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Shyamlal Pragnarain Versus Commissioner of Income-Tax

1955 (1) TMI 36 - ALLAHABAD HIGH COURT

Dated:- 5-1-1955 - Malik, Agarwala And V Bhargava JJ. JUDGMENT Malik, C.J. 1. This case has been referred to a Pull Bench on a difference of opinion. 2. Proviso (2) to Section 66-A, Indian Income-Tax Act is to the effect that when there is a difference of opinion between the Judges hearing areference the point of law upon which they differ and the case shall then be heard upon that point only by one or more of the other Judges of the High Court and such point shall be decided according to the op .....

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d the order has to be passed by it. But that where the whole case has been referred to a new Bench this proviso does not apply and that we can hear the whole reference afresh and give our own decision. This view has been supported by Mr. Jagdish Swarup, counsel for the other side, and both the learned counsel have made a request that even if there be any irregularity they are waving the same and have prayed that the case may be heard and decided by this Bench. 3. Proceeding now to the reference .....

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of the Governor-General and came into force. The Commissions were calculated upon 31-12-1941, and paid on the profits made without deducting income-tax or excess profits tax. The same procedure was followed the next year and commissions were worked out on the same basis on the profits made upto 31-12-1942, and paid to the Manager and the Assistant Manager. The total amount paid as commission was treated as an allowable deduction from the income for payment of Income-tax and Excess Profits Tax a .....

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eduction under Section 10 Indian Income-tax Act, but whether he allowed the deduction under Section 10(2) (X) or 10(2) (XV) of the Act is not clear and the counsel for the parties are not agreed on the point. The Excess Profits Tax Officer, however, while accepting the figure that had been worked out by the Income Tax Officer disallowed a sum of RS. 33,525/- out of the sum of ₹ 68,8427- paid by the assessee firm to the Manager and the Assistant Manager, 5. The assessee appealed to the Trib .....

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s profits by the assessee firm should have been deducted before calculating the commission payable at fixed percentage on its net profits? (2) Whether on the facts and in the circumstances of the case the payment of commission to Babu Lal and shrichand at fixed percentage of profits without deduction of the excess profits tax by the assessee therefrom could legally be held by the Excess Profits Tax Officer to be unreasonable and unnecessary within the meaning of Rule 12(1), Schedule 1, E. P. T. .....

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arly in view when deciding the case and on that account a lot of confusion has been created. Section 10, Income-tax Act provides for the mode of computation of income for the purpose of payment of income-tax; Section 10(2) gives the list of allowable deductions and Section 10(2)(x) allows the deduction of "any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend, if it had not been paid as bonus or com .....

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licable to the computation of the amount of Excess Pro-fits Tax. The Excess Profits Tax Officer is, therefore, also entitled to consider whether the amount payable to an employee as bonus or commission, where such amount would not, have been payable to him as profits or dividend, was a reasonable payment, keeping in view the pay of the employee and the conditions of his service, the profits of the business for the year in question and the general practice in similar business. Rule 12, of Schedul .....

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rule shall be made by the Excess Profits Tax Officer unless he has obtained the prior authority of the Commissioner of Excess Profits Tax. (2) Any person who is dissatisfied with the decision of the Excess Profits Tax Officer under this rule may appeal in the prescribed time and manner to the Appellate Tribunal. (3) In relation to chargeable accounting periods ending after 31-12-1942, the Central Government may make rules for determining the extent to which deductions shall be allowed in respec .....

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probably because the employers, when they realised that they would have to pay a large part of their profits as Excess Profits Tax, became generous and gave away a good part of it to their employees, which generosity they would not have shown if they had not to pay Excess Profits Tax. 8. The reasonableness of the amount of bonus, or commission has to be determined by the Income-tax Officer and the Excess Profits Tax Officer under Section 10(2)(x) with reference to the proviso, that is, with ref .....

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spent must, therefore, be judged with reference to the requirements of the business and if the expenditure relates, to a payment for services then the amount must be reasonable having regard to the actual services rendered by the person concerned. 9. Learned counsel for the assessee has admitted that the word 'reasonable' in Section 10(2)(x), Income-tax Act or in Rule 12 of Schedule I, Excess Profits Tax Act, and the words 'necessary having regard to the requirements of the business& .....

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All 538 at p. 547 (A) : "It does not appear to be necessary to enter into the history of the relations between the industrialists and their workmen in order to determine the nature of 'bonus'. There can be no doubt, however, that, in modern times, bonus, is clearly regarded as deferred wages payable to employees which may be claimed by them as of right under the terms of employment. In the conditions, under which modern industries function, bonus has now come to be recognised as a .....

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contentment. 11. It was admitted in the case before us that commission was paid to the Manager and the Assistant Manager at the rate of 12 per cent, and 3 per cent, without deducting either Income-tax or Excess Profits Tax and no dispute had arisen for decision between the assessee and the Manager and Assistant Manager as regards the terms of the contract. For the purposes of taxation, the question whether the payment was made to the Manager and the Assistant Manager under a legal contract or i .....

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o the requirements of the business and the actual services rendered by the Manager and the Assistant Manager. This was the point that the Excess Profits Tax Officer was required to decide and to which the Appellate Tribunal should have directed its attention. The question as to the terms of the contract may have been a matter of importance as between the employer and the employee but not for the purposes of the determination of the question of reasonableness or necessity either under the Income- .....

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question from their point of view. 13. In the case before us the Appellate Tribunal did not clearly bear in mind what it was called upon to decide and the line followed by it in its appellate order for coming to the conclusion that the Excess Profits Tax Officer was justified in reducing the amount is something like this: "(a) The Excess Profits Tax payable on the profits made by the assessee firm should have been deducted before calculating the commission payable to the Manager and the As .....

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onable or necessary for the requirements of the business. The Excess Profits Tax Officer followed more or less the same line. He said that in accordance with the decision in - 'Walchand & Co. Ltd. v. Hindustan Construction Co. Ltd.', AIR 1944 Boris. 5 (B), the amount of excess profits tax had to be deducted before commission could be worked out for payment to the Manager and the Assistant Manager, and it was, therefore, unnecessary and unreasonable to pay more than the agreed proport .....

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Act. On the mere finding, therefore, that it was an ex gratia payment, without considering other facts arid circumstances, neither the Excess Profits Tax Officer nor the Appellate Tribunal could come to the conclusion that the payment was necessarily neither reasonable nor necessary having regard to the requirements of the business. Learned counsel for the Department has not disputed" this proposition but he has urged that the question whether it was a legal liability that was being discha .....

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he payment was necessary having regard to the requirements of the business and in accordance with the services rendered by the employee's with reference to business principles-and exigencies of the business. 16. A large number of cases were cited on the point whether Excess Profits Tax should or should not be deducted before calculating the commission payable to an employee. This must depend in each case on the, terms of the contract. Where the contract is in writing the terms of the written .....

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ntingency which the parties presumably never anticipated but which has since occurred. The rule to be followed in such cases is clear. The only difficulty is in applying it. The rule is that we are not to make a new agreement for the parties, or to speculate how they would have dealt with the new contingency had they anticipated it; but that (except in cases when the intervening event produces frustration) we have to take the words of the agreement as they stand and apply them, as best we can, t .....

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le the other three Law Lords, Lord Thankerton, Lord Russell and Lord Wright, took the contrary view. 19. In Halsbury's Laws of England, Edition 3, Vol. 6, Para. 591, p. 291, the law on the point is stated as follows: "Directors who are remunerated by a percentage of the net profits or by commission on the sum available for distribution are entitled to compute their remuneration on the profits before income-tax is deducted therefrom. As regards profits tax it seems that if on the true co .....

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are Inclusive of and not exclusive of the income-tax, unless the contract explicitly mentions otherwise. (See - 'Ashton Gas Co. v. Attorney-General', 1906 AC 10 (D).) The reason is obvious. Income-tax is a share of the profits which the State claims as its own for the amenities supplied by it in making it possible for a company to work and earn its profits. The State, therefore, is one of the many co-sharers in the profits earned and the profits must therefore necessarily be inclusive of .....

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e profits for purposes of assessment it was claimed that the Taxes, Income-tax and Excess Profits Tax, paid in Eire should be excluded as deductible expenditure. Lord Oaksey pointed out that the taxes paid in Eire were not paid wholly and exclusively for the purposes of the company's trade in the United Kingdom and the amount paid as such could not be claimed as deductible expenditure. Reliance was, however, placed on a sentence in the judgment of Lord Reid at page 419, where his Lordship, d .....

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ferred to and applied in later cases, are to be disregarded, a payment out of profits after they have been earned is not within the purposes of the trade carried on by the tax-payer. But excess profits tax also is levied on profits after they are earned and, apart from the statutory provision, is in pari pasu with income-tax." It is urged that Excess Profits Tax and Income-tax are both imposts on profits and both must be treated alike and the principle governing the - 'Ashton Gas Compan .....

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as the case is really not relevant for our purposes. Learned counsel has relied on a passage at p. 532 in the judgment of Lord Greene M. R. that: "the excess profits tax was not expenditure attributable to the working of the business, but expenditure which falls to be charged after the results of the working of the business have been ascertained." The difference that has been pointed out in the passage quoted from Halsbury's Laws of England has also been brought out in the judgment .....

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t money wholly and exclusively laid out or expended for the purposes of the trade. The passage relied on at page 527 is as follows: "The reason is not far to seek. It is that neither the cost of ascertaining taxable profit nor the cost of disputing it with the Revenue Authorities is money spent to enable the trader to earn profit in his trade. What profit he has earned, he has earned before ever the voice of the tax-gatherer is heard. He would have earned no more and no less if there was no .....

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r may be the terms of the agreement, it must always be held that Excess Profits Tax for all purposes must be treated in the same way as Income-tax. 24. It is true that assessment under the Income-tax Act and the Excess Profits Tax Act is made more or less on the same principles and the tax is recoverable in the same manner and both are in one sense tax on profits made. But the reasons for the imposition of the tax in the two cases are entirely, different. While Income-tax is a tax on the total i .....

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out of certain businesses in the conditions prevailing during, the present hostilities;" As has been pointed out in several cases, the idea was that the person making this extra profit should not be allowed to keep it to himself when this profit was being made as a result of a calamity which the rest of his countrymen had to face. In England ultimately the whole of this extra profit was taken away by the State. In India, however, two-third was taken away by the State and the person making .....

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e standard profits." The Tax- is, therefore, in respect of a business in contrast to the provisions of the Income-tax Act which provides for a tax being levied on a person. under Section 12, Excess Profits Tax Act, excess profits tax has to be deducted as an expenditure for the purposes of computation of Income-tax. Income-tax is levied on a sliding scale. While Excess Profits Tax is charged either at a fixed percentage of the difference between the profits earned and the standard profits. .....

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ature of the Excess Profits Tax at page 990 said : "It does not appear there that the tax is charged upon a person in respect of his activities. It is a tax designed to catch a portion of the amount which is deemed by the Legislature to be in excess of the normal profits of trade or business." 26. This, however, is a division which is hardly necessary for the purposes of this case. As we have held, the question on what basis commission was payable might be an important question when it .....

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;, (1947) 1 All ER 669 (J), the question arose between the Rural District Council and the Electricity Co., whether the liability to pay excess profits tax was a factor which a rating authority was entitled to take into consideration with others in deciding what percentage of the net receipts should be allocated to tenants' profits when the net receipts were apportioned between hypothetical landlord, hypothetical tenant, and rating authority. Lord Tucker quoted with approval Lord Dunedin' .....

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from sterilising the earnings of profits, it only takes effect if and when such profits have resulted from a condition of fertility. I find it impossible to distinguish between income-tax and excess profits tax for the present purposes." 29. In - 'Condran v. Stark', (1917) 1 Ch 639 XL) Peterson J. pointed out the difference between Income-tax and Excess Profits Tax. He said : "Income-tax is ultimately payable by the person who is entitled to receive the profits. A company pays .....

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from the business Nor are excess profits duty and Income-tax 'payable in respect of the same fund; for excess profits duty is for the purpose of income tax treated as an outgoing of the business, which, reduces the profits in respect of which income-tax is assessable. In my view excess profits duty is a debt due to the Crown, the amount being ascertained with reference to the amount by which the profits exceed the prewar standard." 30. This view was followed by the Court of Appeal in - .....

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he company but was payable to His Majesty's Treasury. At p. 267 the learned Judge posed a question, "What light, if any, do these, statutory provisions throw upon the construction of this agreement" and in answer said: "In my judgment they only throw this light, that, unlike income-tax, excess profits duty is not a part of the profits which is payable to the company carrying on the business, or to its shareholders. Excess profits duty is, for the purpose of ascertaining what i .....

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which again was a case arising out of a dispute between two' contracting parties as to the fund out of which commission was payable, the agreement provided for payment of commission out of the net profits for the year. Bankes L. J. pointed out that on a true construction of the contract the parties were not contracting for payment of anything except the amount of profit divisible amongst the share-holders. 32. Coming to the decisions of the Indian Courts, the decision in - 'James Pinlay .....

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Income-tax and Excess Profits Tax. 34. In - 'Commissioner of Income-tax, Delhi v. Delhi Flour Mills Co. Ltd.', AIR 1953 PunJ 180 (FB) (P) the question arose whether, in calculating the annual net profits of the company for purposes of ascertaining the amount payable as commission to the Managing Agents, Excess Profits Tax was or was not to be deducted. The learned Judges were of the opinion that the amount was not deductible and quoted the observations made in some of the English cases. .....

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e year 1935 to the year 1940 on the profits earned without deducting Income-tax. The fact that Income-tax was not deducted will not, however, be very helpful in determining the terms of the agreement relating to the deduction of Excess Profits Tax. For two years at least, in 1941 and 1942, commission was paid without deducting Excess Profits Tax and neither the Income-tax Officer nor the Excess Profits Tax 'Officer objected to such payment. The Appellate Tribunal has observed in its appellat .....

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it difficult to hold that this was a finding of fact as to the terms of the oral agreement between the parties. The Appellate Tribunal appear to have taken the view that for working out the commission payable to the Manager and the Assistant Manager, Excess Profits Tax had to be deducted out of the profits more as a matter of, law than a matter depending on the terms of the agreement between the parties. 37. The questions framed appear to us to be defective. The first question is whether the Ex .....

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