TMI Blog1958 (10) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... ould answer the question framed in the affirmative. Appeal allowed. - - - - - Dated:- 3-10-1958 - Judge(s) : A. K.SARKAR., GAJENDRAGADKAR., VENKATARAMA AIYAR JUDGMENT The judgment of the court was delivered by SARKAR, J.--By an agreement made in 1936, the assessee company appointed a firm as its managing agents. The agreement provided that the managing agents would be remunerated in the manner following : "In consideration for acting as managing agents the company should pay to the firm remuneration at Rs. 750 p.m. or such principal sum as may from time to time be deemed reasonable by the directors and in addition a commission equal to 10% of the annual net profits. Such net profits will be arrived at after allowing the working expenses, interest on loans and due depreciation, but without setting aside anything to reserves or other special funds. " The question is whether the commission payable to the managing agents under this agreement is to be ten per cent. of the profits of the assessee without deduction of the excess profits tax payable by it on its profits or after deduction. The question has arisen in the course of the assessment of excess profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er something more, namely, excess profits tax, can be deducted. Working expenses, interest on loans and due depreciation have however been expressly made deductible in ascertaining the net profits. If these are all the deductions that can be made, excess profits tax cannot be deducted for it does not come under any one of them. But it seems to us that the agreement was not intended to lay down all the deductions that can be made. It is not in dispute that expenses like overhead expenses, litigation expenses and similar other expenses properly incurred for carrying on the business can be deducted in arriving at the net profits. These would not be included within "working expenses" for that expression is usually understood as referring to expenses debitable to the trading account as having been incurred directly in making the income shown there. If this were not the sense in which the expression "working expenses" was used and it was meant to cover all revenue expenses incurred, then there would have been no need to mention interest on loans and depreciation separately, for these latter would have been included as revenue expenses in the expression "working expenses". We are therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, that part of the profits which is taken away by the State as excess profits tax is not available either to the master or the servant and cannot therefore be divided between them. It is said that the agreement cannot be construed in this way because that would be adding a word to it ; the word 'divisible', not being there, is introduced into the agreement to support this construction. This however is not so. No word is being introduced but the words used are only being explained. It is only stating that the parties meant by " net profits ", the divisible profits. It is really stating the same thing in different words. It is also no objection to the view that we take, that excess profits tax is a part of the profits itself. It perhaps is so but it is no part of the " net profits " contemplated by the parties. It is a part which has to be deducted in arriving at the net profits, that is to say, the divisible profits which alone the parties had in mind. As a matter of construction of the agreement before us,--and we do not think that the question involved in this case can be decided in any other way--therefore, we come to the conclusion that the " net profits " mean the div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also turned on the language of the agreement involved in it and is not therefore of any great assistance. The Indian cases mentioned earlier were also decided on the agreements with which they were concerned. In the James Finlay Co. Ltd. case, the agreement provided that the " net profits " were to be ascertained before setting aside any sum " for payment of income-tax, super-tax or any other tax on income ". It was held that " any other tax on income " included excess profits tax which could not therefore be deducted. Beaumont, C.J., observed in this case that it having been held that income-tax being something which is payable out of the profits and not a liability to be deducted in ascertaining the profits, it was difficult to explain why the same principle should not apply to excess profits duty. He also said that a distinction had been made between the two taxes in the English cases, to some of which we have earlier referred, but he did not think it necessary to consider whether all the grounds of distinction were sound, because in the case before him he thought that excess profits tax had been expressly dealt with. In the Walchand Co. Ltd. case the agreement was very m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to deduct the income-tax before you ascertain what the profit is. I cannot understand how you can make the income-tax part of the expenditure. " Now it seems to us that there is nothing in the Ashton Gas Co. case which prevents us from holding that in ascertaining the net profits for the purpose of the agreement that is before us, excess profits tax has to be excluded. That was not a case of profit sharing. It was not concerned with deciding what sums are deductible in arriving at the divisible profits in a profit sharing agreement. That is what we have to decide. Therefore we think that the Ashton Gas Co. case does not assist in answering the question that has arisen in this case. Nor do we think it necessary in the present case, as we have said earlier, to decide whether there are distinctions between income-tax and excess profits tax. We are not concerned with the question whether income-tax should be deducted before the net profits under the agreement can be ascertained. We will assume that it cannot be. It is common sense and also firmly established on the authorities to which reference has already been made, that in ascertaining the divisible profits excess profits tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the appellant that even if the net profits mentioned in the agreement were not the divisible profits and even if income-tax could not be deducted to ascertain these profits, excess profits tax was a proper deduction to be made. It was said that excess profits tax was for this purpose different in nature from income-tax, for, (a) under section 12 of the Excess Profits Tax Act, 1940, excess profits tax was deductible as an expense for the purpose of income-tax assessment ; (b) that where the employer is a company, as in the present case, the income-tax paid is refundable to the shareholders which excess profits tax is not ; (c) that excess profits tax is a "debt" of the business and therefore an outgoing, and (d) that it was in the nature of a licence fee upon the payment of which alone the business could be carried on. It is unnecessary to consider these points as in our view the net profits in this case were the divisible profits and whether excess profits tax is distinguishable from income-tax for any of these reasons or not, it is properly deductible. We should also refer to an argument advanced by the assessee which was founded on section 87C of the Indian Companies Act, ..... 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