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TMI Blog1958 (10) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... by it on its profits or after deduction. The question has arisen in the course of the assessment of excess profits tax payable by the assessee. The Excess Profits Tax Officer held that the commission has to be ascertained on the profits remaining after deduction of excess profits tax. This view was upheld by the Appellate Assistant Commissioner on an appeal being taken to him by the assessee. On a further appeal by the assessee to the Appellate Tribunal it was held that the commission has to be ascertained on the profits without any deduction of the tax. The revenue authorities then applied for and obtained an order from the Tribunal referring the following question for decision by the High Court : "Whether on a true construction of the managing agency agreement between the assessee company and its managing agents entered into in 1936, the relevant clause of which is quoted above, the excess profits tax payable should be deducted from the profits of the company for the purpose of arriving at the annual net profits of which a percentage should be paid to the managing agents as their commission." The High Court answered the question in the negative. The present appeal is by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or these latter would have been included as revenue expenses in the expression "working expenses". We are therefore inclined to think that there are other items besides those expressly mentioned, which have to be deducted before the net profits can be arrived at. What then are these other items ? That will depend on what the parties must be taken to have had in mind when they used the words " net profits". The intention of the parties as to what they meant by these words can be best gathered by trying to find out what they were about in making the agreement. The parties were a master and a servant and they were fixing the remuneration of the servant. They decided that, profits or no profits, the servant would have a certain fixed sum per month. They also agreed that the servant would, besides the fixed sum, have a certain portion of the net profits. The net profits, whatever they were, would of course be a variable figure ; in some years they would be more or less than in other years. The parties therefore agreed that the remuneration of the servant would increase or decrease as the net profits were larger or smaller. But why did they do so? Obviously because they thought that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se can be decided in any other way--therefore, we come to the conclusion that the " net profits " mean the divisible profits and are to be ascertained after deduction of excess profits tax which is payable by the assessee. That is how the matter strikes us apart from any authority. We now turn to some of the authorities which were cited at the bar. They are In re Condran : Condran v. Stark, Patent Castings Syndicate Ltd. v. Etherington, Vulcan Motor and Engineering Co. v. Hampson, In re G. B. Ollivant & Co. Ltd.'s Agreement, James Finlay & Co. Ltd. v. Finlay Mills Ltd. and Walchand & Co. Ltd. v. Hindusthan Construction Co. Ltd. These cases however all turn on the construction of the agreements involved in them. They are therefore not of much assistance in construing the agreement that we have before us, for, each agreement has to be construed according to the words contained in it and the circumstances in which it was made. The judgment in In re G.B. Ollivant & Co. Ltd.'s Agreement referred to earlier is that of the House of Lords. In the judgment delivered in this case by the Court of Appeal in In re G. B. Ollivant Co. Ltd.'s Agreement, which was affirmed by the majority of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excess profits tax had been expressly dealt with. In the Walchand & Co. Ltd. case the agreement was very much like the agreement that we have before us. It provided that the managing agents would be paid ten per cent. of the annual net profits earned by the company and also stated that in arriving at the net profits certain deductions would be made which included the working expenses and that certain other deductions would not be made, but no mention was made of excess profits tax as being deductible or otherwise. Beaumont, C.J., who was a member also of the Bench which decided this case, held that the agreement was a profit sharing agreement and the net profits had to be ascertained after deducting excess profits tax. Now we do not refer to these judgments as supporting anything that we say but because the High Court unwittingly fell into the error of thinking that the Walchand & Co. Ltd. case came before the James Finlay & Co. Ltd. case and that in the latter case Beaumont, C.J., had doubted the correctness of what he had said in the former. These observations are wholly wrong because the James Finlay & Co. Ltd. case was decided long before the Walchand & Co. Ltd. case I had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which reference has already been made, that in ascertaining the divisible profits excess profits tax has to be deducted. As we have construed the agreement in this case, net profits mean the divisible profits and therefore they can be arrived at only after deduction of excess profits tax. We wish now to refer to the minority opinion in the House of Lords in In re G.B. Ollivant & Co. Ltd.'s Agreement on which the High Court seems largely to have based its decision. The dissenting opinion of Viscount Simon, L.C., arose from the fact that he did not think that the word "Profits" in the agreement then before the House meant the divisible profits. With the reasons for this view we are not concerned for these turned on the wording of that agreement. Having held that the word "Profits" did not mean the divisible profits, he proceeded to consider whether excess profits tax could be deducted in ascertaining the net profits and in doing so said that as income-tax could not be deducted as held in the Ashton Gas Co. case, neither could excess profits tax, for, both were parts of the profits. He also said that the Court of Appeal was wrong in thinking that excess profits tax could be debited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an argument advanced by the assessee which was founded on section 87C of the Indian Companies Act, 1913, introduced by an amendment made in 1936, which provides that the remuneration of the managing agents of a company shall be a fixed percentage of its net annual profits, and that in calculating the net profits no deduction in respect of any tax or duty on income is to be made. It is said that the statute incorporates the universal commercial practice and therefore in construing the present agreement excess profits tax cannot be deducted. We are not aware whether the section incorporates any practice but we think that this contention is entirely unfounded for the section was applied only to a managing agency agreement made after the amending Act came into force, while the agreement in the present case was made before that date. Lastly, we have to point out that nothing turns on the fact that at the date the agreement under consideration was made, the Excess Profits Tax Act had not come on the statute book nor perhaps been thought of, and, therefore, could not have been in the contemplation of the parties. If the net profits are the divisible profits, everything necessary to be e ..... X X X X Extracts X X X X X X X X Extracts X X X X
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