TMI Blog1954 (1) TMI 31X X X X Extracts X X X X X X X X Extracts X X X X ..... 1943, and the conduct of parties, the excess profits tax payable by the assessee should be deducted from the profits before the commission of 12 per cent. payable to N.M.R.V. Mahadevan is calculated. Question No. 2 is:- Whether there was any material before the Tribunal to hold that the commission payment to N.M.R.V. Mahadevan at 12 per cent, before deduction of excess profits tax or business profits tax was not wholly and exclusively laid out for the purpose of the assessee's business, and 3. Whether the commission payments to the branch managers and other employees is an expenditure laid out wholly and exclusively for the purpose of the business? Question No. 2 in Referred Case No. 53 of 1952 is:- Whether there is any material on evidence sufficient in law for the Appellate Tribunal to hold that the commission of 12 per cent. on profits paid to Mahadevan was unreasonable within the meaning of Rule 12 of Schedule 1 of the Excess Profits Tax Act. Question No. 3 relates to the payment of commission to branch managers. In both the references, on ultimate analysis, the questions really are, whether the commission payable to Mahadevan under the agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Trading Company. On the same date, there was an agreement of employment executed by one of the partners in favour of Mahadevan. The terms of his employment were that he should get ₹ 1,800 per annum as remuneration, besides 5 per cent. of the net profits of the concern, calculated by deducting from the gross profits of the business the salaries and wages and other outgoings without making any deduction from capital. The agreement was to take effect from 13th April, 1940, the commencement of the partnership. After some time, on the representation of Mahadevan, that his remuneration was inadequate and was not commensurate with the responsibilities which he undertook, his remuneration was increased with effect from 13th April, 1943, as evidenced by the letter of the company dated 30th March, 1943. Under this arrangement he was to get an increased salary of ₹ 250 per mensem or ₹ 3,000 per year for the present , and a commission at 12 per cent. on the net profits of the Colours Trading Company from 13th April, 1943. He was required by this agreement to devote all his attention to the development of the business, with a promise of further increment in course of time. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere in the analogous position of sub-distributors, from the emergency commission allowed under the arrangement of 1944 the assessee firm allowed to its employees, the branch managers and assistant managers, a commission of 4 per cent. over and above their basic salary, the dearness allowance, and the Deepavali bonus which it was already allowing. The firm entered into agreements with the employees between 10th February, 1944, and 1st May, 1944, providing for the payment of commission with effect from 13th April, 1944, calculated with reference to the year's turnover of the branch, and at rates varying from 1 per cent. to 4 per cent. There was however a requirement under the agreements, that the remuneration shall be payable for any year if the total amount of sales of dyes in the said branch exceeded one lakh of rupees; but if it was below, unless in special cases, the commission should not be allowed; but there was absolute discretion reserved to the employers to allow in such cases the commission at 4 per cent. even if the turnover of the business at each branch did not exceed the limit. The agreements entered into were practically and substantially in the same form, and a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission were allowed by the Income-tax Officer and the Excess Profits Tax Officer. During the assessment year 1943-44 and 1944-45 the increased commission payment to Mahadevan, calculated at 12 per cent. of the net profits of the Colours Trading Company, was disallowed by the Income- tax Officer, and the same was disallowed also by the Excess, Profits Tax Officer in the chargeable accounting periods ended 12th April, 1944, 12th April, 1945, and 31st March, 1946. The amounts claimed as deduction during these periods were ₹ 13,815, ₹ 28,768 and ₹ 14,205 respectively. When the matter finally reached the Appellate Tribunal on a reference under the Excess Profits Tax Act, the Tribunal held that, so far as Mahadevan was concerned, there was no justification for the entire disallowance of the commission by the Excess Profits Tax Officer, but that at the same time there was no justification for the claim of the assessee for an increase in commission from 5 per cent. to 12 per cent. They, however, directed that Mahadevan should be paid 5 per cent. of the net profits before the deduction of the excess profits tax or 12 per cent. after deduction of the excess profits t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the pay of the employee and the conditions of his service; (b) the profits of the business, profession or vocation for the year in question; and (c) the general practice in similar businesses, professions or vocations. Section 10(2)(xv) of the Income-tax Act is as follows: any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out, or expended wholly and exclusively for the purposes of such business, profession or vocation. Rule 12 of Schedule 1 of the Excess Profits Tax Act, 1940, is as follows:- 1. In computing the profits of any chargeable accounting period no deduction shall be allowed in respect of expenses in excess of the amount which the Excess Profits Tax Officer considers reasonable and necessary having regard to the requirements of the business and, in the case of directors' fees or other payments for services, to the actual services rendered by the person concerned: Provided that no disallowance under this rule shall be made by the Excess Profits Tax Officer unless he has obtained the prior authority of the Commission of Excess Profits Tax. 2. Any person who is dissatisfied with the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viso to Section 10(2)(x). It is the cumulative effect of these considerations which should govern the determination of a reasonable amount under that clause. The only considerations therefore are the pay of the employee, the conditions of his service, the profits of the business for the year in question, and the general practice in similar businesses. the scope of Section 10(2)(xv) is entirely different from that of Section 10(2)(x) of the Income-tax Act. Neither the test prescribed by Section 10(2)(xv), that the amount is wholly and exclusively laid out or expended for the purpose of such business, nor the ancillary test of commercial expediency is strictly germane to the consideration of the reasonableness of the deduction claimed for amounts paid out as bonus or commission. If under Section 10(2)(x) of the Income-tax Act the commission or bonus paid to an employee is held to be a lawfully claimable deduction in whole or in part, what the effect of such a decision is on the application of Rule 12 of Schedule 1 of the Excess Profits Tax Act is the further question for consideration. Rule 1 and Rule 12 of Schedule 1 of the Excess Profits Tax Act are comprehensive in their scope; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pediency. The same view was taken by the Bombay High Court in Tata Sons Ltd. v. Commissioner of Income-tax([1950] 18 I.T.R. 460), which was a case Section 10 (2)(xv) of the Income-tax Act. The question that arose for consideration was whether the voluntary payment by the managing agent of a certain sum of money as his share of the bonus, which the managed company paid to some of its officer, was a permissible deduction under Section 10(2)(xv) of the Income-tax Act. As the assessee, the managing agent, did not directly pay the bonus to the employees, the claim could not naturally be considered under Section 10(2)(xv). The bonus was directly paid by the managed company to its employees, but the managing agent was required to contribute his share of the payment under the terms of the arrangement between the managed company and the managing agent. Chagla, C.J., observed at page 467:- Now, the decided cases show that one has not got to take an abstract or academic view of what is proper expenditure laid out or expended wholly and exclusively for the purposes of one's business. One has got to take into consideration questions of commercial expediency and the principles of ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by one unconnected with business. the requirements of the business as laid down in Rule 12 of the First Schedule of the Excess Profits Tax Act are, in our opinion, also to be judged against the same background, and the same principles have to be applied as under Section 10(2)(xv). We have already pointed out that there is not much difference in principle between the requirements of Section 10(2)(xv) and those of Rule 12 of Schedule 1 of the Excess Profits Tax Act. Both attract the justification of expenditure on grounds of commercial expediency, and to that extent, at any rate, there should be no difference at all. We find it rather difficult to envisage a position where an expenditure satisfies the test of Section 10(2)(xv), an expenditure incurred wholly and exclusively for the purpose of the business, not satisfying the test of Rule 12(1), an expenditure reasonable and necessary having regard to the requirements of the business. In our opinion, wholly and exclusively in Section 10(2) (xv) would appear to be even more exacting in its requirements than the test of reasonableness and necessity prescribed by Rule 12. We had to consider at some length the scope of Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the test of commercial expediency is not germane to an enquiry into a claim under Section 10(2)(x), but it is a very relevant consideration in the application of Rule 12 of Schedule 1 of the Excess Profits Tax Act. If it is open to the Excess Profits Tax Officer under Rule 12 to disallow what was already allowed under Section 10(2) (x) it should be equally open to him to allow what was once disallowed, because the test in Rule 12 is not identical with that prescribed by Section 10(2)(x) of the Income-tax Act. We are therefore unable to accept the contention of Mr. Rama Rao Sahib that the only jurisdiction of the Excess Profits Tax Officer under Rule 12 is to disallow what was allowed under Section 10(2)(x) of the Income-tax Act. Even if a claim fails to satisfy the requirements of Section 10(2)(x) of the Income-tax Act, it is for the Excess Profits Tax Officer to decide whether it satisfied the requirements of Rule 12 of Schedule 1 of the Excess Profits Tax Act. It is in the light of the discussion above that the questions raised in these two references have now to be considered. The case of Mahadevan, in our view, does not present much difficulty. The salary and the commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tentions is correct. The Tribunal followed the decision of the Bombay High Court in Walchand Co. Ltd. v. Hindustan Construction Co. Ltd.( [1944] 12 I.T.R. 104) That decision was based upon the majority view of the House of Lords in L.C. Ltd. v. G.B. Ollivant, Ltd.( [1945] 13 I.T.R. Suppl. 23) Viscount Simon, L.C., took a different view. It cannot now be disputed that in arriving at net profits, they ought to be calculated inclusive of and not exclusive of the amount payable for the year in respect of income-tax. This is settled by the House of Lords in Ashton Gas Company v. Attorney-General([1906] A.C. 10.). As observed by the Earl of Halsbury, L.C., in that case, Now the profit upon which the income-tax is charged is what is left after you have paid all the necessary expenses to earn that profit. Profit is a plain English word; that is what is charged with income-tax. But if you confound what is the necessary expenditure to earn that profit with the income-tax, which is a part of the profit itself, one can understand how you get into the confusion which has induced the learned counsel at such very considerable length to point out that this is not a charge upon the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture to observe that excess profits tax, if I may be pardoned for saying so, is a tax on profits. It is a tax (very elaborately calculated it is true) on profits, for it is a tax on excess profits--it skims the cream of profits, so far as they are in excess of the standard profit. From an examination of the provisions of the Excess Profits Tax Act, it will be seen that it is a tax on profits. That is, a share in the profits is taken by the State as a tax. The net profits must therefore be ascertained in accordance with the principles of commercial accountancy and the principles laid down under the Excess Profits Tax Act. It is from that that the tax is taken by the State. The distributable profits are arrived at only after the tax is appropriated from the net profits. For the reasons given by Viscount Simon in the decision referred to above, we think, with great respect to the majority opinion, that the principle to be followed is that expressed by Viscount Simon, L.C., in that decision. It is unnecessary to examine at length the reasoning underlying the decision in Walchand Co. Ltd. v. Hindustan Construction Co. Ltd.( [1944] 12 I.T.R. 104) The same view was taken by a Full B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n black market. In the statement of the case, the Tribunal adverted to the contention on behalf of the assessee, that the additional commission was intended to be passed on to sub-dealers, that such additional commission was paid by the Imperial Chemical Industries (India) Limited, with the avowed object of keeping and retaining in the market their goods reputation, that in accordance with the spirit of the letters of the Imperial Chemical Industries (India) Limited and in order that the other employees of the various branches may not resort to illegal or other shady dealings to the detriment of the assessee, it had agreed to pass on a portion of the additional commission so received to the branch managers and other employees who were virtually in the position of subdealers and as such the commission payments were expenditure laid out wholly and exclusively for the purposes of the business. This background should also enter into the consideration in deciding the reasonableness of the commission allowed to the employees both under Section 10(2)(x) of the Income-tax Act and Rule 12 of the Excess Profits Tax Act. As there is no consideration of the question from this point of view, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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