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Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • Sir N.P Engineer with G.N Joshi,
  • Sir J.B Kanga with M.M Jhavery, for the applicant.
Judges
  • Mr. M.C Chagla, C.J
  • Mr. Tendolkar, J.
Acts
  • s. 12A of the Income-tax Act.
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • Sir N.P Engineer with G.N Joshi,
  • Sir J.B Kanga with M.M Jhavery, for the applicant.
Judges
  • Mr. M.C Chagla, C.J
  • Mr. Tendolkar, J.
Acts
  • s. 12A of the Income-tax Act.
See more information ...
Smart Summary

Structured Summary of the Opinion: Construction of s.12A of the Income-tax Act

Factual and Procedural Background

The assessee is a firm acting as the managing agents of Seksaria Sugar Mills Ltd. On March 22, 1934, the firm entered into two agreements: one with Mirzamull Didwania and Mahadeo Didwania (giving them 2 annas share in managing agency commission) and another with Hiralal Rungta and Ramsarup Batwal (also 2 annas). Ramsarup was adjudged insolvent in 1939, and on September 19, 1942 the firm entered into a new agreement with Hiralal to give him 1 anna instead of 2 annas (to replace the joint share previously payable to Hiralal and Ramsarup).

The firm was assessed in Bombay for the first time in 1942–1943 and made no claim under s.12A for that year. A claim under s.12A with a declaration was filed for assessment year 1943–1944. A further claim for 1944–1945 was made in Bombay; the assessment for that year was completed on July 29, 1948, and the declaration was filed on August 20, 1948 (about 21 days after assessment completion). No declarations were filed in subsequent years. The central procedural question referred to the court was whether the declaration filed for 1943–1944 sufficed for later assessment years, or whether a fresh declaration was required for each assessment year.

Attorneys recorded in the opinion: for appellant — Payne & Co.; for respondent — N.K. Petigara.

Legal Issues Presented

  1. Whether, under s.12A of the Income-tax Act, a declaration filed by a managing agent and the third party(ies) in one year endures for subsequent assessment years, or whether a declaration must be filed in respect of each assessment year ("Is the declaration required by s.12A to be filed for each assessment?").
  2. Whether the amounts shared by the managing agent with other parties can alternatively be allowed as a permissible deduction under s.10(2)(xv) (raised by notice of motion but not decided as a matter of law by the Court).

Arguments of the Parties

Appellant's Arguments

  • Argued by Sir Jamshedji for the assessee firm: s.12A does not require the declaration to be filed every year. Once a declaration has been filed (and the Income-tax Officer has had an opportunity to be satisfied of the facts), the assessee should not be obliged to file the same declaration repeatedly for subsequent assessments.
  • It was suggested that if an agreement creates a liability to share commission for a specified period, the assessee could refer to that agreement in the original declaration and file the agreement itself; the same instrument should suffice in subsequent years without a fresh declaration.

Respondent's / Revenue Arguments

The opinion does not contain a detailed account of the respondent's legal arguments in the text provided.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Govindram Seksaria, In re (construction of s.43) Establishes that a notice under s.43 must be served in respect of every assessment because each assessment is self-contained; a decision or notice applicable to one year does not automatically endure for subsequent years. The Court relied on the reasoning in Govindram Seksaria to support the analogous conclusion that, since assessments are self-contained for obligations under s.43, they should likewise be treated as self-contained for rights under s.12A; therefore a declaration under s.12A does not endure across assessment years and must ordinarily be filed for each assessment year.

Court's Reasoning and Analysis

The Court began with a close reading of s.12A. The provision requires that a managing agent and the third party(ies) "shall file a declaration showing the proportion in which such commission is shared between them," and that "on proof to the satisfaction of the Income-tax Officer of the facts contained in such declaration" each party shall be chargeable only on its stated share. The Tribunal had already found the agreements were made for adequate consideration.

The appellant's contention was that a single timely declaration should suffice for later assessment years and that the statute does not expressly require a declaration to be filed for each assessment year. The Court considered and rejected this interpretation for several reasons:

  • Textual analysis: The statutory language requires proof to the Income-tax Officer "of the facts contained in such declaration" and requires the declaration to show the proportion in which the commission is shared. This suggests the Income-tax Officer must be satisfied with regard to the proportion each time the exemption under s.12A is claimed.
  • Practical difficulties: Accepting the appellant's construction could create recurring practical problems because many sharing agreements are conditional (for example, conditional upon the sharer holding shares of specified value). Whether the condition is fulfilled in any particular assessment year may be a live question, making a single historical declaration unreliable for future years.
  • Analogical support from prior decision: The Court relied on its prior construction of s.43 in Govindram Seksaria (noting s.43 does not provide for periodic notices yet the Court held a notice must be served for each assessment). That decision is grounded on the principle that assessments are self-contained, and the Court applied the same principle to the rights created by s.12A: if obligations must be re-determined each year, so must claims to rights/exemptions.

On these bases the Court concluded that a declaration filed for one assessment year does not automatically endure for subsequent years; a fresh filing (or other appropriate procedure) is required when claiming the exemption in a later assessment.

On the late declaration filed for 1944–1945 (filed about 21 days after assessment completion), the Court analyzed the proper procedure. It held that the Appellate Assistant Commissioner could not himself accept the late declaration because s.12A requires the Income-tax Officer to be satisfied by proof of the facts in the declaration. However, the Appellate Assistant Commissioner had the power, in proper cases, to remit the matter back to the Income-tax Officer and ask him to take the late declaration into consideration if a ground for condonation of delay was established. The Court observed that, in the present case, the facts were not disputed and the agreement was held genuine; the Court expressed the hope that the Income-tax Commissioner would consider the declaration and "consider the desirability of giving the necessary relief to the assessee firm."

With respect to the alternative submission under s.10(2)(xv) (that the amounts shared should be allowable as permissible deductions), the Court declined to decide the broader legal question. The Tribunal had found that s.10(2)(xv) did not apply on the facts: the agreement merely showed consideration for sharing the commission, and that alone is insufficient to establish that the commission was shared "wholly or exclusively for the purposes of the assessee's business." The Court agreed with the Tribunal that more specific proof would be required to make such an inference, and that the Tribunal's conclusion was a factual appreciation (not raising a question of law). Accordingly the Court considered this matter as turning on evidence and did not treat it as a legal issue warranting further decision.

Holding and Implications

Holding: For each assessment.

The Court answered the principal question by holding that, for the purposes of s.12A, a declaration must be filed in respect of each assessment; a declaration filed for one year does not automatically apply to subsequent assessment years.

As to the secondary matter raised by notice of motion (relief under s.10(2)(xv)), the Court did not decide the legal question, endorsing the Tribunal's factual conclusion that s.10(2)(xv) had no application on the evidence; accordingly the Court's response to that point was recorded as: "See Judgment." The notice of motion was dismissed with costs.

Direct consequences recorded in the opinion:

  • The assessee firm cannot rely upon the declaration filed for 1943–1944 to obtain exemption in subsequent years; a fresh declaration (or appropriate procedure) is required for each assessment year.
  • The Appellate Assistant Commissioner could not himself accept an out-of-time declaration but had the power to remit the matter to the Income-tax Officer for consideration of a late declaration where grounds for condonation exist; the Court specifically noted the Appellate Assistant Commissioner could have referred the late 1944–1945 declaration back to the Income-tax Officer.
  • The Tribunal's finding that s.10(2)(xv) did not apply was a factual determination; the Court found no question of law arose from that conclusion.

Costs and final orders: The assessee was ordered to pay the costs. Notice of motion dismissed with costs. The opinion concludes with the procedural direction "Answer accordingly."

P.M.P
Show full summary ...

    Govindram Ramnath And Co. v. Commissioner Of Income-Tax, Bombay City

    Chagla, C.J:—

    The question that arises in this reference is as to the true construction of s. 12A of the Income-tax Act. The assessee is a firm and in the relevant years of account it acted as the managing agents of Seksaria Sugar Mills Ltd. The assessee firm entered into an agreement on March 22, 1934, with one Mirzamull Didwania and Mahadeo Didwania and agreed to give them 2 annas share in the managing agency commission earned by the assessee firm. On the same date the assessee firm entered into another agreement with Hiralal Rungta and Ramsarup Batwal agreeing to pay to these two persons also two annas share in the managing agency commission. Ramsarup was adjudged insolvent in 1939 and on September 19, 1942, the assessee firm entered into another agreement with Hiralal agreeing to give him 1 anna instead of 2 annas share jointly to Hiralal and Ramsarup. The assessee firm was assessed in Bombay for the first time in 1942-1943 and no claim was made by the assessee firm under s. 12A. The claim was made under s. 12A in the assessment year 1943-1944 and a proper declaration as required by s. 12A was filed. A Bombay claim was also made for the assessment year 1944-1945. The assessment of that year was completed on the July 29, 1948, and the declaration under s. 12A was filed on August 20, 1948. In the subsequent years no declaration was filed, and the question is whether the assessee firm having filed a declaration for the assessment year 1943-1944 is entitled to claim exemption in respect of the share of the managing agency commission given by them to other parties without filing fresh declaration and on the strength of the original declaration filed for the year 1943-1944.

    Turning to s. 12A, it provides that “where a managing agent of a company is liable under an agreement made for adequate consideration to share managing agency commission with a third party or parties, the said agent and the said party or parties shall file a declaration showing the proportion in which such commission is shared between them, and on proof to the satisfaction of the Income-tax Officer of the facts contained in such declaration such agent and each such party shall be chargeable only on the share to which such agent or party is entitled under the agreement.” In this case the Tribunal has found that the agreement was made for adequate consideration. The only question that arises is the question of filing a declaration required by this section. It is contended by Sir Jamshedji on behalf of the assessee firm that section does not lay down that the declaration has got to be filed every year by the assessee. Once a declaration is filed it would be open to the Income-tax Officer to ask for proof as to the statements made in the declaration at any time subsequent to the filing of the declaration, but here is no obligation whatever cast upon the assessee to file a declaration every year for the purpose of every assessment. It is clear on the language of the section that the declaration has to be filed before the assessment is completed because the Income-tax Officer has got to be satisfied of the facts contained in the declaration. But what is contended is that the declaration having been filed in time for the assessment year 1943-1944, it was not necessary for the assessee to file it again with regard to the assessment year 1944-1945 and the subsequent assessment years. If the proposition is accepted that an assessment for each year is self-contained, then it is with regard to each and every assessment that the assessee has to satisfy the Income-tax Officer that he is sharing the managing agency commission with a third party or parties. A declaration once made and acted upon by the Income-tax Officer cannot endure for the benefit of the assessee in subsequent years of assessment. Every assessment being self-contained, the declaration lapses with the completion of the assessment, and if the assessee again desires to have the benefit of s. 12A he must apply for it in the manner laid down in s. 12A. It was suggested by Sir Jamshedji that if there is an agreement under which there is a liability upon the assessee to share the commission for a certain number of years, it ought to be sufficient for the assessee to refer to such an agreement in the declaration and to file the agreement, and it would be unnecessary in subsequent years again to rely on the same agreement which would be in force. But we feel that to accept the interpretation suggested by Sir Jamshedji may lead to many serious practical difficulties. Many agreements to share commission do not lay down a clear or absolute obligation upon the managing agent to share his commission. The right to share may be conditional upon the sharer carrying out certain obligations, and every time a difficult question would arise whether an agreement filed with a declaration covered clearly an obligation on the part of the assessee to share the commission not only during the year of assessment but also in subsequent years. In this very case the agreement to share is conditional, conditional upon the parties who share the commission holding shares of a certain value in the company. Further, the language used by the Legislature also leads one to the conclusion that the intention was to file a declaration in respect of every assessment, because what the declaration has to show is the proportion in which the commission is shared between the assessee and the sharers, and then when the Income-tax Officer is satisfied on proof of the facts contained in the declaration the managing agent and each sharer shall be chargeable only on the share to which such agent or party is entitled under the agreement. Therefore, the assessee has got to satisfy the Income-tax Officer of the proportion in which the commission is shared between him and the sharer, and it seems that he must satisfy the Income-tax Officer with regard to this proportion each time he claims an exemption and not generally with regard to future assessment years.

    Support is lent to this argument also by the view taken by our Court on a construction of s. 43. In that case there is an obligation cast upon the Income-tax Officer to cause a notice to be served of his intention of treating a person as the agent of a non-resident person when he wants to hold the person liable as the agent of the non-resident for the purposes of the Act. Section 43 does not provide that the notice has got to be served periodically, and yet our Court in Govindram Seksaria, In re., held that the notice must be served in respect of every assessment and that the notice once served cannot hold good for subsequent years. In construing this section Mr. Justice Kania as he then was pointed out that the assessment for each year is self-contained and, therefore, the contention that once a notice is served on the party and he is held to be an agent such decision is good for all times unless the party himself moves and takes steps to get that decision set aside, is not correct. Section 43 dealt with the obligation of the Income-tax Officer when he sought to impose a liability upon a person. Section 12A deals with the right of the assessee to claim a certain exemption given to him under the provisions of that section. If every assessment is self-contained when we are considering the obligation of the Income-tax Officer, it must equally be self-contained when we are considering the rights of the assessee. The assessee must claim whatever right he is entitled to in respect of each assessment and the right given under s. 12A is that he is exempted from paying tax on that portion of the commission which he has earned which he has shared with a person under an agreement for adequate consideration.

    Therefore, in our opinion, the Tribunal was right in the view that it took that the declaration filed by the assessee firm for the assessment year 1943-1944 did not endure for subsequent years.

    We should like to say a word about the declaration filed by the assessee firm for the year 1944-1945. As already pointed out, that declaration was out of time by about 21 days. In our opinion the Appellate Assistant Commissioner on appeal could undoubtedly not have taken into consideration that declaration because it was out of time, but he could have sent the matter back to the Income-tax Officer and asked him to assess the assessee after taking into consideration that declaration. It is difficult to understand why the Appellate Assistant Commissioner did not follow this procedure. All that s. 12A requires is that the declaration must be filed before the assessment is completed. Assuming the assessment is completed and the declaration is filed thereafter, there is nothing to Bombay prevent, in proper cases, the Appellate Assistant Commissioner from asking the Income-tax Officer to take the declaration into consideration and then assess the assessee. The Appellate Assistant Commissioner himself cannot consider the declaration because s. 12A requires the Income-tax Officer to be satisfied with regard to the proof of the facts contained in the declaration. We do not say that in every case where there is delay in filing the declaration the Appellate Assistant Commissioner should send the matter back to the Income-tax Officer. But if the Appellate Assistant Commissioner is satisfied that a ground is made out for condonation of the delay, he has certainly the power to refer the matter back to the Income-tax Officer. In this particular case, considering that the facts are not disputed and the agreement is held to be a genuine agreement for adequate consideration, we hope that the Income-tax Commissioner would take into consideration the declaration filed by the assessee and would consider the desirability of giving the necessity relief to the assessee firm.

    A notice of motion has been taken out by the assessee firm to raise a further question which they say arises out of the order of the Tribunal, and the further question suggested is that the amount shared by the assessee firm with other parties of the commission received by it should be allowed as a permissible deduction under s. 10(2)(xv). Sir Jamshedji says that in law even though the Legislature has enacted s. 12A which deals with the specific case of managing agency commission being shared by a managing agent, even so the assessee firm is not precluded from applying for the necessary relief under s. 10(2)(xv), and that raised an interesting question. But in our opinion it is unnecessary to raise that question or to decide it, because on the facts the Tribunal has held that s. 10(2)(xv) has no application. The Tribunal has pointed out that all that the agreement shows is that there was a certain consideration for the assessee sharing the managing agency commission and the consideration was that the sharer was to have bought shares of the value of Rs. 1,25,000 of the Seksaria Sugar Mills Ltd. and to have retained, throughout the continuance of this agreement, shares of the value of Rs. 10,000. The right of the sharer to receive his share was conditional upon holding these shares of Rs. 10,000. But the Tribunal points out, and in our opinion rightly, that the mere fact that a managing agent agrees to share his commission for a consideration is not sufficient proof of the fact that the commission was shared wholly or exclusively for the purposes of the assessee's business. Something much more would have to be proved than that. The assessee would have to prove that it was for the purpose of his business or in order to help or assist his business that he had to part with a portion of his commission, and it is only then that he could possibly make a claim under s. 10(2)(xv). The only evidence before the Tribunal in this case was the agreement on which the assessee firm relied and the agreement merely showed the consideration for which the commission was shared. But, as we said before, the mere fact that there is consideration for sharing the managing agency commission is not sufficient to lead to the inference that the commission was shared exclusively and wholly for the purposes of the assessee's business. The Tribunal has taken the view that on that decision no question of law arises and that the decision turns purely on appreciation of evidence and is nothing more than a decision on question of fact. We agree with the view taken by the Tribunal and, therefore, in our opinion no question of, law arises out of the decision of the Tribunal.

    The result is that the answer to the first question submitted to us is, “for each assessment”. The answer to the second question is: “See Judgment”. Assessee to pay the costs. Notice of motion dismissed with costs.

    Attorneys for appellant: Payne & Co.

    Attorneys for respondent: N.K Petigara.

    Answer accordingly.
    P.M.P
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    Comments

    Govindram Ramnath And Co. v. Commissioner Of Income-Tax, Bombay City
    (Oct 10, 1952)