Net profits for managing agents' commission exclude excess profits tax, and section 87C did not apply to the pre-amendment appointment.

Where a managing agency agreement and revised article 83 fixed commission by reference to "net profits," that term was construed according to the instrument's own language, and excess profits tax was held not deductible before computing the commission base. The decision also held that section 87C of the Indian Companies Act, 1913 did not apply to a managing agency appointment made before that provision commenced. On both issues, the reference was answered in favour of the assessee, confirming the commission calculation and excluding the later statutory restriction from the pre-amendment arrangement.

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Issues: (i) Whether excess profits tax was to be deducted before arriving at the net profits on which managing agents' commission was payable under the managing agency agreement read with revised article 83 of the articles of association; (ii) whether section 87C of the Indian Companies Act, 1913 applied to the managing agency arrangement.

Issue (i): Whether excess profits tax was to be deducted before arriving at the net profits on which managing agents' commission was payable under the managing agency agreement read with revised article 83 of the articles of association.

Analysis: The remuneration clause defined the basis of commission as a fixed percentage of the company's net profits after specified deductions. The expression "net profits" had to be construed from the language actually used in the agreement and the articles. On that construction, and following the governing interpretation of a similarly worded provision, excess profits tax did not form a deduction to be made before computing the net profits for commission purposes.

Conclusion: Excess profits tax was not deductible before arriving at the net profits for payment of the managing agents' commission, and this issue was decided in favour of the assessee.

Issue (ii): Whether section 87C of the Indian Companies Act, 1913 applied to the managing agency arrangement.

Analysis: The managing agents had been appointed before the commencement of the amendment which introduced section 87C. That provision was framed to govern appointments made after its commencement and therefore did not extend to prior appointments.

Conclusion: Section 87C of the Indian Companies Act, 1913 did not govern the case, and this issue was decided in favour of the assessee.

Final Conclusion: The reference was answered by holding that excess profits tax was not to be deducted in computing the commission base and that the statutory provision relied upon had no application to the pre-amendment appointment.

Ratio Decidendi: Where a contract or articles define commission by reference to "net profits", the term must be construed according to the instrument's own language, and a later statutory provision governing managing-agency remuneration does not apply to appointments made before its commencement.

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