The Commissioner of Excess Profits
Tax, Madras Vs. N. M. Rayaloo Iyer & Sons [1960] INSC 277 (8 December 1960)
SHAH, J.C.
KAPUR, J.L.
HIDAYATULLAH, M.
CITATION: 1961 AIR 692 1961 SCR (3) 60
ACT:
Excess Profits Tax-Deductions-Remuneration of
managing agent-Percentage of net Profits less outgoings--Excess Profits tax, if
included in outgoings-Construction of agreement-Commission paid to branch
managers-Deduction when of 1922), ss. 10(2)(XV), 10(2)(x)-Excess Profits Tax
Act, 1940 (15 of 1940), ss. 2(16), 19, 21, Sch. 1, cl. (12).
HEADNOTE:
The respondents, a firm carrying on business
in dyes and chemicals under the name and style of Colours Trading Company, with
their head office at Madurai and thirteen branch offices in different towns,
were the chief representatives in South India of the products of the I. C. I.,
a manufacturing concern. M was employed as the General Manager of the
respondents and by virtue of an agreement, he was to be paid remuneration at
the rate of Rs. 3,000 per annum and 12-1/2% of the net profits of the company
calculated by deducting from the gross profits of the business the salaries,
wages and other outgoings. The branch offices were managed by local managers
and assistant managers who were paid in addition to monthly salary, annual and
special bonus and dearness allowance. The respondents received from the I. C.
I. commission at varying rates on the different-products sold to them and with
effect from April 1, 1944, the I.C.I. allowed a special emergency commission of
5% recommending that 1% out of the commission allowed may be passed on by the
respondents to their sub distributors. The respondents claimed to have
distributed to their employees commission pursuant to the recommendation of the
I.C.I. at rates varying between 2% and 7-1/2% and in some cases at a rate as
high as 12%. Though under the service agreement, commission was payable to the
employees only if the turnover exceeded Rs. 1,00,000 net in any year, the
respondents claimed to have paid them commission at generous rates even when
the turnover fell far short of that amount. In the year of account ending April
12, 1945, there was a revision of the scales of salaries of the employees, as a
result of which the employees received an amount equal to 2-1/2 times the
enhanced basic salary and also commission sometimes exceeding 12 times the
basic salary.
In computing the total income of the
respondents 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 61 profits to
M, and for the years 1945-49 he disallowed the commission paid to the branch
managers and other employees on the ground that taking into account all the
circumstances the remuneration paid to the employees was adequate and that any
additional commission paid was in excess of what was reasonable or necessary.
The Appellate Tribunal confirmed the order of the Income-tax Officer except in
the case of M to whom payment of 5% of the net profits without deduction of Excess
Profits Tax or Business Profits Tax, or 12% after deduction of Excess Profits
Tax or Business Profits Tax, whichever was higher, was regarded as permissible
deduction. The High Court, on reference, took the view, inter alia, that in
determining the net profits under the agreement with M, the excess profits tax
could not be deducted, that in considering the question whether the bonus or
commission paid to the employees in the present case might be permitted as a
justifiable deduction, in the light of S. 10(2)(X) Of the Income-tax Act and r.
12 of Sch.
1 of the Excess Profits Tax Act, the test of
reasonableness of the expenditure was to be judged from the point of view of a
business man and not by the application of any subjective standard of a taxing
officer, and that on an analysis of the materials furnished, there was nothing
per se unreasonable in the amounts of commission actually paid by the
respondents to the branch managers and assistant managers.
Held: (i) that the question whether in the
computation of the tax bale income, the commission payable to M under the
agreement entered into with him by the respondents should be allowed before
deducting the excess profits tax, depended on the true interpretation of the
agreement; the expression "outgoing" in the agreement was not
restricted to business or commercial outgoings but included the excess profits
tax paid by the assessees, and that, consequently, the net profits of which M
was to be given a percentage by way of commission should be computed after
deducting the excess profits tax paid.
Commissioner of Income-tax, Delhi v. Delhi
Flour Mills Co., Ltd., [1959] SUPP. 1 S.C.R. 28, relied on.
(2) that under cl. (12) Of Sch. 1 of the
Excess Profits Tax Act, 1940, it was for the Excess Profits Tax Officer,
subject to review by the Tribunal, to decide whether the deduction was
reasonable and necessary, having regard to the requirements of the business and
in case of payments for services, to the actual services rendered by the
persons concerned; it was not open to the High Court exercising its
jurisdiction on questions referred to it under the Excess Profits Tax Act, to
substitute its own view as to what may be regarded as reasonable and necessary
and to set aside the decision of the taxing authorities on a re-appreciation of
the evidence. If the High Court considered that the taxing authorities had
committed an error in law by misconceiving the evidence or by applying
erroneous tests or 62 otherwise by acting perversely, the proper course for it
was in answering the questions submitted, to lay down the true principles
applicable to the ascertainment of the permissible deductions and to leave it
to the taxing authorities to adjudicate upon the reasonableness and necessity
of the expenses in the light of the requirements of the business.
(3) that there was ample evidence in support
of the conclusion of the Excess Profits Tax Officer which was confirmed by the
Tribunal, and that the question, whether the disallowance by the excess profits
tax authorities of the commission paid to branch managers was justified under
r. 12 of Sch. 1 of the Excess Profits Tax Act, should have been answered in the
affirmative.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 494 and 495 of 1958.
Appeals from the judgment and order dated
April 18, 1955, of the Madras High Court in Case referred Nos. 53 of 1952 and
44 of 1953.
Hardayal Hardy and D. Gupta, for the
appellant.
A. V. Viswanatha Sastri, R. Ganapathy Iyer,
S. Padmanabhan and G. Gopalakrishnan, for the respondent.
1960. December 8. The Judgment of the Court
was delivered by SHAH, J.-These are two appeals filed with certificates of
fitness granted by the High Court of Judicature at Madras.
Appeal No. 494 of 1958 arises out of orders
passed in certain Excess Profits Tax Appeals and Appeal No. 495 of 1958 arises
out of orders passed in certain Income-tax References, Excess Profits Tax
Appeals and Business Profits Tax Appeals.
M/s. N. M. Rayaloo Iyer &
Sons-hereinafter referred to as the assessees-are a firm carrying on business
principally in dyes and chemicals. They are the chief representatives in
"South India" of the products of the Imperial Chemical Industries
Company (India) Ltd.-hereinafter referred to as the "I.C.I.". The
business in dyes and chemicals was in the years material to these appeals,
conducted in the name and style of "Colours Trading Company", with
its Head Office at Madura and in thirteen branch offices in different 63 towns
in "South India". The busines 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
121/2% of the net profits of the Colours Trading Company. The branch offices
were managed by local managers and assistant managers who were paid in addition
to monthly salary, annual and special bonus and dearness allowance. The assessees
received from the I. C. I. commission at rates varying between 7-1/2% and 12%
on different products sold to them.
With effect from April 1, 1944, the I. C. I.
allowed a special emergency commission of 5% on all dyes and dyestuffs sold to
the assessees. This special emergency commission was increased to 15 % on all
sales on or after March 1, 1945, but was subsequently reduced to 10% on sales
on and after September 1, 1946.
These appeals relate to the liability of the
assessees to Excess Profits Tax for the chargeable accounting periods ending
April 13, 1943, April 12, 1944, April 12, 1945, and, March 31, 1946, and for
Business Profits Tax for the chargeable accounting periods ending April 12,
1946, March 31, 1947, April 13, 1947, March 31, 1948, and April 12, 1948.
64 The assessees claimed that they had paid
to their employees in the years of account 1942-43 to 1947-48 under agreements
executed from time to time a share in the special emergency commission received
from the I. C. I., in addition to monthly salary, dearness allowance and
general and special bonus. The I. C. I. in allowing the emergency commission by
its letter dated January 24, 1944, recommended that 1% out of the 5% commission
allowed may be "passed on" by the assessees to their "sub-distributors".
The assessees claimed that pursuant to this recommendation, they paid to their
employees commission at rates varying between 1-1/2% to 4%, and when the
emergency commission was increased to 15% and the I. C. I. by letter dated
February 23, 1945, recommended that 6% out of this commission may be passed on
to the sub-distributors, the assessees claimed to have distributed commission
at rates varying from 2% to 7-1/2% and in some cases at a rate as high as 12%.
Under the service agreements, commission was payable to the employees only if
the turnover in dyes exceeded Rs. 1,00,000 net in any year, but to employees in
several branches the assessees claimed to have paid commission at generous
rates even when the turnover fell far short of that amount. In the year of
account ending April 12, 1945, there was a revision of the scales of salaries
of the employees, and the assessees commenced giving to their employees
dearness 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 21 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 65
assessment years 1945-46, 1946-47, 1947-48 and 194849 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 121% after deduction of Excess Profits Tax or'
Business Profits Tax whichever was higher. That order was confirmed in appeal
by the Income-tax Appellate Tribunal. The Tribunal also confirmed the order
disallowing the emergency commission paid to the branch managers and other
employees, and in the computation of taxable income for purposes of Income-tax,
Excess Profits Tax and Business Profits Tax, added back all those payments. At
the instance of the assessees, the Tribunal referred two sets of questions to
the High Court under s. 66(1) of the Income-tax Act read with s. 21 of the
Excess Profits Tax Act.
Questions 1 to 3 in Referred Case No. 44 of
1953 were:
(1) Whether in allowing a deduction under s.
10(2) (xv) of the Income-tax Act, the Income-tax Officer is precluded from
going into the question whether the amount was paid wholly and exclusively for
the purpose of the assessee's business? (2) Whether there was any material before
the Tribunal to hold that the commission payment to N. M. R. Mahadevan at 121 %
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? (3)
Whether the commission payment to the branch managers, assistant managers and
other employees is an expenditure laid out wholly and exclusively for the
purpose of the business? Questions referred in Referred Case No. 53 of 1952
were:
66 (1) Whether the Appellate Tribunal erred in
law in holding that in accordance with the terms of letters dated 17th April,
1940, and 30th March, 1943, and the conduct of the parties the Excess Profits
Tax payable by the assessee should be deducted from the profits before the
commission of 12-1/2% payable to M. N. R. Mahadevan is calculated? (2) Whether
there is any material on evidence sufficient in law for the Appellate Tribunal
to hold that the commission of 12-1/2% on profits paid to Mahadevan was
unreasonable within the meaning of Rule 12 of Schedule 1 of the Excess Profits
Tax Act? (3) Whether on the facts and circumstances of the case the
disallowance by the Excess Profits Tax authorities of the commission paid to
branch managers is justified under Rule 12 of Schedule 1 of the Excess Profits
Tax Act? The material provisions relating to allowances under the Excess
Profits Tax Act and the Business Profits Tax Act (which Act superseded 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 s. 10(2)(xv) of Income-tax Act but properly under s.
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 tax payer may be permitted as a
deduction in the light of s. 10(2)(x) of the Income-tax Act and r. 12 of Sch. 1
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 this case being whether in allowing deduction of commission at
the rate of 12-1/2% on the net profits, the 67 Excess Profits Tax paid by the
assessees was to be taken into account. Following a judgment of the Punjab High
Court in Commissioner of Income-tax, Delhi v. Delhi Flour Mills Ltd. (1), the
High Court observed that in computing net profits Excess Profits Tax could not
be deducted, but on the materials on the record, the question whether the
commission paid to the branch managers and other employees was properly
deductible could not be decided, and accordingly the High Court called for and
obtained from the Tribunal a supplementary statement of facts. The High Court
after considering the supplementary statement observed that the assessees had
undoubtedly distributed substantial sums out of the emergency commission to its
managers and assistant managers in the branches at rates well above the minima
recommended by the I. C. I., but the distribution was at rates within the
percentages allowed by the I. C. I., as additional commission and the balance
retained by the appellants out of the emergency Commission was also
substantial. In the view of the High Court, the Tribunal had to consider three
factors, (1) the reasonableness of the commission in the light of the
conditions laid down in s. 10(2)(x), (2) the reasonableness of the percentages
above the minima suggested by the I. C. I., and (3) the need for maintaining
the reputation of the I. C. I., and the distributor in conditions that
prevailed during that period when "black-marketing was rampant", but
observed the High Court "the Tribunal had made no real attempt to analyse
the evidence before it to justify its conclusion that only the minima
recommended by the I.C.I. and nothing in excess satisfied the test of
reasonableness under r. 12, Sch. 1, of the Excess Profits Tax Act". They
then observed that, whether the test of reasonableness is that prescribed by s.
10(2)(x) of the Income-tax Act or whether reasonableness has to be judged in
the light of commercial expediency under r.
12, Sch. 1, of the Excess Profits Tax Act,
the expenditure was to be judged from the point of view of a businessman and
not by the application of any subjective standard of a taxing (1) [1953] 23
I.T.R. 167.
68 officer and that on an analysis of the
materials furnished, they were unable to see anything per se unreasonable in
the amounts of commission actually paid by the assessees to the branch managers
and assistant managers in the branches. The High Court also observed that the
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 Imperial Chemical Industries so
that the distributors could maintain the reputation of the Imperial Chemical
Industries 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 employee s 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 per se be unreasonable, in the sense that no prudent businessman in that line
of business, in those years, and in the market condition that prevailed then,
with ample scope for black-marketing, would have paid out commission on such a
basis".
They then concluded:
"Though, of course, it was for the
assessee to show that it was entitled to the deduction claimed under s.
10(2)(x) of the Income-tax Act and r. 12 of Sch. 1 of the Excess Profits Tax
Act, there was really no basis on record to show that judged from the point of
view of a businessman, payments in excess of the minima recommended by the
Imperial Chemical Industries were not reasonable. We are of 69 opinion that the
entire claim should have been allowed both under s. 10(2)(x) of the Income-tax
Act and under r. 12 of Sch. 1 of the Excess Profits Tax Act on the ground that
the statutory requirements were satisfied by the assessee." The High Court
accordingly answered the questions about the disallowance of commission paid to
the employees of the assessees being justified under r. 12, Sch. 1, of the
Excess Profits, Tax Act in the negative. Against those orders, these two
appeals have been preferred with certificates of fitness from the High Court.
The first question which falls to be
considered is whether in the computation of taxable income for purposes of
Incometax and Excess Profits Tax, commission allowed to Mahadevan at 12-1/2%
should be allowed after deducting the Excess Profits Tax paid. By the agreement
dated April 17, 1940, as modified by the agreement dated March 30, 1943,
Mahadevan was to be paid remuneration at the rate of Rs. 3,000 per annum and
121 % of the net profits of the Colours Trading Company. In the view of the
High Court in determining the "net profits" under the agreement
"in accordance with the principles of commercial accountancy and the
principles laid down under the Excess Profits Tax Act" the Excess Profits
Tax which is a tax on profits could not be deducted. In our judgment the
question is one of the true interpretation of the agreement. Mahadevan was
under the agreement to receive 121% commission on the net profits of the
Colours Trading Co. calculated by deducting from the gross. profits of the
business the salaries, wages and other outgoings. The expression
"outgoings" is not restricted to business or commercial outgoings.
The agreement specifically disentitles the employers to make deductions of
capital expenditure, but there is no indication that the outgoings are to be
business outgoings only. There is nothing in the agreement 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, Delhi v. Delhi
70 Flour Mills Co. Ltd. (1), it 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 permissible
deduction under s. 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 s. 21 of the Excess Profits Tax Act,
amongst other provisions, s. 10 of the Income-tax Act is made applicable with
modifications if any as may be prescribed as if it were a provision of the
Excess Profits Tax Act and refers to the Excess Profits Tax instead of
Income-tax. By s. 2(19), the expression "profits" means profits
determined in accordance with Sch. 1 of the Act which lays down the rules for
computation of profits for the purpose of Excess Profits Tax Act. Rule 12 of
Sch. 1 (which was added by s. 4 of the Excess Profits Tax Ordinance, 1943
provided 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 the Excess Profits Tax Officer unless he has obtained the
prior authority of the Commissioner of Excess Profits Tax.
(2) [1959] Supp. 1 S.C.R. 28.
71 (2) Any person who is dissatisfied with
the decision of the Excess Profits Tax Officer under this rule may. appeal in
the prescribed time and manner to the Appellate Tribunal.
(3) In relation to chargeable accounting
periods ending after the 31st day of December, 1942, the Central Government may
make rules for determining the extent to which deductions shall be allowed in
respect of bonuses or commissions paid.
We were informed at the bar that though
authorised, the Central Government did not make rules for determining the
extent to which deductions shall be allowed in respect of bonuses or
commissions paid. The Excess Profits Tax Act was substituted as from the year
1946 by the Business Profits Tax Act, 1947. That Act also defined by' s. 2, cl.
(16), the expression "profits" as meaning profits determined in
accordance with Sch. 1 and by s. 19, the provisions of the sections of the
Indian Income-tax Act as applied to the Excess Profits Tax Act by virtue of ss.
21 and 21A in so far they were not repugnant to the provisions of the Business
Profits Tax Act applied to that Act as they applied to Excess Profits Tax Act
and by cl. (3) of Sch. 1, a provision substantially similar to cls. (1) &
(2) of cl. 12, Sch. 1, of the Excess Profits Tax Act was incorporated.
Profits of a business for purposes of Excess
Profits Tax Act have to be ascertained by reference to s. 10 of the Income-tax
Act modified to the extent directed by Sch. 1 of the Excess Profits Tax Act. By
cl. (12) of Sch. 1 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 72 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
the Excess Profits Tax Officer. It is for him subject to review by the Tribunal
to decide whether the deduction is reasonable and necessary, having regard to
the requirements of the business and in case of payments for services to the
actual services rendered. The jurisdiction which the High Court exercises on
questions referred to it under the Excess Profits Tax Act is merely advisory;
the High Court is not sitting in appeal over the judgment of the taxing
authorities. If the taxing authorities having regard to the circumstances come
to a conclusion that expenditure claimed as a deduction is not reasonable and
necessary, it is not open to the High Court to substitute its own view as to
what may be regarded as reasonable and necessary. Even if the High Court holds
that the taxing authorities have committed an error in law by misconceiving the
evidence, or by applying erroneous tests, or otherwise by acting perversely,
the High Court may in answering the questions submitted, lay down the true
principles applicable to the ascertainment of the permissible deductions and
leave it to the taxing authorities to adjudicate upon the reasonableness and
necessity of the expenses in the light of the requirements of the business.
In the case in hand, the Excess Profits Tax
Officer held, (a) that the employees of the assessees were being amply
remunerated for services rendered by adequate salary, generous dearness
allowance and annual bonus equal to the basic salary, (b) that the emoluments
of the employees had been increased year after year and there was no material
to show that the employees had made a persistent demand for increased
emoluments, (c) that the commission was credited to the employees' account at
the end of the year and was carried forward but no payments were made to 73
them' (d) that the agreements which had been produced by the assessees were
fabricated with a view to, reduce tax liability, and (e) that the expenditure'
claimed was not proved to have been laid out wholly and exclusively for the
purpose of the business. Taking into account these circumstances, the Excess
Profits Tax Officer held that the remuneration paid to the employees was
adequate and any additional commission paid was in excess of what was
reasonable and necessary. The only criticism urged by counsel for the assessees
against the grounds given is that the Excess Profits Tax Officer observed that
while the net profit according to the Profit & 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 setting
out the distribution among the employees of dearness allowance, bonus and
salary in the relevant years, and observed:
"In addition to the generous allowances,
the payment of this sum appears to us a payment made in order to dissipate the
profits. It would be sufficient to say that including the commission alleged 10
74 to have been paid, the total emoluments would be something like 1200% and in
some cases even more than the basic annual salary. There is no doubt in our
mind, that this was wholly unnecessary for business purposes." Observing
that the assessees having no sub-distributors, the direction given by the
I.C.I. did not require the assessees to "pass on" the commission to
their employees, they concluded that the expenditure alleged to have been
incurred was not reasonable and necessary within the meaning of r. 12, Sch. 1,
of the Excess Profits Tax Act.
The following table which is incorporated in
the statement of case of the Tribunal sets out for the four years in question
the emergency commission received by the assessees and the aggregate amount
paid by them to their employees.
Extra commission Amount of commission Assessment
received paid by the year. by the assessee. assessee.
Rs. Rs. 1945-46 1,28,533 1,00,715 1946-47
3,20,391 2,44,698 1947-48 3,15,934 1,28,506 1948-49 3,70,964 1,75,079 This
distribution out of the emergency commission to the employees has to be viewed
in the context of the following circumstances set out by the Tribunal:
(1)that even though the I.C.I. recommended
payment to sub-distributors and the assessees had no sub-distributors, they
claimed to have paid commission to their employees at rates in excess of the
minimum rates recommended by I.C.I.
(2) that this commission was paid to the
employees in branches in which the annual turnover did not exceed Rs. 1,00,000
even though the agreements which the assessees had executed expressly provided
that the commission was to be paid only if the annual turnover in a branch
exceeded Rs. I lakh and (3)that the basic salaries of the employees had been
substantially increased from time to time and generous dearness allowance and
Deepavali bonus 75 were given besides the annual bonus to the employees.
An analysis of annexure 'IL" to the
supplemental statement of case made by the Tribunal discloses some striking
instances of Payments to employees. 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 deduction claimed by the
assessees for payments made as bonus or commission paid to an employee is to be
allowed, the taxing officer must have regard to the provisions of s. 10(2)(x)
of the Income-tax Act and cl. (12) of Sch. 1 of the Excess Profits Tax Act; and
in assessing the reasonableness, consideration of commercial expediency must
undoubtedly be taken into account. But commercial expediency must be viewed in
the light of the requirements of the business and the actual services rendered
by the persons concerned. Any abstract consideration of commercial expediency
is out of place.
In our view, the High Court was not justified
in seeking to re-appreciate the evidence on which the 76 conclusion of the
Excess Profits Tax Officer which was confirmed by the Tribunal was based. Their
jurisdiction being advisory, the High Court had to answer the questions
submitted for opinion on the facts found; if the High Court held the view that
the taxing authorities had misdirected themselves in law or had made a wrong
inference in law or had failed to apply the correct tests or had misconceived
the evidence, it was. open to them to invite the attention of taxing
authorities to the error committed by them; but the High Court could not set
aside the decision of the taxing authorities on a re-appreciation of the
evidence. We may also point out that even if the High Court concluded that the
total disallowance of the deduction claimed was not justified, the High Court
could not substitute its own view as to what was reasonable and necessary. The
High Court bad, if it disagreed with the taxing authorities, still to answer
the questions submitted and leave to the consideration of the Excess Profits
Tax Officer what in the circumstances was reasonable and necessary.
Counsel for the assessees submitted that in
any event, the Tribunal having in its supplementary statement of case stated
that payment in excess of what was recommended by the I.C.I. was unjustified,
this court may so modify the order of the High Court that deductions of the
amounts which were recommended by the I.C.I. may be regarded as permissible
deductions. The I.C.I. recommended distribution of a certain percentage out of
the emergency commission to the sub-distributors; but in the administrative set
up of the assessees, the sub-distributors did not find a place. The assessees
carried on their business through paid employees.
In terms therefore the recommendation by the
I.C.I. had no application to the assessees. It is true that even if the
assessees did not carry on the business through subdistributors, payment made
to its employees if reasonable and necessary having regard to the requirements
of the business, may still be deductible, but that in our judgment is a matter
to be decided by the taxing authorities and not by us.
77 The Tribunal had come to the conclusion
that no payment in addition to the salary, annual bonus and, special bonus was
justified and any expression of opinion to the contrary in the supplementary
statement pursuant to the order for statement of case could not in our judgment
affect the conclusion originally recorded.
In our view the answer to the question
whether the disallowance by the Excess Profits Tax authorities of the commission
paid to branch managers was justified under r.
12, Sch. 1, of the Excess Profits Tax Act
should have been answered in the affirmative. On the view taken by us, Appeal
No. 494/1958 will be allowed, but there will be no order as to costs.
Appeal No. 495 of 1958 will be allowed with
*costs.
Appeals allowed.
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