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TMI Blog1962 (4) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 managing agency firm--Messrs. Benodiram Balchand--which had, by reason of its shareholding exceeding 50 per cent. of the issued share capital, a controlling interest in the company. The respondent company was assessed to war profits tax for three chargeable accounting periods--July 1, 1944, to December 31, 1944, January 1, 1945, to December 31, 1945, and January 1, 1946, to June 30, 1946. During each of these accounting periods the respondent company had paid remuneration to its managing agents and claimed to deduct the remuneration so paid in the computation of its business profits during these three periods. The assessing officer disallowed the claim on the ground that the remuneration received by the managing agency firm had not been factually assessed in the hands of the managing agent and that consequently, the matter was covered by the opening words of rule 4 and not saved by proviso (b) to the rule. An appeal against this order of assessment was dismissed by the appellate authority and thereafter by the Commissioner of War Profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any that the expression " included " in proviso (b) meant " disclosed in the return of the director " and on this basis it was contended that as Messrs. Binodiram Balchand had, in the statement of their own profit and loss account for Samvat 2000, 2001 and 2002, disclosed the managing agency commission received by them, the remuneration had been " included " in their profits for the purposes of the war profits tax, though for reasons which are unnecessary to discuss they claimed that the sum was not liable to be brought to tax and this claim was accepted. This argument which was rejected by the departmental authorities is, however, responsible for the form of the question referred to the High Court. This contention, however, was not apparently repeated before the High Court and does not figure in the judgment as part of the reasoning of the learned judges in the judgment now under appeal and has not been relied upon before us. We shall, therefore, say no more about it, but proceed to deal with the substantial question raised. The facts being as above stated the entire question in the appeals turns on the meaning of the expression " is included in the profits of the managing agenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Schedule ". The provisions of the Ordinance relating to the computation of profits do not bear upon the point now in controversy, but what is of relevance are certain of the ru1es for the computation of the profits in Schedule I. From the terms of the charging section read with the other provisions of the Ordinance to which we have adverted it would be seen that it is the profits accruing from business that is brought to charge and that each person whether he be an individual or comprehended within the inclusive definition of the term " person " is an independent unit of assessment whose profits are computed by aggregation of all of its sources of income from every business which that unit may carry on. How the profits of each unit is to be computed for the purposes of tax has to be gathered, apart from the provisions of the Ordinance which, as stated earlier, are not relevant to the present case, from Schedule I headed " Rules for the computation of profits for the purposes of war profits tax ". Rule 1 of these Rules which generally follows the pattern of the Indian Income-tax Act in setting out the list of permissible deductions, provides as one of such deductions in rule 1(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cess Profits Tax Act has never come up before the courts for decision. The contention urged on behalf of the appellant before the learned judges of the High Court was that the inclusion referred to an inclusion by the assessment officer of the remuneration in the assessment of the managing agent and that unless the remuneration sought to be excluded in the computation of the profits of the company was actually assessed in the hands of the managing agent, the company could not claim the benefit of proviso (b). The learned judges repelled this submission by holding that the proviso could not be construed as to vest in the assessing authority an absolute discretion to assess either the company or the managing agent. They read the words " is included " as equivalent to " is liable to be included " and that as it was not contested before them that if the assessment officer had been so minded he could have included this sum in the profits of the managing agent's business, the terms of proviso (b) were satisfied. Mr. Sen, learned counsel for the appellant, did not pursue the same line of argument as in the court below. We should add that we consider that Mr. Sen was right in not attem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aving regard to the manner in which the proviso was worded, where the managing agent failed to include his remuneration in his own return and have it assessed as part of his profits, the effect was the same as if he had opted to have the sum taxed in the company's assessment. The option, it was urged, was that of the managing agent who controlled the affairs of a company and, therefore, in effect represented it and who in one capacity acted for himself and in another acted for the company. In effect the submission of learned counsel was that the provision was designed to obviate double taxation of the same income and for this purpose vested the controlling director with a discretion to render the company immune from tax where the sum was included in his own return and was assessed in his hands. The theory propounded regarding the provision being one for avoidance of double taxation in the manner above indicated by vesting a discretion in the controlling director breaks even on a cursory examination. Let us assume that the managing agent opts to have the company taxed and submits a return on behalf of the company in which no deduction is claimed in respect of this item and an asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... construction suggested by Mr. Sen which leads to such an unreasonable result and inflicts an unjust injury on the other shareholders is not any proper interpretation of the provision. Besides, there are other grounds why the meaning attributed to the words " is included " as referring to " included by the managing agent " cannot be accepted. Suppose the managing agent includes it in his return but the assessing authority does not include it in the computation of his return but prefers to disallow the deduction in the case of a company. Would that be " inclusion in his profits ? " Again, suppose the managing agent does not include it in his return but the assessing authority does, and tax is paid by the managing agent, would there be no exclusion ? These illustrations serve to bring out the anomalies that would arise if it were held that the words " is included " meant " is included in his return by the managing agent ". This leaves for consideration the meaning that " is included " refers to the inclusion under the provisions of the Ordinance. If this meaning were accepted it would not matter whether the managing agent has or has not included the sum in his return or whether the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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 (1) would not be attracted, with the result that the managing agent not being liable to tax under the Ordinance on the remuneration derived by him, the company, if it were a controlled company, would not be entitled to the deduction of that remuneration in the computation of its profits. Except in cases where the remuneration received by a managing agent is not liable to tax under the Ordinance, it is the managing agent that would be liable to pay tax on his remuneration and notwithstanding that the company is a controlled company the remuneration paid by it to the managing agent would be a permissible deduction by reason of the exception to the opening words of rule 4(1) contained in proviso (b). It is unnecessary for our present purpose to consider whether besides section 5(1)(b), already referred to, there are other contingencies in which remuneration received by a director could be held not to be " included " in the latter's profits under the Ordinance, since in the case before us it is admitted that the remuneration received by the managing agent was lia ..... X X X X Extracts X X X X X X X X Extracts X X X X
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