1950 (5) TMI 38 - HC - Income Tax

Firm liable for excess profits tax on agency income but not shop salary; reimbursed expenses to be added to income.

The court held that the applicant-firm was liable to be assessed for excess profits tax on income from the selling agency business of Cawnpore Cotton ... - Issues Involved:1. Liability of the applicant-firm to be assessed to excess profits tax on income from the selling agency of Cawnpore Cotton Mills Co.2. Liability of the applicant-firm to be assessed to excess profits tax on income from the running or management of the retail cloth shop of Cawnpore Cotton Mills Co.Issue-wise Detailed Analysis:1. Liability of the applicant-firm to be assessed to excess profits tax on income from the selling agency of Cawnpore Cotton Mills Co.:The core question was whether the income derived from the selling agency business should be treated as business profits or salary. The applicant-firm contended that the income was salary for services rendered, thus exempt from the Excess Profits Tax Act. However, the Excess Profits Tax Officer, the Appellate Assistant Commissioner, and the Income Tax Appellate Tribunal all classified the income as business profits, making it liable for excess profits tax.The court examined the nature of the relationship between the firm and the British India Corporation, Limited, focusing on the degree of control exercised. Despite some control elements, such as requiring approval for sales and not dismissing certain employees without permission, the court found that the firm operated independently in significant aspects, such as choosing employees, entering contracts, and bearing financial liabilities. These factors indicated that the firm was running its own business rather than acting as a servant of the Corporation.The court concluded that the selling agency business was indeed the firm's own business, and the income derived from it was business profits, not salary. Therefore, the firm was liable to be assessed to excess profits tax on this income.2. Liability of the applicant-firm to be assessed to excess profits tax on income from the running or management of the retail cloth shop of Cawnpore Cotton Mills Co.:The facts regarding the retail cloth shop were different. The shop was owned by the Cawnpore Cotton Mills Company, and there was no written agreement outlining the firm's responsibilities or remuneration. The firm argued that any payment depended entirely on the discretion of the Corporation, implying no fixed share in the profits.The court found that the firm was managing the shop as a servant of the Corporation, not as an independent business. Consequently, any payment received for managing the shop should be treated as salary, not business income. The sum of Rs. 27,030-15-0 paid to the firm was thus considered salary and not liable to excess profits tax.However, the Tribunal noted that this amount exceeded the expenses incurred on advertisement and salaries of traveling representatives. The court ruled that the portion of the amount reimbursing these expenses should be added to the firm's business income for the purposes of assessing excess profits tax. The exact amount of such reimbursement needed determination.Conclusion:The court answered the question by stating that:(a) The applicant-firm is liable to be assessed to excess profits tax on the income, profits, or gains derived from the selling agency business of Cawnpore Cotton Mills Company.(b) The applicant-firm is not liable to be assessed to excess profits tax on the income, profits, or gains derived from the running or management of the retail cloth shop of Cawnpore Cotton Mills Company. However, the income from the retail shop must be increased by the amount reimbursed for expenses on advertisement and salaries of traveling representatives.Reference answered accordingly.