be paid remuneration for the broken period only on the basis of the minimum remuneration on the ground that the net profits of the company cannot be ascertained before the close of the accounting year for the broken period. Dealing with that view, it has been pointed out in that case that the minimum remuneration provided for under the agreement is applicable only in case of absence or inadequacy of profits in any year and that clause will not come into operation when the company has, in fact, earned adequate profits. In our view, the decision in that case squarely applies to the facts of this case.

5. The learned counsel for the revenue would, however, distinguish the decision in that case by stating that the facts in this case are different. It is pointed out by the learned counsel that, in this case, there is another managing agency firm, which had come into the picture and had managed the company for a portion of the accounting year and, therefore, it is not possible to apply the pro rata basis as was done in the case cited. According to the learned counsel, the pro rata basis is normally adopted wherethe managing agents would have served the company throughout the accounting year, and earned full remuneration for the entire year as per the agreement, and, in this case, the managing agency having been taken over by the new managing agency firm for a portion of the year, there is no room for adopting the pro rata basis for the broken period. We are of the view that the fact that for a portion of the subsequent period in the accounting year, another managing agency firm had functioned will not make any difference. If the company was shown to have earned adequate net profits at the end of the year, then the managing agents' remuneration for the period from January 1, 1960, to March 31, 1960, has to be worked out only on the basis of the net profits and not on the basis of minimum profits and the reasonable method to be followed is to adopt the pro rata basis for the said period of service. Therefore, following the decision rendered by this court in T.C. No. 233 of 1968, the question has to be answered in the negative and in favour of the assessee. The assessee will have the costs from the revenue. Counsel's fee Rs. 250.


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