TMI Blog1959 (5) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... roceed, and the Tribunal in affirming that finding had further material to act upon. The decision of the High Court impugned here was correct. Appeal dismissed. - - - - - Dated:- 14-5-1959 - Judge(s) : BHAGWATI., HIDAYATULLAH., S. R. DAS JUDGMENT The judgment of the court was delivered by HIDAYATULLAH, J.--This appeal by special leave of this court has been filed against the judgment and order of the Bombay High Court dated August 27, 1954, by the Ahmedabad Manufacturing and Calico Printing Co. Ltd., Ahmedabad, hereinafter called the assessee company. By that judgment, the High Court of Bombay answered the first of the two following questions referred to it by the Income-tax Appellate Tribunal Bombay, in the negative, and declined to answer the second question, inasmuch as, in its opinion, that question did not arise in view of the answer to the first question : " 1. Whether in law, if there is an obligation on the employer to pay a certain bonus, the Excess Profits Tax Officer is bound to allow it as a deduction and is precluded from exercising his discretion under rule 12(1) of the First Schedule of the Excess Profits Tax Act. 2. If the answer to the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on payable to the said employees and the five officer employees. 2. Whether in the circumstances of the case the finding of the Tribunal that the full amount of commission or bonus, paid to the employees of the petitioners under the Provident Fund Rules and to the five officer employees under their respective agreements is not an allowable deduction in computing the taxable profits of the petitioners for the purpose of excess profits tax is justifiable in law. " It appears that when the rule nisi came to be heard, the High Court of Bombay accepted the contentions of counsel for the Department, and modified the questions to those which have been stated at the commencement of this judgment. We mention this fact, because in the hearing before us, it was contended that the proper questions which arose from the order of the Appellate Tribunal were the questions which were formulated by the High Court in the rule nisi and not the ones which were subsequently set down when the rule was made absolute. A few further facts are necessary to indicate what exactly was the arrangement between the assessee company and the five employees with regard to payment of bonus to them and also wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 1940. It was also a question whether the Excess Profits Tax Officer could, under the powers conferred on him by rule 12(1) of First Schedule of the Excess Profits Tax Act, 1940, order that the deduction of excess profits tax should be made before applying the percentage. Rule 12(1) reads as follows. " In computing the profits of any chargeable accounting period no deduction shall be allowed in respect of expenses in excess 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. " In the assessment year 1944-45, which corresponded to the chargeable accounting period ending December 31, 1943, the Income-tax Officer had not allowed the claim of the assessee company with regard to excess profits tax in the income-tax assessment. In that year the Excess Profits Tax Officer also acting under rule 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, could be raised. The questions were accordingly, modified to the two questions which are set out in the beginning of this judgment, and which may, for convenience, be again reproduced : " 1. Whether in law, if there is an obligation on the employer to pay a certain bonus, the Excess Profits Tax Officer is bound to allow it as a deduction and is precluded from exercising his discretion under rule 12(1) of the First Schedule of the Excess Profits Tax Act. 2. If the answer to the first question is in the affirmative, whether on a true construction of the agreement between the assessee and its employees and the Provident Fund Rules, the assessee company is under obligation to pay the bonus without deducting the excess profits tax. Mr. Palkhivala who appeared for the assessee company contended that several matters were not in dispute in the present case. He argued that the genuineness of the agreements and the rules were not at any stage questioned, and that these agreements had come into existence long before the passing of the Excess Profits Tax Act. He drew attention to the recognition granted by the Commissioner of Income-tax to the Provident Fund Regulations when they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess Profits Tax Officer was rested on a decision of the Bombay High Court reported in Walchand Co. Ltd. v. Hindustan Construction Co. Ltd., in which the object underlying the calculation of excess profits tax was analysed by Chagla, C.J. Having quoted from the judgment of Chagla, C. J., the Excess Profits Tax Officer set down rule 12 of First Schedule of the Excess Profits Tax Act, and observed as follows : " In the light of the observations of the Chief Justice in the case of Walchand Co. Ltd. quoted above the payments of bonuses on the basis of net profits as per balance sheet without deducting excess profits tax is clearly both unreasonable and unnecessary within the meaning of rule 12 of Schedule I of the Act. The employer and the employee cannot divide the profits including the item of excess profits tax payable which the employer himself is not allowed to retain. As required by proviso to rule 12 of Schedule I after obtaining the prior authority of the Commissioner of Excess Profits Tax, the excess of bonuses payable arrived at on the basis of excess profits tax payable on balance-sheet profits without deduction of excess profits tax has been disallowed under rule 12 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the percentage of bonus to salary ranged between 412 to 884 per cent., if payment was calculated before deducting the excess profits tax. In the case of the fifth employee to whom no salary was paid in the year, a sum of no less than Rs. 2,46,260 was paid as bonus in the relevant year. He also showed that the percentage of the provident fund contribution to salary ranged from 56 per cent. to 553 percent. and this, according to him, was also excessive. He therefore concluded as follows : " From the figures supplied in the attached lists, it may kindly be seen that the contribution by the company as bonus not only exceeds the contributions of the employees but is several times more than the annual salaries paid to the employees. If such excessive payments as claimed were foreseen at the time when the recognition was given, the Commissioner of Income-tax while recognising the fund would not have recognised the fund without this rule (rule 10 of the Provident Fund Rules) and basis being changed. From the above facts, it is clear that the payments made to the five employees and the 53 employees admitted to the benefits of the provident fund are clearly excessive having regard to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that there was evidence on which the Tribunal could reach the conclusion that the payments were unreasonably high, having regard to the requirements of the business. The Excess Profits Tax Officer had prepared schedules showing the proportion of bonus or additional payments to the salary of these employees and also the proportion of the provident fund contributions to salary and had stated that in no other concern such extraordinarily high payments were being made. The Tribunal also examined one of the employees of the assessee company who was present, and collected data in relation to some typical cases. All this material was before the Tribunal when it gave its finding. The schedules which are appended to the order of the Excess Profits Tax Officer's remand report speak volumes. The payments even in the lowest cases seem extraordinarily high, and cannot be justified as dictated by the requirements of the business. There was again the practice of other concerns similarly situated to make a comparative study. The Excess Profits Tax Officer on a view of the matter held that it was not reasonable to apply the percentage before deducting the taxes. The process of his reasoning wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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