Contractual profit computation excludes excess profits tax unless the agreement expressly requires deduction.

Where a contract requires profits to be computed according to ordinary commercial practice, excess profits tax is not deductible unless the agreement clearly says so. The majority treated the tax as a levy on profits already earned, not an expense incurred in earning them, and held that the contractual profits were to be ascertained before deducting that tax. The dissent considered the tax part of the ordinary commercial computation, but the prevailing interpretation gave effect to the contract's scheme and excluded the later-imposed war profits tax from the profit calculation used for instalments under the goodwill sale agreement.

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Issues: Whether excess profits tax was deductible in computing the profits of the purchasing company for the purpose of determining the instalments payable under the agreement for sale of goodwill.

Analysis: The agreement required the auditors to compute profits according to the general principles of ordinary commercial practice, subject to the special provisions of the contract. The majority held that the relevant profits were the profits ordinarily ascertained for a trading company in a profit and loss account, that excess profits tax was a tax on profits and not an expense incurred in earning them, and that the contract contemplated the ascertainment of profits before such tax was deducted. The dissenting view treated the tax as falling within the computation of profits under ordinary commercial practice and the contractual scheme.

Conclusion: Excess profits tax was not deductible in computing the contractual profits, and the appeal succeeded.

Final Conclusion: The contractual method of computing profits did not require deduction of a later-imposed war profits tax, so the annual instalment was to be calculated without reducing profits by that tax.

Ratio Decidendi: Where a contract directs profits to be computed according to ordinary commercial practice, a tax imposed on profits after they are earned is not to be treated as a deductible item in the computation unless the contract clearly so provides.

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