TMI Blog1962 (4) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... missed. - - - - - Dated:- 3-4-1962 - Judge(s) : P. B. GAJENDRAGADKAR., A. K. SARKAR., K. N. WANCHOO., K. C. DAS GUPTA., N. RAJAGOPALA AYYANGAR JUDGMENT The judgment of the court was delivered by AYYANGAR J.--Rule 4(1)(b) of Schedule I headed " rules for the computation of profits for the purposes of war profits tax " of the Gwalior War Profits Tax Ordinance, Samvat 2001 (hereinafter referred to as the Ordinance) provided : " 4. In computing the profits of a business carried on by a company, no deduction shall be made in respect of-- (1) remuneration paid to directors if during any part of the accounting period concerned, they had controlling interest in the company ; Provided that this sub-rule shall not apply-- (a) .................................................... (b) to the remuneration of any managing agent where such remuneration is included in the profits of the managing agents' business for the purposes of the War Profits Tax. " The respondent--Binod Mills Co. Ltd.--which had its business at Ujjain, in the State of Gwalior, was a company whose profits were liable to war profits tax under the Ordinance. The company was managed by a managin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some enquiry. There was not much dispute, and even if there was, it was abandoned fairly early, that Messrs. Benodiram Balchand were " directors " of the company within the meaning of the Ordinance and had a controlling interest in the company. In this connection we might advert to the definition of " director " in section 2(10) of the Ordinance. " 2. (10) 'director' includes any person occupying the position of a director by whatever name called and also includes any person who-- (i) is a manager of the company or concerned in the management of the business ; and (ii) is remunerated out of the funds of the business ; and (iii) is the beneficial owner of not less than 20 per cent. of the ordinary share capital of the company. " The controlling interest being established, it was common ground that the remuneration paid to the managing agent could not be deducted in computing the profits of the company unless it fell within proviso (b) of rule 4(1). Before the departmental authorities it was suggested on behalf of the company that the expression " included " in proviso (b) meant " disclosed in the return of the director " and on this basis it was contended that as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsons or the giving to other persons of advice of a commercial nature in connection with the making of contracts : Provided that where the functions of a company or of a society incorporated by or under any enactment consist wholly or mainly in the holding of investments or other property or both, the holding thereof shall be deemed for the purpose of this definition to be a business carried on by such company or society : Provided further that all businesses to which this Ordinance applies carried on by the same person shall be treated as one business for the purposes of this Ordinance. " The second proviso uses the term " person " which is defined by section 2(13) to include " any company or body of individuals or any other association of persons whether incorporated or not and also includes a Hindu undivided family ". The " profits " which is referred to in the charging section is, by reason of the definition of the term in section 2(16), to mean " profits as determined in accordance with the provisions of this Ordinance and its First Schedule ". The provisions of the Ordinance relating to the computation of profits do not bear upon the point now in controversy, but wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be deductible in the computation of the companies' profits. This turns on whether the remuneration paid to the managing agent " is included in the profits of the managing agent's business ". The words used being " is included " there is no doubt that an actual inclusion is posited. But this, however, does not solve the problem, for the " inclusion in the profits " might refer to three distinct " inclusions " : (1) the inclusion by the managing agent as an assessee for the purposes of his individual assessment, i.e., in his return, (2) the inclusion by the assessing authority in the order of assessment made against the managing agent ; (3) the inclusion under the terms of the Ordinance of the remuneration as an amount chargeable to the tax as part of the profits of the managing agent. In passing we might observe that rule 7(2) (b) of Schedule I to the Indian Excess Profits Tax Act, 1940, on which the Ordinance is modelled is in the same terms as the proviso (b) to rule 4 (1) of the Ordinance but the proper interpretation of the rule in the Excess Profits Tax Act has never come up before the courts for decision. The contention urged on behalf of the appellant before the lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to suggest that in order that the benefit of proviso (b) should be available to a company, the assessment of the managing agent should have been completed first--a matter not always within the control of a company. We do not think it necessary to dilate further on this construction, since Mr. Sen did not commend it for our acceptance. His submission, on the other hand, was that this was a special provision designed to meet the cases of companies in which the directors had a controlling interest. In such cases it was these directors who had to submit and submitted the return on behalf of the company and who, of course, had to submit their own returns in their individual capacity as persons in receipt of taxable profits. In these circumstances he urged that the proviso should be read as conferring an option upon the directors either to include their remuneration in their own returs, get them taxed and pay the tax themselves or to include it in the company's return and have the amount taxed in company's assessment. His further submission was that having regard to the manner in which the proviso was worded, where the managing agent failed to include his remuneration in his own ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be entitled to the deduction. The option suggested by Mr. Sen to the managing agent was that he might either elect to pay the tax himself or get the company to pay it. Obviously it would always be in the interest of the managing agent to have the tax paid by the company if by that means, as is suggested by Mr. Sen, he could obtain absolution from the obligation of paying the tax himself, for if the tax is paid by the company the loss involved in the payment of the tax would fall on him only to the extent of his shareholding, being for the rest shared by the other shareholders of the company. It is really difficult to understand the principle by which one could construe a rule of this nature as enabling a managing agent who holds, say 51% of the share capital of the company to visit 49% of the burden of tax which normally one would expect to be paid by him, to be paid by the other shareholders of the company merely because he happens to be the managing agent holding at controlling interest by the extent of his shareholding. We consider that the construction suggested by Mr. Sen which leads to such an unreasonable result and inflicts an unjust injury on the other shareholders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company in the matter of the computation of its income. Where the remuneration of the managing agent was not under the Ordinance liable to be brought to tax the position would be different and that is just what is indicated as that which would render the proviso inapplicable. For instance, section 5(1) of the Ordinance enacts : " Provided further that this Ordinance shall not apply to--.......... (b) profit from a business carried on wholly on behalf of a religious or charitable institution and the profits of which are applied solely to the purposes of the institution and enure for the benefit of the public, and-- (i) the business is carried on in the course of the carrying out of a primary purpose of the institution, and (ii) the work in connection with the business is carried on by the beneficiaries of the institution ; ". If, for instance, the business of the managing agency was being carried on for or on behalf of a trust of the character indicated by the provision just now read, the remuneration of the managing agent would not be liable to tax for the reason that it is outside the ambit of the Ordinance and to such a case the terms of proviso (b) to rule 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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