TaxTMI 
TaxTMI 
TaxTMI 
1954 (1) TMI 31
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.... letter dated 17th April, 1940, and 30th March, 1943, and the conduct of parties, the excess profits tax payable by the assessee should be deducted from the profits before the commission of 12½ per cent. payable to N.M.R.V. Mahadevan is calculated." Question No. 2 is:- "Whether there was any material before the Tribunal to hold that the commission payment to N.M.R.V. Mahadevan at 12½ per cent, before deduction of excess profits tax or business profits tax was not wholly and exclusively laid out for the purpose of the assessee's business, and 3. Whether the commission payments to the branch managers and other employees is an expenditure laid out wholly and exclusively for the purpose of the business?" Question No. 2 in Referred Case No. 53 of 1952 is:- "Whether there is any material on evidence sufficient in law for the Appellate Tribunal to hold that the commission of 12½ per cent. on profits paid to Mahadevan was unreasonable within the meaning of Rule 12 of Schedule 1 of the Excess Profits Tax Act." Question No. 3 relates to the payment of commission to branch managers. In both the references, on ultimate analysis, the q....
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....rs in the Imperial Chemical Laboratory at Bombay, was appointed as General Manager of Colours Trading Company. On the same date, there was an agreement of employment executed by one of the partners in favour of Mahadevan. The terms of his employment were that he should get ₹ 1,800 per annum as remuneration, besides 5 per cent. of the net profits of the concern, calculated by deducting from the gross profits of the business the salaries and wages and other outgoings without making any deduction from capital. The agreement was to take effect from 13th April, 1940, the commencement of the partnership. After some time, on the representation of Mahadevan, that his remuneration was inadequate and was not commensurate with the responsibilities which he undertook, his remuneration was increased with effect from 13th April, 1943, as evidenced by the letter of the company dated 30th March, 1943. Under this arrangement he was to get an increased salary of ₹ 250 per mensem or ₹ 3,000 per year "for the present", and a commission at 12½ per cent. on the net profits of the Colours Trading Company from 13th April, 1943. He was required by this agreement to devote....
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....ers of the assessee firm. As they had no sub-distributors and as practically the managers of each branch were in the analogous position of sub-distributors, from the emergency commission allowed under the arrangement of 1944 the assessee firm allowed to its employees, the branch managers and assistant managers, a commission of 4 per cent. over and above their basic salary, the dearness allowance, and the Deepavali bonus which it was already allowing. The firm entered into agreements with the employees between 10th February, 1944, and 1st May, 1944, providing for the payment of commission with effect from 13th April, 1944, calculated with reference to the year's turnover of the branch, and at rates varying from 1½ per cent. to 4 per cent. There was however a requirement under the agreements, that the remuneration shall be payable for any year if the total amount of sales of dyes in the said branch exceeded one lakh of rupees; but if it was below, unless in special cases, the commission should not be allowed; but there was absolute discretion reserved to the employers to allow in such cases the commission at 4 per cent. even if the turnover of the business at each branch d....
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....rofits tax assessment for the corresponding chargeable accounting period ending 12th April, 1942, the salary and commission were allowed by the Income-tax Officer and the Excess Profits Tax Officer. During the assessment year 1943-44 and 1944-45 the increased commission payment to Mahadevan, calculated at 12½ per cent. of the net profits of the Colours Trading Company, was disallowed by the Income- tax Officer, and the same was disallowed also by the Excess, Profits Tax Officer in the chargeable accounting periods ended 12th April, 1944, 12th April, 1945, and 31st March, 1946. The amounts claimed as deduction during these periods were ₹ 13,815, ₹ 28,768 and ₹ 14,205 respectively. When the matter finally reached the Appellate Tribunal on a reference under the Excess Profits Tax Act, the Tribunal held that, so far as Mahadevan was concerned, there was no justification for the entire disallowance of the commission by the Excess Profits Tax Officer, but that at the same time there was no justification for the claim of the assessee for an increase in commission from 5 per cent. to 12½ per cent. They, however, directed that Mahadevan should be paid 5 per ....
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.... if it had not been paid as bonus or commission : Provided that the amount of the bonus or commission is of a reasonable amount with reference to- (a) the pay of the employee and the conditions of his service; (b) the profits of the business, profession or vocation for the year in question; and (c) the general practice in similar businesses, professions or vocations." Section 10(2)(xv) of the Income-tax Act is as follows: "any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out, or expended wholly and exclusively for the purposes of such business, profession or vocation." Rule 12 of Schedule 1 of the Excess Profits Tax Act, 1940, is as follows:- "1. In computing the profits of any chargeable accounting period no deduction shall be allowed in respect of expenses in excess of the amount which the Excess Profits Tax Officer considers reasonable and necessary having regard to the requirements of the business and, in the case of directors' fees or other payments for services, to the actual services rendered by the person concerned: Provided that no disallowance under this rule shall be made by....
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....r that section to determine a reasonable amount as deduction. But in doing so, it has to take not of the three circumstances or considerations specified in the proviso to Section 10(2)(x). It is the cumulative effect of these considerations which should govern the determination of a reasonable amount under that clause. The only considerations therefore are the pay of the employee, the conditions of his service, the profits of the business for the year in question, and the general practice in similar businesses. the scope of Section 10(2)(xv) is entirely different from that of Section 10(2)(x) of the Income-tax Act. Neither the test prescribed by Section 10(2)(xv), that the amount is wholly and exclusively laid out or expended for the purpose of such business, nor the ancillary test of commercial expediency is strictly germane to the consideration of the reasonableness of the deduction claimed for amounts paid out as bonus or commission. If under Section 10(2)(x) of the Income-tax Act the commission or bonus paid to an employee is held to be a lawfully claimable deduction in whole or in part, what the effect of such a decision is on the application of Rule 12 of Schedule 1 of the E....
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....s transaction was voluntarily entered into in order indirectly to facilitate the carrying on of the business of the company and was made on the ground of commercial expediency." The same view was taken by the Bombay High Court in Tata Sons Ltd. v. Commissioner of Income-tax([1950] 18 I.T.R. 460), which was a case Section 10 (2)(xv) of the Income-tax Act. The question that arose for consideration was whether the voluntary payment by the managing agent of a certain sum of money as his share of the bonus, which the managed company paid to some of its officer, was a permissible deduction under Section 10(2)(xv) of the Income-tax Act. As the assessee, the managing agent, did not directly pay the bonus to the employees, the claim could not naturally be considered under Section 10(2)(xv). The bonus was directly paid by the managed company to its employees, but the managing agent was required to contribute his share of the payment under the terms of the arrangement between the managed company and the managing agent. Chagla, C.J., observed at page 467:- "Now, the decided cases show that one has not got to take an abstract or academic view of what is proper expenditure laid out ....
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....person who actually runs a huge growing concern, like the business of the Tatas in the case above referred to, and may not always be fully appreciated and sympathetically viewed by one unconnected with business. the "requirements of the business" as laid down in Rule 12 of the First Schedule of the Excess Profits Tax Act are, in our opinion, also to be judged against the same background, and the same principles have to be applied as under Section 10(2)(xv). We have already pointed out that there is not much difference in principle between the requirements of Section 10(2)(xv) and those of Rule 12 of Schedule 1 of the Excess Profits Tax Act. Both attract the justification of expenditure on grounds of commercial expediency, and to that extent, at any rate, there should be no difference at all. We find it rather difficult to envisage a position where an expenditure satisfies the test of Section 10(2)(xv), an expenditure incurred wholly and exclusively for the purpose of the business, not satisfying the test of Rule 12(1), an expenditure reasonable and necessary having regard to the requirements of the business. In our opinion, "wholly and exclusively" in Section 1....
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....re, still it might be an expenditure which was reasonable and necessary having regard to the requirements of the business within the meaning of Rule 12(2). We have already pointed out that the test of commercial expediency is not germane to an enquiry into a claim under Section 10(2)(x), but it is a very relevant consideration in the application of Rule 12 of Schedule 1 of the Excess Profits Tax Act. If it is open to the Excess Profits Tax Officer under Rule 12 to disallow what was already allowed under Section 10(2) (x) it should be equally open to him to allow what was once disallowed, because the test in Rule 12 is not identical with that prescribed by Section 10(2)(x) of the Income-tax Act. We are therefore unable to accept the contention of Mr. Rama Rao Sahib that the only jurisdiction of the Excess Profits Tax Officer under Rule 12 is to disallow what was allowed under Section 10(2)(x) of the Income-tax Act. Even if a claim fails to satisfy the requirements of Section 10(2)(x) of the Income-tax Act, it is for the Excess Profits Tax Officer to decide whether it satisfied the requirements of Rule 12 of Schedule 1 of the Excess Profits Tax Act. It is in the light of the discuss....
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....ts tax must be excluded, and 12½ per cent. must be calculated on the balance, while the contention of the assessee was that the excess profits tax should not be deducted in order to arrive at the net profits. We have to decide which of the contentions is correct. The Tribunal followed the decision of the Bombay High Court in Walchand & Co. Ltd. v. Hindustan Construction Co. Ltd.( [1944] 12 I.T.R. 104) That decision was based upon the majority view of the House of Lords in L.C. Ltd. v. G.B. Ollivant, Ltd.( [1945] 13 I.T.R. Suppl. 23) Viscount Simon, L.C., took a different view. It cannot now be disputed that in arriving at net profits, they ought to be calculated inclusive of and not exclusive of the amount payable for the year in respect of income-tax. This is settled by the House of Lords in Ashton Gas Company v. Attorney-General([1906] A.C. 10.). As observed by the Earl of Halsbury, L.C., in that case, "Now the profit upon which the income-tax is charged is what is left after you have paid all the necessary expenses to earn that profit. Profit is a plain English word; that is what is charged with income-tax. But if you confound what is the necessary expenditure to ....
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....ring to the decision relating to income-tax in Ashton Gas Co. v. Attorney-General([1906] A.C. 10): "Why is not the same thing true about excess profits tax? Varying a famous phrase of Lord Macnaghten in London Country Council v. Attorney-General([1901] A.C. 26, 35), I venture to observe that excess profits tax, if I may be pardoned for saying so, is a tax on profits. It is a tax (very elaborately calculated it is true) on profits, for it is a tax on excess profits--it skims the cream of profits, so far as they are in excess of the standard profit." From an examination of the provisions of the Excess Profits Tax Act, it will be seen that it is a tax on profits. That is, a share in the profits is taken by the State as a tax. The net profits must therefore be ascertained in accordance with the principles of commercial accountancy and the principles laid down under the Excess Profits Tax Act. It is from that that the tax is taken by the State. The distributable profits are arrived at only after the tax is appropriated from the net profits. For the reasons given by Viscount Simon in the decision referred to above, we think, with great respect to the majority opinion, that t....