Every tax law has a story — some provisions stand the test of time, while others fade out as the economy & business practices evolve. One such forgotten but important provision was Section 39 of the Income Tax Act, 1961.
This section existed to address a specific issue that was common in India’s business landscape of the 1960s and 1970s — the sharing of managing agent commissions. Before professional management became mainstream, many large companies were run by managing agencies — entities entrusted with administrative and operational control of corporations.
Section 39 was created to tax these commission arrangements fairly & to avoid any dispute over how the income should be distributed when shared between the main agent and a third party.
What Section 39 Originally Dealt With
In simple terms, Section 39 stated that if a managing agent earned a commission & shared it with someone else — for instance, a partner or associate who helped secure the contract — then that shared portion was still taxable under specific rules.
It was a special provision because the managing agency system was unique to India. Companies often delegated their operations to individuals or firms known as managing agents who received a fixed percentage of profits as commission.
When these commissions were split with others, confusion arose — who should pay tax on that portion? The original agent or the recipient? Section 39 stepped in to clarify the tax responsibility.
Why It Was Important at the Time
During the early decades after Independence, India’s corporate world was still governed by colonial-era business structures. Managing agencies dominated industries like textiles, tea, and steel. Multiple individuals and entities worked under one agency, and profits were often shared across partnerships."
The government wanted to ensure that the Income Tax Department collected its fair share and that companies didn’t avoid tax by simply splitting commissions among partners or relatives. Thus, Section 39 of the Income Tax Act was introduced to deal with the taxation of a managing agent’s commission when shared with a third party.
It was both a clarity-building & a preventive measure against tax evasion.
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The Legal Mechanics of Section 39
Before its omission, Section 39 specified that the entire commission received by a managing agent was to be considered taxable income. If a part was shared with another party, the sharing did not affect the taxability of the original recipient — the agent had to include the full commission in his income and then claim a deduction or disclose payment to the other person.
In effect, the law recognized the entire commission as income first & then allowed adjustments only after proper disclosure. This reduced ambiguity and helped the tax department track where money was actually going.
The Direct Tax Laws (Amendment) Act, 1987 — Why Section 39 Was Removed
By the mid-1980s, India’s corporate regulations had changed drastically. The managing agency system was phased out under the Companies (Amendment) Act, 1970, which banned such arrangements altogether. Once that happened, Section 39 had no real purpose left. Hence, as part of a wider simplification drive, the Direct Tax Laws (Amendment) Act, 1987 officially removed it. This amendment was historic because it cleaned up many redundant provisions and aligned India’s tax law with modern business practices.
In short, Section 39 of the Income Tax Act, 1961, was removed by an amendment called the Direct Tax Laws (Amendment) Act, 1987.
Impact of Its Omission
The removal of Section 39 did not create a gap in the law because the concept it covered — the taxability of shared commissions — was already redundant. Managing agency agreements were prohibited, and commissions were now governed by standard income classification rules under “Profits and Gains from Business or Profession.”
From a modern standpoint, the principles behind Section 39 can still be seen in how the law treats partnership profits & shared business income today — clear ownership, full disclosure, and taxation of gross income before deductions.
Connection to Other Sections of the Act
While Section 39 has been omitted, similar concepts are reflected in other parts of the Act such as:
- Section 28 – Covers profits and gains from business or profession, including commissions & fees.
- Section 40(b) – Deals with partner remuneration and profit sharing in partnership firms.
- Section 37(1) – Allows deductions for business expenses if they are wholly and exclusively for the purpose of the business.
Together, these sections now address the situations that Section 39 once covered.
A Glimpse into the Managing Agency Era
To understand why Section 39 existed, it helps to recall the managing agency era. Before India’s corporate laws matured, companies often depended on promoters or families to run their affairs as agents. These managing agents received a percentage of profits as commission.
It was not uncommon for such agents to sub-contract part of their work to another party and share their commission. Without a specific law, it was difficult to decide who should pay tax on the shared portion. Section 39 was the solution to this problem — it ensured the entire amount was first taxed in the hands of the primary recipient.
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Example Illustration
Let’s say ABC Agencies was the managing agent for a manufacturing company & earned ₹5 lakh as commission. Later, ABC shared ₹1 lakh with XYZ Consultants for assisting in contract negotiations.
Under Section 39, the entire ₹5 lakh was first taxable in the hands of ABC Agencies. XYZ would then declare ₹1 lakh as its income separately. This eliminated confusion & ensured complete transparency in reporting income distribution.
Why Understanding Omitted Sections Matters
At first glance, it may seem irrelevant to study sections that no longer exist. However, tax professionals & students often refer to these provisions to understand the historical logic behind today’s laws.
Sections like 39 form the bridge between India’s past corporate culture and modern tax governance. By studying them, we get insight into how business structures shaped our tax framework over time.
Key Takeaways
- Section 39 of the Income Tax Act, 1961, has been omitted.
- It originally dealt with the taxation of a managing agent’s commission when shared with a third party.
- It was removed by the Direct Tax Laws (Amendment) Act, 1987."
- The concept of taxing shared commissions was phased out after managing agencies were abolished.
- Today, related principles survive in sections governing business income & profit sharing.
Modern-Day Relevance
Even though Section 39 no longer exists, its underlying principles remain vital. The modern tax system still requires full disclosure of income, clear ownership of earnings, and proper taxation before sharing profits or commissions. These values trace their roots to early sections like 39.
The removal of this provision was not a rejection of its importance but an acknowledgment that business practices had matured beyond its scope.
Also Read: Section 88A: The Forgotten Rule That Once Helped You Pay Less Tax
Conclusion
Section 39 of the Income Tax Act, 1961 may be a relic of India’s corporate past, but it played a significant role in shaping the way business commissions & income sharing were taxed. Its deletion through the Direct Tax Laws (Amendment) Act, 1987 was part of India’s journey toward simpler, clearer, and more modern tax regulations. By understanding its purpose, we can appreciate how India’s tax framework evolved from complex commercial arrangements to today’s structured business environment focused on compliance and transparency.
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