TaxTMI 
TaxTMI 
1960 (12) TMI 11
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....branch offices in different towns in " South India. " The business was carried on originally in partnership by three brothers, N. M. R. Venkatakrishna Iyer, N. M. R. Subbaraman and N. M. R. Krishnamurti. On April 13, 1946, N. M. R. Subbaraman retired from the firm and the share of N. M. R. Venkatakrishna Iyer was taken over by a private limited company, N. M. R. Venkatakrishna Iyer & Sons Ltd., but the business was, notwithstanding the changes in the personnel, continued in the original name and style. One N. M. R. Mahadevan (son of N. M. R. Venkatakrishna Iyer)--hereinafter referred to as Mahadevan--was employed by the assessees as the general manager of the Colours Trading Co. By letter dated April 17, 1940, the assessees wrote to Mahadevan agreeing to pay him remuneration at the rate of Rs. 1,800 per annum and 5% of the net profits of the concern (Colours Trading Company) calculated by deducting from the gross profits of the business, salaries, wages and other outgoings but without making any deduction for capital. By letter dated March 30, 1943, the salary of Mahadevan was fixed at Rs. 3,000 per annum and the commission was enhanced to 12 1/2% of the net profits of the Colours ....
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....rness allowance and special bonus which in the aggregate exceeded 50% of the basic annual salary and also annual bonus equal to the annual salary. The result of this revision of emoluments was that each employee received an amount equal to at least 2 1/2 times his enhanced basic salary. In addition to this remuneration, the assessees claimed that they had paid a share in the commission which in some cases exceeded 12 times the basic salary. In computing the total income of the assessees for the years 1943-44 and 1944-45 for purposes of income-tax, the Income-tax Officer disallowed the payment of 12 1/2% of the net profits of the Colours Trading Co. to Mahadevan and in computing the income for the assessment years 1945-46, 1946-47, 1947-48 and 1948-49 the Income-tax Officer disallowed the commission paid to the branch managers and other employees. In appeal the Appellate Assistant Commissioner set aside the order which disallowed the amount of commission paid to Mahadevan and following the order of the Income-tax Appellate Tribunal in certain excess profits tax appeals, allowed 5% of the net profits without deduction of excess profits tax or business profits tax, or 12 1/2% after ....
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.... the Excess Profits Tax Act as from March 30, 1946) were on the questions arising in this case substantially the same and hereafter reference to the Excess Profits Tax Act will in respect of the period after March 30, 1946, be deemed to be a reference to the Business Profits Tax Act. In the opinion of the High Court, in computing the taxable income, the deductions claimed by the assessees fell to be considered not under section 10(2)(xv) of the Income-tax Act but properly under section 10(2)(x) of the Income-tax Act, the latter being a specific provision in the Act relating to deduction of commission or bonus paid to an employee. The High Court observed that in assessing liability to excess profits ; tax the bonus or commission paid to the employees of the taxpayer may be permitted as a deduction in the light of section 10(2)(x) of the Income-tax Act and rule 12 of Schedule I to the Excess Profits Tax Act. The case of Mahadevan, according to the High Court, did not present much difficulty, the only question which fell to be determined in his case being whether in allowing deduction of commission at the rate of 12 1/2% on the net profits, the excess profits tax paid by the assesse....
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.... minima recommended by the I. C. I. did not provide the only or an absolute standard for judging the reasonableness of the payments made, and stated : " No doubt, the employees of the assessee were in receipt of regular salaries and bonuses. But then, a sub-distributor, if he had not been paid a salary, would have had to be paid a share of the basic commission itself. What the assessee got in the years in question was in the nature of a windfall. It shared it with its employees. It had been instructed to share it. The emergency commission was allowed by the I.C. I. so that the distributors could maintain the reputation of the I.C.I. in the market even under the disturbed conditions that prevailed in those years. If, to maintain that reputation and to maintain its own, the assessee paid to its employees, even on a liberal basis, a share of that emergency commission, it is a little difficult to hold that, while receipt of the emergency commission was reasonable, sharing it beyond a particular point would be per se unreasonable, in the sense that no prudent businessman in that line of business, in those years, and in the market conditions that prevailed then, with ample scope for bl....
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....greement or in the context justifying the view that in the expression " outgoings " is not included the excess profits tax paid by the assessees. In Commissioner of Income-tax v. Delhi Flour Mills Co. Ltd. was observed by this court in construing a similar agreement that the excess profits tax was a part of the profits itself, but it was no part of the net profits contemplated by the parties ; if it was a part which had 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 the net profits meant divisible profits and were to be ascertained after deduction of excess profits tax. Counsel for the Revenue has not challenged the decision of the High Court that in computing taxable income for the purpose of income-tax, commission paid to the various employees is a permissble deduction under section 10(2)(x) of the Income-tax Act. The only question which survives on this branch for consideration is, therefore, whether those deductions are permissible in the assessment of excess profits tax. By section 21 of the Excess Profits Tax Act, amongst other provisions, section 10 of the Income-tax....
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....s incorporated. Profits of a business for purposes of Excess Profits Tax Act have to be ascertained by reference to section 10 of the Income-tax Act modified to the extent directed by Schedule I of the Excess Profits Tax Act. By clause 12 of Schedule I of the Excess Profits Tax Act, a deduction in respect of expenses in excess of the amounts which the Excess Profits Tax Officer considers reasonable and necessary having regard to the requirements of the business and in the case of payments for services to the actual services rendered by the persons concerned, is not to be allowed. The deduction to be allowed, it is true, does not depend upon any subjective satisfaction of the Excess Profits Tax Officer, but on objective standards as to what is reasonable and necessary having regard to the requirements of the business and in the case of payments for services to the actual services rendered by the persons concerned. The order passed by the Excess Profits Tax Officer is open to review by the Tribunal to which appeal against the order of the Excess Profits Tax Officer lies. But in considering whether the deduction is properly claimed, the primary duty is vested by the Legislature in t....
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....erved that while the net profit according to the profit and loss account of the firm was Rs. 20,487 leaving a share of Rs. 6,800 only to each of the partners, some of the managers got more than this amount. It appears that the Excess Profits Tax Officer committed an error in so observing. The profits of the Colours Trading Co., as disclosed by the order of assessment for the year 1945-46, were Rs. 99,435 and not Rs. 20,487 ; but that error did not affect the ultimate conclusion recorded by the Excess Profits Tax Officer. According to the books of account of the assessees for the year 1943-44 of the business in dyes, the profits were Rs. 99,435 and they claimed to have distributed a commission of Rs. 1,00,715 to their employees out of the emergency commission, which was prima facie wholly disproportionate to the amount received by them. The order passed by the Excess Profits Tax Officer was confirmed in appeal by the Appellate Tribunal. In the view of the Appellate Tribunal, no additional incentive was required to sell dyes and chemicals in the years in question because dyes and chemicals were in short supply and there was a rise in demand. The Tribunal also referred to the table ....
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.... One Themaswamy was paid annually commission varying from Rs. 15,000 to Rs. 23,000 when his basic salary was Rs. 2,100 per annum; one K. N. Rajagopalachari was paid commission varying from Rs. 16,000 to Rs. 12,000 when his basic salary was Rs. 1,260 per annum; one S. L. Radhakrishnan was paid commission varying from Rs. 5,700 to Rs. 13,000 when his salary varied between Rs. 516 and Rs. 636 per annum and one K. R. Rama Rao was paid commission varying from Rs. 4,600 to Rs. 10,520, his salary being Rs. 492 and later increased to Rs. 612 per annum. There was thus ample evidence in support of the conclusion of the Excess Profits Tax Officer which was confirmed by the Tribunal. As we have already observed, it is the province of the Excess Profits Tax Officer and the Tribunal to assess the permissible deductions in the context of reasonableness and necessity having regard to the requirements of the business and interference with the conclusion is permissible if the view of the taxing authorities is vitiated by an error of law or is not based on any materials, or the conclusion is such that no man instructed in law could have arrived at. It is true that in considering whether the deducti....