TMI Blog1965 (8) TMI 98X X X X Extracts X X X X X X X X Extracts X X X X ..... business is looked after by a Board of Directors and the working of the branches, by Managers. Generally Directors themselves are appointed as Managers. The Directors and the Managers are paid their monthly salaries or fees and commission worked out at certain fixed percentages of the net profits The commission is fixed at the time of the appointment or subsequently by a resolution. By a resolution the Board of Directors had decided that the commission should be paid to the Managers, the Directors and the branch Managers on no, audited profits only after depreciation had been allowed for but prior to any allocation or appropriation of such profits including provision for taxation . This resolution was subsequently clarified by the Board resolving that the words including provision for taxation were intended to, and did specifically cover, all forms of taxation including excess profits tax and other like impositions . The result was that the excess profits tax was not to be deducted for arriving at the figure of the net profits for calculating the commission. Accordingly the assessee has been calculating the commission by applying the percentages to the profits without deducting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreed percentages of the profits before deduction of the excess profits lax. The orders passed by him were upheld by the Income Tax Appellate Tribunal on 22-3-1947. Though its attention was drawn to the absence of evidence regarding any extra services having been rendered by fee Directors and the Managers it recorded no finding that they had not rendered extra services. It gave no reasons of its own and contended itself with observing that the Excess Profits Tax Officer was justified In acting as he did. Subsequently it stated the case under Section 66(2) of the Income Tax Act; I shall come to this presently. 4. The Excess Profits Tax Officer took up the assessment of the excess profits tax for the next chargeable accounting periods ending 31-12-1945 and 31-3-1946 and on 15-12-1947 and 31-3-1948 passed assessment orders on the same lines as for the chargeable accounting periods 1948 and 1944. In the assessment orders he said: For reasons stated in the order dated 80-3-1945 under Rule 12 Schedule 1 for the chargeable accounting period to 31-12-1943, I hold that, having regard to the requirements of the business and the actual services rendered by the persons concerned, the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary and justified or not, keeping in view the ordinary commercial practice, the commercial expediency and the services rendered by them, because there was not a word about these matters in their orders. Since the Tribunal did not record any finding of fact with regard to the necessity for the payments, the exigencies of the business and the services rendered by the recipients the learned Judges answered the question in the negative. The judgment is reported in British India Corporation Ltd. Kanpur v. Commr. of Excess Profits Tax. [1958]33ITR826(All) . 6. There are two questions before us but they are identical with each other, the only difference being that one refers to the chargeable accounting period 1945 and the other to the chargeable accounting period 1946. These questions are undisputedly identical (except for the figures) with the question answered by Bhargava and Mehrotra, JJ The Excess Profits Tax Officer has not given any reasons for applying Rule 12 (1) in the particular manner and has simply relied upon the previous assessment orders. On the other hand, the Tribunal has gone into the matter with some detail. It referred to his findings (though based on the ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g out-goings consisting of expenses the Excess Profits Tax Officer is required to consider whether the expenses are reasonable and necessary or not. In this case he found that part of the commission paid to the Directors and the Managers was not reasonable and necessary and, therefore, did not deduct it in computing the profits. In his opinion the commission that would have been calculated by applying the percentages to the net profits computed after making provision for the excess profits tax liability would have been both reasonable and necessary. The commission actually paid was calculated by applying the percentages to the profits without making any provision for the excess profits tax liability. It is the difference between these two commissions that has been found by the Excess Profits Tax Officer to be unreasonable or unnecessary. That the commission paid was worked out in accordance with the resolutions passed by the assessee is of no consequence. If it was not necessary for the assessee to pass the resolutions the commission paid in accordance with them cannot be said to be necessary and reasonable does not at all depend upon whether it was in accordance with the resolutio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits and the general practice within the meaning of Section 10(2)(x) and (4) whether payment of the commission (or a part of it) is not reasonable and necessary having regard to the requirements of the business and the actual services rendered by the Director. These questions are distinct from one another and an answer given to any of them is no guide to the answer to be given to any of the remaining three. A payment may be in accordance with the agreement and the company may be legally bound to pay it but it does not follow that it was laid out wholly and exclusively for the purposes of its business within the meaning of Section 10(2)(xv) or was both reasonable and necessary within the meaning of Rule 12 (1). Similarly a payment which is found to be laid on) wholly and exclusively for the purposes of the business within the meaning of Section 10(2)(xv) is not always reasonable and necessary within the meaning of Rule 12 (1); an unreasonable or unnecessary payment can be laid out wholly and exclusively for the purposes of the business. A payment may be said to be necessary when it is obligatory under the agreement and similarly an ex gratia payment may be said to be not nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cted in calculating the net profits for determining the Managing agency commission. In Commissioner of Income Tax Delhi v Delhi Flour Mills Co Ltd.. [1959]35ITR15(SC) the agreement between the assessee and the managing agent was that the former should pay to the latter in addition to a salary a commission at a certain percentage on the net profits to be computed after allowing working expenses and interest on loans but without setting aside anything to reserve or other special funds. The Supreme Court held that it was an agreement essentially to share the profits, e.g. the net profits, and that consequently the divisible profits should be computed after deducting the excess profits tax. In the instant case we have resolutions but they have been taken to be equal to agreement. The facts in Ahmedabad Manufacturing and Calico Printing Co. Ltd. v. Commissioner of Excess Profits Tax, Bombay North, Kutch and Saurashtra Baroda [1960]38ITR675(SC) were that the company made large payments by way of bonus or commission to its employees and also made large contributions to their provident funds, the payments and the contributions were on the basis of percentages applied to its profits with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer having come to conclusion (b) .. .. .. applied conclusion (a), viz., that the payment of percentage without deduction of excess profits tax was per se unreasonable and unnecessary . (Conclusion (a) is ground (a) and conclusion (b), ground (b) above.) In James Finlay and Co., Ltd. v. Finlay Mills Ltd, (1945)47BOMLR774 the agreement was for payment of commission at a certain percentage on the net annual income before setting aside any sum for payment of any tax on income and the Bombay High Court held that as excess profits tax was a lax on income it was not to be deducted before calculating file commission Obviously the decision turns upon an interpretation of the agreement and not upon the payment of commission being found to be necessary and reasonable The decision is, therefore, of no avail here. 11. My answer to the questions would, therefore, he in the affirmative. But it was vehemently contended on the assessee's behalf that the decision of Bhargava and Mehrotra JJ. in the earlier reference operates as res judicata. The questions that we have to answer are not abstract questions of law but are concrete questions referring to particular sums and the question t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he orders passed by them in the instant reference are similar to them and that consequently the decision in the earlier reference operates as res judicata. Then there is the fact that in the instant case the Tribunal took into consideration also a statement prepared by the Excess Profits Tax Officer showing how enormous are the sums paid to the Directors and the Managers by way of commission, which distinguishes the instant case from the earlier case Thus on facts I find that the questions that we have to answer at present are different from the question answered in the earlier reference. 12. The authorities are divided on the question whether a decision in respect of a question arising in taxation for one year operates as res judicata when the same question arises in respect of (fixation for a subsequent year. In taxation matters as in licensing matters, there is no lis. no controversy inter parties. and no decision in favour of one of them and against the other, as observed by Lord Herschell in Boulter v. Kenl Justices. (1897) AC 556, and Malik. C. J. Ami Seth. J in Kamlapat Motilal v. Commissioner of Income-lax, U. P. [1950]18ITR812(All) In the case of Kamlapal Molilal. [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereafter questioned by litigation. In Broken Hill Proprietary Co. Ltd. v. Municipal Council of Broken Hill, (1926) AC 94. the Judicial Committee held that a previous decision by the High Court of Australia as to the valuation for a previous year was not res judicata Lord Carson said at page 100: The decision of the High Court related to a valuation and a liability to a tax in a previous year, and no doubt as regards that year the decision could not be disputed The pre-sent case relates to a new question namely, the valuation for a different year and the liability for that year. It is not eadem question, and therefore the principle of res judicata cannot apply I may refer to 49 Law Quarterly Review page 14. which contains an editorial note on these two decisions. The decision in Sneath's case 1932 2 KB 362 is said to be of general interest, being concerned with res judicata on which branch of the law there is little learning. It was further noticed that the court of Appeal did not have to answer in that case whether the tax in one year is a different tax from that in a subsequent year so that it cannot be the basis of res judicata except for the year for which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir Vakil Mills v. Commissioner of Income Tax Bombay. AIR 1904 SC 318 S. K Das. J. observed:-- The doctrine of res judicata .. .. .. does not apply to such decisions (decisions by In-come Tax Officers for particular assessment years); in some cases it has been held that though the Income Tax Officer is not bound by the rule of res judicata ... ... .. he can reopen a question previously decided only if fresh facts come to light or if the earlier decision was rendered without taking into consideration material evidence etc. (page 321) He did not accept the law laid down in Hoysfead's case 1926 AC 155. In Hoystead's case 1926 AC 155 the Privy Council had held that the Commissioner of Taxation was estopped from taking a certain view during an assessment in one year by the contrary view expressed by the High Court on a reference in respect of assessment for an earlier year. The decision of the High Court on the reference rested on a matter which was admitted but was fundamental to the decision and the objection was that a decision based on admission could not operate as res judicata and it was this question that was answered in the affirmative by the Judicial Committee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed. The argument that as a matter of public policy the principle of the thing adjudged should be held not to apply to controversies as to taxation, if there be merit in it, should he addressed to the law-making and not to the judicial department. He made it clear that only those question which are presented and decided on an earlier occasion operate as res judicata on a subsequent occasion. In United States v. Stone and Downer Co., (1926) 71 L Ed 1013 Taft C. J. referred to the above decision as laying down the general rule but added that it is not the rule in a number of States and distinguished it from the case before him because there the thing adjudged was the existence of an immunity of the property of a bank from taxation due to a contractual obligation of the state or city government to the bank, a personal relation which might without embarrassment and with much more safety be permanently fixed for one taxpayer than a question of fact or law affecting discriminatingly one of a whole class of importers and giving the exceptional operation in its favour of a general tariff on articles of merchandise largely imported (page 1027). The question that was decid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stantial similarity' extending the doctrine of res judicata to it introduces an uncertainty and the doctrine of stare decision seems better adopted to it. 13. It would appear that the weight of authority, and particularly the authority by which we would be bound, is in favour of not applying the doctrine of res judicata in taxation matters A tax authority in dealing with taxation in one year is not bound by a decision in a previous year on the same question. There is no material difference if the previous decision was given by a High Court on reference. The High Court's jurisdiction is advisory and it does not decide the question of the Department's rights and the assessee's liabilities. In a reference under the Income Tax Act or under the Excess Profits Tax Act it does pronounce a judgment but it is for advising the Tribunal as to what order it should pass and does not by its own force affect the rights and the liabilities of the Department and the assessee. If it answers the question in the same way in which it was answered by the Tribunal the Tribunal has to do nothing on receipt of its judgment and the rights and the liabilities remain governed by its own ord ..... X X X X Extracts X X X X X X X X Extracts X X X X
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