TaxTMI 
TaxTMI 
1959 (5) TMI 2
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....1) of the First Schedule of the Excess Profits Tax Act. 2. If the answer to the first question is in the affirmative whether on a true construction of the agreement between the assessee and its employees and the Provident Fund Rules, the assessee company is under obligation to pay the bonus without deducting the excess profits tax. " The facts out of which the reference arose were as follows : The assessee company is a limited liability company, and is one of the well-known manufacturers of textile goods. We are concerned with three chargeable accounting periods corresponding to the calendar years 1943, 1944 and 1945. While making the assessment of the assessee company, the Excess Profits Tax Officer found that large payments had been made to five of the employees of the company during the chargeable accounting periods. He also found that in the case of 53 employees of the assessee company, excessive contributions had been made by the company to their provident funds. These payments and contributions were on the basis of a percentage of the profits of the assessee company made in the years of account. In determining the profits on which the said percentage was to be calculated,....
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....ompany and the five employees with regard to payment of bonus to them and also what the existing rules were under which the company's contribution to the provident fund came to be made. The Tribunal in stating the case has forwarded five agreements entered into with the said employees. Of these, four agreements are between the years 1933 and 1935 and the fifth agreement is of 1944. In all these agreements, it is provided that the employee in question would receive in addition to the salary, if any, bonus or remuneration calculated at a certain percentage of the profit in accordance with the following formula: X per cent. of the profit of Block value Rs...... the company for the year x -------------------------------------------------------------------------------- Block for the year for which bonus or remuneration payable. The percentage of the block value is shown differently under different agreements, but that is not much to the purpose. There was, however, a condition which was common to all the agreements, by which it was provided that profits meant the company's profit for each complete official year of the company as shown in the balance-sheet for that year before ....
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....that year the Excess Profits Tax Officer also acting under rule 12 above quoted, disallowed the claim for excess profits tax assessment. In the two subsequent assessment years corresponding to the chargeable accounting periods ending December 31, 1944, and December 31, 1945, respectively, the Income-tax Officer computed the assessable profits by allowing bonus to the employees and contribution to the provident fund on the basis of net profits after deduction of excess profits tax. The Excess Profits Tax Officer also took the same action, but he did it not only on the acceptance of the assessment of the Income-tax Officer but also under special power conferred on him under rule 12 above quoted. The Excess Profits Tax Officer, however, did not give a finding of fact that the payments of bonus and contributions to the provident fund of the employees were in excess of the amount which he considered reasonable and necessary, having regard to the requirements of the business and in the case of bonus, to the actual services rendered by the persons concerned. When the matter came before the Income-tax Appellate Tribunal, Bombay, on appeal, it remanded the case to the Excess Profits Tax Off....
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....ner of Income-tax to the Provident Fund Regulations when they were enacted, and added that there was no dispute as to the meaning of the relevant conditions in the documents between the employer and the employees. He wound up this part of his argument by saying that the reasonableness of the percentage was also not questioned by the Department. He stated that the construction placed by the assessee company upon the agreements and regulations to the effect that the excess profits tax should not be deducted before the percentage was calculated was reasonable, regard being had to several decisions, including the opinion of Viscount Simon, L.C., and Lord Macmillan in L. C. Ltd. v. G. B. Ollivant, Ltd. He also referred to three decisions of the Indian High Courts in which a similar view was taken, viz., N. M. Rayaloo Iyer and Sons v. Commissioner of Income-tax, Commissioner of Income-tax v. Delhi Flour Mills Co. Ltd. and Western Hosiery & General Mills v. Commissioner of Income-tax. Reference was also made to the decision of the Allahabad High Court reported in Shyamlal Pragnarain v. Commissioner of Income-tax, as to what was meant by " reasonable " and what one must see before deciding....
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....on of excess profits tax has been disallowed under rule 12 of Schedule I as under : Bonuses paid to 6 employees : --------------------------------------------------------------------------------------------------------------------------------------------------- S. Name of the Bonus Pay- Bonus that would Excess of Date of No. Employee ment claimed be payable on the bonus agree- for the year basis of profits dis- ment 1943 after deducting allowed E. P. T. payable under on basis of bal- r. 12 of ance sheet profits Sch. I. --------------------------------------------------------------------------------------------------------------------------------------------------- Rs. Rs. Rs. 1. S. H. Gidwani 2,46,260 1,06,583 1,39,427 3-1-33 2. Bhogilal B. Shah 74,251 32,410 41,841 8-3-34 3. J. A. Gandhi 64,621 25,449 39,172 24-3-44 4. A.C. Shah 29,700 12,964 16,742 as sanc- tioned by directors. 5. A. N. Tankaria 14,850 6,482 8,386 ------------------ 53 employees admitted 2,45,550 to the benefits of Provident Funds' Scheme as per figures worked out in attached list. 2,40,733 1,04,043 1,36,690 ------------------ Total amount disallowed under rule ....
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....ly excessive having regard to the requirements of the business and the actual services rendered by the persons concerned within the meaning of rule 12(1) of Schedule I. " Learned counsel for the assessee, company contended that there was no evidence whatever, on which the conclusion that the payments were unreasonable could be justified, and that the matter was wrongly apprehended by the authorities. According to him, the Excess Profits Tax Officer could have acted on one of the two and only two grounds, viz. : (a) that the payment of percentage without deduction of excess profits tax was per se unreasonable and unnecessary ; or (b) that a payment to an individual employee or to his provident fund by the company was unreasonable or unnecessarily large, having regard to the requirements of the business. He contended that the Excess Profits Tax Officer had acted solely on the first ground and had thus acted not under rule 12 of Schedule I but on a rule of thumb which led to rather inconsistent and startling results in that a few hundreds of rupees paid to one employee came to be considered unreasonable but not tens of thousands of rupees paid to another employee. He stated th....