Rustomji Mangaldas and Co. vs Commr. of Income Tax Bombay North

Shah, C.J.—By this application made u/s 66(2), Indian Income Tax Act, the Assessee, Messrs. Rustomji Mangaldas and Co., prays that the Income Tax Appellate Tribunal, Bombay (Bench B), may be required to state the case and refer it to this High Court onus certain questions of law set out in pares 10 and 15 of this application. The applicants are the Managing Agents of the New Jehangir Vakil Mills Co., Ltd., Bhavnagar, hereinafter referred to as the Managed Company or Co.

The provisions relating to the remuneration of the applicants as Managing Agents of the said Corn-puny are contained in el. 7 of the Memorandum of Association and Article 155 of the Articles of Association of the Managed Co. and Clause 3 of the Managing Agency Agreement. Clause 7 of their Memorandum of Association is in the following terms:

As aforesaid, Custom Mangaldas fee Co., have been entrusted with the management and they have agreed to do so. In consideration thereof a commission will be paid to them at the rate of 4 per cent on the price of the Yarn and Cloth manufactured and sold by the Company and at rhea rate of 10 per cent, on the bill for other working In respect of goods other than yarn and cloth but if in any year the Company''s income is not sufficient to pay 6 per cent, interest to the share-holders in the said-year they shall give up commission up to one-third.

Article 155 of the Articles of Association provides as follows:

The said Messrs. Custom Mangaldas and Co. of Bhavnagar shall receive from the Company a commission at the rate of 4 (four) per cent. Sixth sale price of all cotton yarn, cloth and goods manufactured and sold by the Company and on the sale proceeds of all materials, yarns and fabrics manufactured from wool, jute, silk and other fibers and sold by the Company and a commission of 10 per cent, on the bills (labour days) made for all other-work done by the company except the cloth, own and fabrics as mentioned above; provided always that if in any one year hue income of the Company after allowing for depreciation Is not such as to allow a dividend of 6 per cent, on the paid up Capital of the Company, the said firm of Messrs. Rustomji Mangaldas and Co., shall remit Upton one-felid of the commission so earned by them in the with year lo make up the said deficiency to pay dividends at the rate of six per cent on the paid-un capital of the Co.

Clause 3 of the Managing Agency Agreement is in the following terms:

The company shall pay to the Agents so Ion? ns they act as Secretaries, Treasurers & Agents of the O0tftbny, commission at the rate of 4 per cent on the sale proceeds of ready made yarn and cloth and at the rate of 10 per cent on the bills made in respect of other working. But it is hereby specifically agreed as regards commission in the year in which share-holders get dividend at the rate of less than 6 per cent on the paid up capital that they shall give up such portion of the commission not exceeding one-third of the whole as may be necessary to make a dividend at the rate of 6 per cent.

The share capital of the Company was Rs. 8,60,000/- divided into 8,000/- ordinary shares of Rs. 20/- each and 7,000 % redeemable cumulative Preference shares of Rs. 100/- each. The applicants accounting year is the calendar year and the dispute relates to their income for the year 1940. The net profit of the Managed Company in that year was Rs. 3,50,337-8-7 subject to, that is to say, Without the depreciation, In that your the" Co. declared a dividend of on the Ordinary share which worked out to 375 per cent.

According to the sins of the Managed Company, the managing agency commission would come to Rs. 4,58,388/-, but the applicants gave up a one-third of the same and accepted a sum of Rs. 3,05, .692/- as remuneration as Managing Agents for the said year. The Income Tax Officer assessed the applicants on a sum of Rs. 4,58,388/- as their commission income as against Rs. 3,05,592/- contended for by the applicants, and in doing so he laid stress on Clause 3 of the Managing Agency Agreement, and he said that apart from the fact'' that the dividend declared was more than 6 per cent, it was not necessary lord the Managing Agents to forego the commission, Rs. 1,52,798/-. He further held that this latter sum was part of the. managing'' agency commission which had accrued to the applicants, and since the applicants had given it up voluntarily the same was liable to tare in the applicants'' hands.

This order was confirmed on appeal by, the Appellate Assistant Commissioner of Income Tax, Saurashtra Range on substantially the same grounds. According to him, under Clause 3 of the Managing Agency Agreement, the commission was to be foregone in a year in which the shareholders got a dividend a. a rate less than 6%, and it was to be given up to the extent required for making up the dividend a the rate of 6% and he said that the provisions of Article 155 of the Articles of Association were also worded. In the same way and inasmuch as the Actual dividend declared was more than 6%, there was no occasion for giving up the agency commission and that the applicants had voluntarily given up the same and a commission which had accrued in the first instance and was voluntarily given up was liable to tax in the applicants'' hands.

An appeal was taken to the Income Tax Appellate Tribunal, and the Tribunal held that what was relevant and decisive of the matter was whether a dividend on Ordinary shares had or had not been paid for the year 1049 and not whether a dividend could not have been paid it certain amounts such as the depreciation etc., had been debited to the profit and loss account.

The tribunal laid stress on the terms of Clause 3 of the Managing Agency Agreement, and took the view that as the share-holders did get a dividend of over 6% there was no scope and no occasion lord the Managing Agents to give up any part of their commission; and inasmuch as there was no necessity to forego it, the giving up of the commission was a voluntary act and the sum so given up was rightly included in the income of the assessed and taxed. The appeal was therefore dismissed.

On the applicants having applied to the said Tribunal u/s 66 (2), Income Tax Act to refer to the High Court questions of law stated in their petition, the Tribunal held that no question of law arose in this case and therefore refused to state the case, and the applicants have therefore now come to this Court u/s 66(2) of the Act.

Now the material part of Clause 7 of the Memorandum of Association says that if in any year the Company''s income is not sufficient to pay 6% Interest to the share-holders in the said year, they, meaning Rustomji Mangaldas and Co., shall give tip commission up to one-third thereof.

Article 155 of the Articles of Association provides that if in any one year the income of the Company after allowing, fur depreciation if. not such ns to allow ''a dividend of e per cent on the paid up capital of the Company Messrs. Custom Mangaldas and Co., shall remit up to one-third of the commission envied by the in the said year in make the decency to pay dividend in the 6%.

So that so far as the Articles of Association are concerned, the income of the Managed Co. is to be taken as the income remaining after providing for depreciation, and if such income is not sufficient to allow a 6% dividend, then the Managing Agents are to remit their commission up to a one-third. The Managing Agency Agreement bays that if in a given yean share-holders get a dividend at the rate of less than 6% on the paid up capital, then the Managing Agents are to give up their commission up to a maximum of or few-third.

There is thus a divergence between the provisions; of the Memorandum of Association, the Articles of Association and the Managing Agency Agreement in so far as they relate to the remission, to be made by the Managing Agents in their Commission.

Mr. Kolah for the applicants has urged that this is entirely a question of construction of documents and therefore a pure question of law, and arranging to him, Clause 3 of the Managing Agency Agreement should be read in light of Clause 7 of the Menitranduni of Association and Article 155 of the Articles at Association; and assuming that there .was a cupric between these provisions,, then the provision His of the Memorandum and Articles of Association should be taken as overriding those of the Managing Agency Agreement.

The Appellate Tribunal has, in this case, laid stress on Clause 3 of the Managing Agency Agreement and has not considered the cumulative effect of all the three provisions nor whether in the event of a conflict, would the provisions of the Memorandum and of the Articles of Association prevail over those of the Managing Agency Agreement. In our opinion, the case involves an interpretation of the relevant provisions of these three documents, and a construction of the documents is always a question of law.

The question will be whether in'' ascertaining the Income of the Company for the purpose of seeing whether a 3% dividend could be paid from the income of a particular year, allowance has first to be made; for depreciation or not with suiting that the Co. itself may not have made any such provision in its profit and loss account of that year.

The question also will be whether the fact of the Company having actually declared a dividend at the rate of 0% is conclusive on the question whether the Managing Agents were right Jr. remitting a portion of their commission, that is to nave, whether the actual state of affairs is the determinative factor or whether on a true construction of the relevant documents, the Managing Agents Were liable to give up a part of their commission if the income of the Company after deducting the depreciation was insufficient to pay a dividend of 6%.

Now in the present case the depreciation'' cone) to Rs. 4,98,543/- and if this item is to be taken into account, then there would be no profit for the year 1949, and on the contrary there would be a loss or deficiency apart altogether from lie sun of Rs. 2,00,000/-'' being the donation paid to the Saurashtra Government for establishing a Commerce College at Bimvnagar and Rs. 2,08,692/- being bonus to work-men for the year 1948 payable in 1949.

Mr. Kolah has contended that even if the mm was remitted voluntarily, tile applicants are entitled to a deduction in respect of it; and he was willing to assume for the purpose of arguments that it was a voluntary remission. In support of this contention, Mr. Kolah has referred to a judgment or Chayla Co. and Tendoikar, J. dated 10-9-1905 in income tax: Ref No. 29 of 1953 (Bom) (A) which lends support, to his contention. At any rate, the question it out of law and requires H decision by this Court.

Therefore these questions and other questions arise in tills case and they are embodied the question; ruined below:

whether on the interpretation or the of the and Article of assumption and the Manager Arfument the applicants were entitled to Rs. 4,55,388/- or Rs. 3,05,592/- or any other sum as commission for the year 1949.

Whether the provisions of the Memorandum and the Articles of Association override the provisions of the Managing Agency Agreement as to the applicants'' remuneration.

Whether in computing the Income of the Company for the purpose of ascertaining the commission payable to the applicants in the year 1849:

a. As. 4,98,643/- being, for depreciation for the said year should be ignored because it was not debited In the books.

b. The .donation of Rs. 2,00,000/- should be Ignored because the same was net, debited to the profit and loss account but to Reserve Fund in the accounts as between the Company and the shareholders, or for any other reason.

c. The bonus for 1948, viz. 2,99,692/- paid in the year J 949 and debited to the Reserve Fund should be ignored because it was not debited to the Profit and Loss account of the company laid before the share-holders, or for any other reason.

Whether the Mill Company and the applicants having agreed to a certain interpretation of the situation and having acted upon it, it was open to the Department to set it aside.

Whether the applicants having adopted the receipt or cash basis of accounting, it is open to the Income Tax Officer to adopt the accrual or mercantile system for the assessment, and If not, whether the abetment should not be on Rs. 3,05,692/- in-tend of on Rs. 4,68,388/-.

Whether in any event and. in the event of Its being held that the applicants charged a lower sum; via. Rs. 3,05,692/-''than the sum vis Rs. 4,58. 388 which they be held entitled to charge as commission, the income of the applicants is the actual sum charged as commission viz.'' Rs. 3,05,592/- or the sum they were entitled to charge viz. Rs, 4,58, 888/-.

The applicants have also prayed that the following additional question of law be raised end directed to be referred to this Court:

Whether in any event the sum of Rs. 1,52, 790/- being the difference between the sums of Rs. 4.58,338 and of Rs. 305.592, should be allowed u/s 10(2) (XV) of the Indian Income Tax Act.

This question was not raised in the Reference Application Marie to the Tribunal, and it has therefore been contended by the learned Advocate Central that it could not be raised now end the Tribunal cannot be required to refer it to this Court. To our if is open (o the applicant in their the deduction of Section any provisions of law even thought provision against not have been before the Tribunal.

In Commr. of Income Tax, Bombay City v. Breach Candy Swimming Bath Trust, 1955 27 Bom 219: 57 BomLR 84: AIR 1955 Bom 260 the question submitted to the High Court by the Tribunal was whether the income of the three relevant years was exempt u/s 4(3) (i-a) Indian Income Tax Act or on the ground raised by the Assessee. Before the High court, it was contended by counsel for the Commissioner Unit if the case of the assess not Section 4(3)(i-a) the ha lat Chief justice, who observed as follows:

Now, in our opinion, the real object of making a reference, stating a case, and relating questions 13 to bring out the veal controversy between the Joint under jurisdiction can a which the Tribunal can act; and there case no dispute that the High Court has ample Jurisdiction to alter and reformulate questions submitted by the Tribunal In order to bring out the real controversy between the parties.

Now, what is the real controversy between the parties In this case? The contention of th6 est. see is that it is not liable to pay tax on the Nicosia derived from certain activities carried on by the trust because the trust is a charitable fast fruition, and the, contention of the apartment his become is not exempt fine tax. The have to consider is lifting to the provisions of the Income Tax Act, whether is not exempt from tax.

It is not necessary for the Assessee to suttees under what particular section of the Act the income is exempt. That is a, matter of a legal argument, which can always be advanced in tins Court therefore, the proper question which the Tribunal should have framed and submitted to us was whether this particular income is exempt from taxation. It would be open to the Tribunal in the statement of the case to point out under which section in its opinion it is exempted.

But we would not be bound necessarily to take the same view as the Tribunal. In order to uphold the exemption it would be open to us if that question was raised to say that although we to not agree with the Tribunal that the income is exempt under the particular provision of the law on which the Tribunal has relied it is still exempt from taxation under some other provision.

We cannot accept Mr. Joshi''s contention that our Jurisdiction is confined within such narrow bounds as to permit us only to decide whether the exemption falls u/s 4(3) (la) or not and if aur view is that it does not fall u/s 4(3) (ia) even though the Assessee may be entitled to exemption under some other provision of law, it is not opt to us to express that opinion.

All the necessary facts of the instant case were before the Tribunal and there is also no dispute about them. In our opinion, the principle of the above Bombay ruling applies here, and we therefore being that the question stated in para 6 above should be referred to this Court.

In the result, therefore, we direct the Income Tax Appellate Tribunal. Bombay to state the case and 10 refer it to Court on the question in para 4 and question No. 7 in para 5 of this judgment under the circumstances of the case we direct the parties to bear their own costs of this application.

Baxi, J.

I agree.