Law:

Section:

Section 37(1) of the Income-tax Act, 1961 [Corresponding to section 10(2)(xv) of the Indian Income-tax Act, 1922] - Business expenditure - Allowability of - Assessment year 1945-46 - In 1937, assessee-company entered into a managing agency agreement with 'K' under which 'K' was entitled to certain remuneration and commission - On 27-3-1942, Government of India issued a notification under Defence of India Rules authorizing Excise Controller to exercise control over work of assessee - Controller was also given power of control over staff and power to replace existing staff by making fresh appointments - There was nothing, however, in notification terminating or amending terms of managing agency agreement - Whether on facts managing agents could not be deprived of commission legally payable to them; amount of commission due to be payable to 'K' during relevant accounting year was an allowable business expenditure - Held, yes FACTS In February 1937, the assessee-company entered into a managing agency agreement with 'K'. The remuneration payable to the managing agents was a fixed amount and besides the remuneration mentioned in the agreement they were also probably entitled to some commission. Under the Defence of India Rules-rule 81, sub-section (3), the Governor issued a notification on 27-3-1942, authorising the Excise Commissioner, U.P. to exercise control over the work of the company with effect from 1-4-1942. The Controller was also given power of control over the staff and had the power to replace the staff working in the company by making fresh appointments. There was nothing in the notification terminating the managing agency agreement, nor did it expressly provide that the managing agents would no longer be entitled to the remuneration fixed in the said agreement. During the accounting year relevant to assessment year 1945-46, certain amount was paid to managing agents by way of commission and the assessee claimed deduction of this amount under section 10(2)(xv). The ground on which the claim was disallowed was that since there was a Controller appointed by the Government the managing agents had no work to do and, therefore, it could not be said that the…

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