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TMI Blog1972 (10) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the affirmative. The facts and circumstances of the case on which these answers were given are : The assessee is a public limited company (hereinafter called " the Corporation ") having several branches and subsidiary companies. It has a board of directors which looks after its business. The branches of the company are looked after by managers who are members of the board of directors. It appears that for a long time and even before the Act came into force the corporation has been remunerating its directors including the managing director and branch managers by way of commission based on a certain fixed percentage of its net audited profits. This commission was in addition to the directors' fees and/or stipulated monthly salary. In the case of a branch manager the amount of commission to be paid was calculated on the profits of the branch of which he was in charge. In the case of others the profits made by the Corporation as a whole were taken into consideration. The commission to be paid was either fixed at the time of appointment or by resolution passed subsequently. In so far as the two chargeable accounting periods are concerned, the position in regard to the payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits Tax Officer accordingly held that Rs. 11,47,143 for the first chargeable accounting period and Rs. 11,06,693 for the second chargeable. accounting period could not be allowed and was further of the view that a portion of it was not reasonable and necessary having regard to the requirements of the business and the actual services rendered by the persons concerned. It was pointed out that the commission of the nature under consideration was being paid by the corporation even before the Act came into force and that such commission was being allowed in its entirety for purposes of computing profits under section 10 of the Income-tax Act, 1922, in the two corresponding assessments made under section 10 of the Income-tax Act. Though this was so under the Income-tax Act, the Excess Profits Tax Officer, on the facts of the case and having regard to rule 12 of the Schedule to the Act, took the view that, since the commission in the respective chargeable accounting periods were paid out of the profits which could not be retained by the corporation, a portion of the commission attributable to the Excess Profits Tax Act earned in the peculiar circumstances of a national calamity was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Profits Tax, consisting of Bhargava J. (as he was then) and Mehrotra J., were of the view that the findings of the Excess Profits Tax Officer that the payments were both not necessary and not reasonable amounted to holding that the previous practice and agreements gave no indication that the commission had to be paid without deducting the excess profits tax from the net profits and that the payments made were beyond the terms of the agreement. According to that court this was not the basis on which the question of reasonableness and necessity of the payments had to be decided. But, what the officer and the Tribunal ought to have decided is the question whether or not these payments were necessary and justified, having regard to the ordinary commercial practice and commercial expediency and taking into account the services rendered by the persons to whom the payments were made. Bhargava J., who delivered the judgment of the Bench, in arriving at the conclusion that the disallowance of the amounts was not justified, followed a Full Bench judgment of that court in Shyamlal Pragnarain v. Commissioner of Income-tax. In that Full Bench it was observed that what the Excess Profits Tax O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Commissioner of Excess Profits Tax." This rule is designed to prevent the dissipation of the excess profits by inflating expenditure which has no relation to the requirements of the business. The test is, whether the expenditure is unreasonable and unnecessary 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. There is of course no reference in this rule to commercial expediency or commercial practice in considering whether an expenditure is unreasonable and unnecessary having regard to the requirements of the business. But, that is another way of saying that all relevant factors must be taken into consideration by the Excess Profits Tax Officer in considering whether that expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectors and management. As a result of war conditions the profits of the corporation have gone up tremendously from about Rs. 10 lakhs in the pre-war period to about Rs. 2 crores during the relevant chargeable accounting period and the commission to management on the basis of net profits has risen in the same proportion. Since the excess profits tax, which is intended to prevent the owner of a business from making a large fortune out of what is a national danger, is not deducted out of net profits in calculating commission, 'an employee stands to benefit from the national emergency to a greater extent than an employer' : (Walchand & Co. Ltd. v. Hindustan Construction Co. Ltd.). It, therefore, appears both unnecessary and unreasonable to pay more than the agreed proportion of the profits after deduction of excess profits tax. In the circumstances, I hold that the increased expenditure under commission, although of a nature which, under the provisions of section 10 of the Income-tax Act, is in itself an allowable deduction, is unreasonable and unnecessary having regard to the requirements of the business and the actual services rendered by the persons concerned. " After giving the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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