Chagla, C.J:— Two questions have been raised on this reference, and with regard to one it is very easy to dispose of that question. The assessee company is a public limited company and it is resident and ordinarily resident in India. The assessment year is 1949-1950 and the corresponding accounting year is the year ended 30-9-1948. The company does business in cotton and its head office is in Bombay. This company entered into an agreement with one Lcombas for the purchase of 100 jeeps and 400 Chevrolet trucks, and against the purchase of 100 jeeps the company made an advance of Rs. 50,000 by cheque to this Loombas.

2. Loombas subsequently repudiated having entered into this agreement and thereupon the assessee company filed a criminal complaint against him for cheating in respect of this sum of Rs. 50,000, and in prosecuting this complaint the assessee company spent a sum of Rs. 8,150. The assessee company claimed this sum of Rs. 8,150 as a permissible deduction. The Tribunal held that as the jeep business was not started, the expenditure in respect of this prosecution was not expenditure incurred by the assessee company in the carrying on of its business and therefore it disallowed this amount.

3. In our opinion, the Tribunal was right in the conclusion it came to. The business of the assessee is cotton business and it intended to start a business which is entirely disconnected with its ordinary business, and all that it had done was to enter into agreement for the purchase of jeeps and trucks. Therefore, on the facts on the record it is clear that the finding of the tribunal is justified, viz. that the jeep business had not yet been started when this sum of Rs. 8,150 was spent for the prosecution.

4. It is difficult to understand how the assessee company can claim this sum as a permissible deduction in respect of carrying on a business when that business had not been started at all. This expenditure stands on the same footing as preliminary expenses which a business man or a business company may incur in order to start a business. Just as those preliminary expenses are not permissible deductions, equally so this amount spent for prosecuting a person who repudiated an agreement entered into for the purchase of jeeps is not a permissible deduction.

5. But the more important and the more interesting question is the question that has been raised at the instance of the Commissioner and that question comes to be raised under the following circumstances. The assessee company has also a branch at Karachi and the business of this branch is to purchase local cotton either for direct export from Karachi or for shipping it to the head office at Bombay. Separate profit and loss accounts were maintained in respect of the business carried on in Bombay and also in respect of the business carried on at Karachi. For the relevant accounting year the profits at Bombay were ascertained at Rs. 9,44,905. From this amount there was deducted a sum of Rs. 1,88,980 which represented the managing agents' commission at the rate of 20 per cent on the profits and therefore the net profits of the Bombay business were assessed at Rs. 7,55,925.

6. With regard to the Karachi business the profits were ascertained at Rs. 6,18,598 and from that sum also the managing agency commission due at 20 per cent aggregating to Rs. 1,23,719 was deducted and the net profits of the Karachi business were assessed at Rs. 4,94,879. The assessees contended that they were entitled to deduct from their taxable income in India not only the managing agency commission of Rs. 1,88,980 attributable to the Bombay profits, but also the sum of Rs. 1,23,719 attributable to the Karachi profits. The Income tax Officer allowed a sum of Rs. 13,713 in respect of this sum of Rs. 1,23,719 and rejected the claim of the assessees in respect of Rs. 1,10,006, and the question that has been submitted to us is whether this was a proper rejection by the Income-tax Authorities. The Tribunal has taken the view that this was a permissible deduction and therefore the Commissioner has come before us on a reference.

7. Sir Nusserwanji has drawn cur attention to the agreement arrived at between the two Dominions of Pakistan and India under S. 49AA of the Income-tax Act. The object of this agreement is to avoid double taxation and give relief to the citizens of India and also the citizens of Pakistan. The agreement has now statutory force by reason of a notification under S. 49AA, issued by the Central Government on 10-12-1947. Sir Nusserwanji's contention is that but for this agreement, as the company is resident and ordinarily resident in India, the whole of the income of the company both in Bombay and in Karachi would be liable to be taxed, and it is merely because of the agreement arrived at between the two Dominions that the income of the assessee company earned in Pakistan is exempt from tax.

8. But, says Sir Nusserwanji, what is exempt from tax is not the gross profit earned by the assessees in Pakistan, but the net profits, and Sir Nusserwanji says that the assessees themselves have ascertained the net profits in Pakistan at Rs. 4,94,879 and in arriving at those net profits they themselves have deducted from the gross profits the sum of Rs. 1,23,719 which is the managing agency commission attributable to the profits earned in Karachi. Sir Nusserwanji says this is not merely a case of interpreting the Income-tax Act, but also giving proper and equitable effect to the agreement between the two Dominions. He says that it could never have been contemplated that an Indian assessee governed by the Indian Income-tax Act should be exempt from payment of tax not only in respect of net profits earned in Pakistan, but also in respect of gross profits.

9. Now, we must frankly admit that we realise the force and strength of the argument advanced by Sir Nusserwanji. He seems to us to be right in principle, and the principle underlying any such agreement between the two Dominions can only be that an assessee should not have to pay tax in respect of the same profits in two Dominions, and therefore it is but proper that each Dominion should tax the profits earned in that particular Dominion, and if we approach that question from that point of view, it is clear that the profits earned in Pakistan are not the sum of Rs. 6,18,698, but the sum of Rs. 4,94,879 which are the taxable profits after deducting whatever is legitimately deductible from the gross profits earned in that Dominion.

10. Mr. Palkhivala says that the managing agency remuneration is overhead expense. It is pointed out that the managing agency office is situated in Bombay, that the managing agents are a private limited company known as Parakh Cotton Co. Ltd., and all the business of the managing agents is done from Bombay, and Mr. Palkhivala says that remuneration paid to the managing agents is as much an overhead expense as remuneration paid to various other officers of the assessee company, and if you are going to apportion the managing agency commission between the business in Karachi and the business in Bombay, there is no reason why all the overhead charges should not be equally apportioned.

11. We are not very much impressed by this argument, because if Sir Nusserwanji was right in principle, whatever difficulty it may involve, if the managing agency commission could be apportioned, equally so the other overhead charges could be apportioned. But the question is whether Sir Nusserwanji is right in law when he contends that the managing agency commission must be apportioned between the Bombay business and the Karachi business and that portion of the commission attributable to the profits earned in Karachi must be debited to those profits and the managing agency commission attributable to the profits earned in Bombay must be debited to those profits.

12. Now, under the managing agency agreement it is rather important to note that the commission is paid at the rate of 20 per cent on the net annual profits of the company and no apportionment is made as between the profits of the Karachi business and the profits of the Bombay business. Therefore, it is only when the profits of the whole business are ascertained — and they would be ascertained in Bombay at the head office of the managing agency company — that the managing agents would be entitled to 20 per cent commission.

13. It may happen in a particular case that there may be a loss in the Karachi business and a profit in the Bombay business or ‘vice versa’, but the commission to which the managing agents would be entitled would not depend on what profits were earned at Karachi and what profits were earned at Bombay; the commission would depend upon the net profits of the business of the managed company as one integrated business. It is also important to note that the managing agency commission accrued to the managing agents in Bombay and it was received by them in Bombay and paid to them in Bombay.

14. Now, what Sir Nusserwanji says is that whatever may be the position under the managing agency agreement, we have got to consider the agreement between India and Pakistan, and when we consider that agreement, we must look at the Karachi business and the Bombay business as two separate independent businesses of the assessees and we must proceed to apportion the managing agency commission from that point of view. There is a direct decision of the Calcutta High Court in — ‘Birla Brothers Ltd. v. Commr. of Income-tax, Calcutta’, AIR 1952 Cal 194 (A) considering an almost identical question, and the Calcutta High Court has taken a view which is totally opposed to the contention put forward by Sir Nusserwanji. There the question arose under S. 14(2)(c) of the Income-tax Act.

15. The position under S. 14(2)(c) of the Indian Income-tax Act was very similar to the position under S. 49AA of the Indian Income-tax Act. Under that section an assessee was not liable to pay tax in respect of any income, profits or gains which accrued to him within an Indian State unless such income was brought into India. Therefore, just as in that case the income of the assessee arising or accruing in an Indian State was not liable to tax, here the income of the assessees arising or accruing in Pakistan is not liable to tax, and the question that arose before the Calcutta High Court was whether the directors' fees paid by Messrs Birla Bros. Ltd., could be deducted from the income earned by that company in India, or whether the directors' fees could be apportioned between the business done by Birla Bros, in Calcutta and in Gwalior.

16. The contention of the Department was that some work done by the directors must be attributed to earning the income of the company in the Indian State and therefore the company was not entitled to claim exemption in respect of the income earned in Gwalior without deducting a certain portion of the fees paid to the directors. In other words, the contention of the Department was identical with the contention before us, viz. that the assessee was not entitled to a deduction of the gross income earned in the Indian State but the net income, and the Calcutta High Court came to the conclusion that inasmuch as the directors of Messrs Birla Bros. carried on their activities in Calcutta, they must be deemed to have earned their directors' fees in Calcutta, and as those fees would be liable to Indian Income-tax, the assessee was entitled to deduct the whole of the directors' fees from the income earned in India and these fees were not apportionable between the income earned in India and the income earned in an Indian State.

17. The learned Chief Justice relied on an English case, — ‘McMillan v. Guest’, (1943) 11 ITR Sup 35 (B), which laid down that although a director was concerned with matters entirely outside England and he resided outside England and even was paid outside England, still as he was a director of a company incorporated in England he held the office of a director in England and therefore the fees received by him were liable to tax in England. Relying on this decision the learned Chief Justice has expressed the opinion that even if a director of Messrs Birla Bros, lived in Gwalior (that was the Indian State which the Calcutta High Court was concerned with) and gave the whole of his time to the Gwalior business, nevertheless the director would be regarded as earning his director's fees in Calcutta and would be liable to Indian income-tax, and the learned Chief Justice points out that

“if these directors are carrying on their business in Calcutta then it appears to me quite clear that their remuneration is an expense which can be set off against the income of this Calcutta business.”

18. Now, the position of the managing agents in this case is identical. As we have already pointed out, the private limited company, which is the managing agents, carry on its business in Bombay, its head office is in Bombay, it manages the managed company from Bombay, it earns its remuneration in Bombay and that income accrues to it in Bombay. Therefore, if the Calcutta High Court held that the directors' fees could not be apportioned between the business at Gwalior and the business at Calcutta, although the director might have supervised both the businesses in Gwalior and in Calcutta, equally so on the same principle it is impossible to accept the contention of the Department that the remuneration of the managing agents should be apportioned between Karachi and Bombay because the profits at Karachi were earned by reason of the work done by the managing agents just as the profits at Bombay were earned by the work done by the managing agents.

19. The only distinction that Sir Nusserwanji suggests in the case before the Calcutta High Court and the case before us is that the Calcutta High Court was dealing with S. 14(2)(c) and we are dealing with the Indo-Pakistan agreement. It is difficult to understand how this distinction is based on any principle. It is true that S. 14(2)(c) was part of the Income-tax Act and so also a part of the machinery of assessment, but equally so the Indo-Pakistan agreement by reason of S. 49AA has become a part of the Income-tax Act and a part of the machinery of assessment. Sir Nusserwanji says that under S. 14(2)(c) there was a total exemption from tax with regard to the income earned in an Indian State, whereas in the case of the Indo-Pakistan agreement there is a matter of reciprocity and a matter of avoiding double taxation.

20. There again it is difficult to understand what the difference on principle is. As far as our taxing authorities are concerned, the assessee is immune from taxation in respect of income earned in Pakistan, as much as under S. 14(2)(c) the assessee was immune in respect of income earned in an Indian State. We have tried very hard to see if we could distinguish the judgment of the Calcutta High Court, but we find it difficult to do so, and if the Calcutta High Court has laid down the law, then on the principle that this Court has always accepted in interpreting an All-India statute we must accept the law as laid down by a sister High Court.

21. We must confess that it is with Some reluctance that we have come to the conclusion that we have because, as we have already pointed out, there is considerable force in the contention of Sir Nusserwanji. But that is more a matter for the Legislature than for us. As far as we are concerned, we must accept the decision of the Calcutta High Court as correctly laying down the principle of law, and if we follow that principle of law, the only conclusion that we can come to is that the Tribunal was right in the view that it took.

22. The result is that the two questions submitted to us will be answered as follows: First question in the affirmative. Second question in the negative.

23. No order as to costs.

B/D.H.Z

Answers accordingly.