Case: Commissioner of Income Tax, Bombay Vs. M/s. C. Parakh &amp; Company (India) Limited

out of Rs. 15,63,504, the total income of the assessee, and it was only the net income of Rs. 12,50,804 that had been allocated, Rs. 7,55,925 for the business at Bombay and Rs. 4,94,879 for the Karachi business, and that to disallow Rs. 1,23,719 which had been included in the profit and loss statement of Pakistan would be to give relief twice over in respect of the same income. It was also contended that as the assessee had itself deducted that amount from the profits as business allowance in its profit and loss statement for Karachi and obtained relief in Pakistan on that footing, it was not entitled to claim relief in respect of that very amount under the terms of the Agreement between the two Dominions. For the respondent, Mr. Kolah contended that under the provisions of the Income-tax Act the respondent was not entitled to deduct Rs. 1,23,719, in the profits earned at Karachi, that in deducting that amount in the profit and loss statement for Karachi the assessee had made a mistake, and that, in fact, the Income-tax authorities in Pakistan who had originally admitted the deduction on the basis of the profit and loss statement had subsequently revised the assessment on the ground of error, and had disallowed it. He further contended that the question as to the relief to which the assessee was entitled under the Agreement between the two dominions was not the subject of reference under S. 66(1), and therefore did not arise for consideration. Now,. The question referred under S. 66 (1) for the decision of the court is simply whether the sum Rs. 1,23,719 is allowable a deduction against the India profits of the company, and though there is some discussion in the judgment of the High Court on the scope of the Agreement between the two Dominions and the principles deducible from the provisions thereof, the reference itself did not raise any such question, and we refer not to express any opinion thereon.8. On the question of the admissibility of the deduction of Rs. 1,23,719, the contention of the appellant is that as the respondent had itself split up the commission of Rs. 3,12,699 paid to the managing agents, and appropriated Rs.1,23,719 thereof to the profits earned at Karachi and had debited the same with it, it was not entitled to go back upon it, and claim the amount as a deduction against the Indian profits.We do not see any force in this contention. Whether the respondent it entitled to a particular deduction or not will depend on the provision of law relating thereto, and not on the view which it might take of its rights, and consequently, if the whole of the commission is under the law liable to be deducted against the Indian profits, the respondent cannot be estopped from claiming the benefit of such deduction, by reason of the fact that it erroneously allocated a part of it towards the profits earned in Karachi. What has therefore to be determined is whether, notwithstanding the apportionment made by the respondent in the profit and loss statements, the deduction is admissible under the law.9. Section 10(2)(xv) of the Indian Income-tax Act provides that in computing the profits of a business, allowance is to be made for any expenditure laid out or expended wholly and exclusively for the purpose of such business. Now, the respondent is carrying on business in cotton both in India and in Karachi.When as assessee carries on the same business at a number of places, there is for the purpose of S. 10, only one business, and the net profits of the business have to be ascertained by pooling together the profits earned in all the branches and deducting therefrom all the expenses. The fact that some of the branches are in foreign territories will make no difference in the position if the assessee is, as in the present case, resident and ordinarily resident within the taxable territories. Therefore, the profits earned in India and in Karachi have to be thrown together, and the expresses including the commission payable to the managing agents deducted therefrom, and it is the net profits thus struck that become chargeable under the Act. That is how the Income-tax Officer has worked out the figures. The respondent is therefore clearly entitled to a deduction of the whole of the commission of Rs. 3,12,699 paid to the managing agents including the sum of Rs. 1,23,719 against the Indian profits.10. It should further be added that the apportionment of Rs. 1,23,719 in the profit and loss statement of the Karachi branch on which the appellant rests his argument is not warranted by the terms of the managing agency agreement .and is indeed opposed to them.Under that agreement, the managing agents are entitled to a 20 per cent. commission on the annual net profits of the company, and to ascertain those profits, one has to take into account the result of the trade in all its branches.In the present case, profits were earned during the accounting period both in Bombay and in Karachi, and the apportionment of the commission between the two branches makes no material difference in the result. But is might happen that the business at Bombay results in profits, while that at Karachi ends in loss. In that event, what the managing agents would be entitled to would be commission not on the profits made in Bombay but on the net profits after setting off the loss in the Karachi branch against the profits of the Bombay business. And that would also be the position if the business at Bombay resulted in loss, while that at Karachi ended in profit.The appropriation, therefore, of Rs. 1,23,719 as proportionate commission in respect of the profits of Rs. 6,18,599 earned at Karachi in the profits and loss statement for that branch is not in accordance either with the terms of the managing agency agreement, or with the rights of the respondent under the law.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]8. On the question of the admissibility of the deduction of Rs. 1,23,719, the contention of the appellant is that as the respondent had itself split up the commission of Rs. 3,12,699 paid to the managing agents, and appropriated Rs.1,23,719 thereof to the profits earned at Karachi and had debited the same with it, it was not entitled to go back upon it, and claim the amount as a deduction against the Indian profits.We do not see any force in this contention. Whether the respondent it entitled to a particular deduction or not will depend on the provision of law relating thereto, and not on the view which it might take of its rights, and consequently, if the whole of the commission is under the law liable to be deducted against the Indian profits, the respondent cannot be estopped from claiming the benefit of such deduction, by reason of the fact that it erroneously allocated a part of it towards the profits earned in Karachi. What has therefore to be determined is whether, notwithstanding the apportionment made by the respondent in the profit and loss statements, the deduction is admissible under the law.9. Section 10(2)(xv) of the IndianAct provides that in computing the profits of a business, allowance is to be made for any expenditure laid out or expended wholly and exclusively for the purpose of such business. Now, the respondent is carrying on business in cotton both in India and in Karachi.When as assessee carries on the same business at a number of places, there is for the purpose of S. 10, only one business, and the net profits of the business have to be ascertained by pooling together the profits earned in all the branches and deducting therefrom all the expenses. The fact that some of the branches are in foreign territories will make no difference in the position if the assessee is, as in the present case, resident and ordinarily resident within the taxable territories. Therefore, the profits earned in India and in Karachi have to be thrown together, and the expresses including the commission payable to the managing agents deducted therefrom, and it is the net profits thus struck that become chargeable under the Act. That is how theOfficer has worked out the figures. The respondent is therefore clearly entitled to a deduction of the whole of the commission of Rs. 3,12,699 paid to the managing agents including the sum of Rs. 1,23,719 against the Indian profits.10. It should further be added that the apportionment of Rs. 1,23,719 in the profit and loss statement of the Karachi branch on which the appellant rests his argument is not warranted by the terms of the managing agency agreement .and is indeed opposed to them.Under that agreement, the managing agents are entitled to a 20 per cent. commission on the annual net profits of the company, and to ascertain those profits, one has to take into account the result of the trade in all its branches.In the present case, profits were earned during the accounting period both in Bombay and in Karachi, and the apportionment of the commission between the two branches makes no material difference in the result. But is might happen that the business at Bombay results in profits, while that at Karachi ends in loss. In that event, what the managing agents would be entitled to would be commission not on the profits made in Bombay but on the net profits after setting off the loss in the Karachi branch against the profits of the Bombay business. And that would also be the position if the business at Bombay resulted in loss, while that at Karachi ended in profit.The appropriation, therefore, of Rs. 1,23,719 as proportionate commission in respect of the profits of Rs. 6,18,599 earned at Karachi in the profits and loss statement for that branch is not in accordance either with the terms of the managing agency agreement, or with the rights of the respondent under the law.