R. G. S. Naidu and Co. Vs.
Commissioner of Income-Tax and Excess Profits Tax, Madras [1960] INSC 294 (14
December 1960)
SHAH, J.C.
KAPUR, J.L.
HIDAYATULLAH, M.
CITATION: 1961 AIR 1007 1961 SCR (3) 271
ACT:
Excess Profits Tax-Excess Profits, unassessed
or under assessed--Assessment, if can be reopened-Apportionment of
income-Excess Profits Tax Act, 1940 (XV of 1940), s. 15, r. 9, Sch. 1.
HEADNOTE:
Under an agreement dated July 11, 1945, the
appellants were appointed managing agents of the Coimbatore Spinning and
Weaving Co. Ltd., for 20 years, and certain remuneration was provided for them
including 10% commission on the net profits of the company due and payable
yearly immediately after the accounts of the company were closed and
commissions on purchases and capital expenditure of the company. Prior to
October 1, 1944, the appellants were the managing agents of the Coimbatore
Mills Agency Ltd., who were the managing agents of the Coimbatore Spinning and
Weaving Co. Ltd. The year of account of the appellants ended on March 31, of
the company on June 30, and of the Agency Company on September 30. For the
assessment year 1945-46 the appellants submitted a return of their income which
included the stipulated remuneration and commissions.
This return was accepted by the Income-tax
Officer, and Excess Profits Tax liability for the chargeable accounting period
ending March 31, 1945, was also worked out on that basis. A return of income
was submitted by the appellants for the assessment year 1946-47 which included
commission for the period 1-4-45 to 30-6-45 on purchases of cotton and stores
and on capital expenditure. The Tax Officer directed that the commission on
purchases and capital expenditure be taken into account 272 for the year April
1, 1945, to March 31, 1946, and that the receipts be computed accordingly. The
assessment for 194546 was then reopened under S. 34 of the Income-tax Act under
s. 15 of the Excess Profits Tax Act and as a result of apportionment made by
the application of r. 9 of Sch. 1 of the Excess Profits Tax Act, the liability
of the appellants for Income-tax and Excess Profits 'fax was revised and fresh
assessments were made. The orders of assessment were confirmed by the appellate
authorities.
Held, that as in the instant case the
chargeable accounting period for the assessment of Excess Profits Tax and the
year of account of the company did not tally, by the assessment of income made
on the assumption that they did tally, there had resulted under assessment and it
was open to the Tax Officer to take action under s. 15 of the Excess Profits
Tax Act. The Excess Profits Tax Officer acted properly in apportioning under r.
9 of Sch. 1 the commission received by the appellants.
Rule 9 of Sch. 1 of the Excess Profits Tax
Act is enacted in general terms and it is applicable to all contracts which are
intended to be operative for fixed periods. If, for the performance of the
entire contract, remuneration is payable at certain rates the profits earned
out of that remuneration must be apportioned in the manner prescribed by 19 if
the performance of the contact extends beyond the accounting period.
E. D. Sassoon & Co., Ltd. v. The
Commissioner of Incometax, Bombay City, [1955] 1 S.C.R. 313, distinguished.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 181 to 184 of 1960.
Appeals. from the judgment and order dated
March 16, 1955, of the Madras High Court in Case Referred No. 43 of 1950.
A. V. Viswanatha Sastri, R. Ganapathy Iyer
and G. Gopalakrishnan, for the appellants.
Hardayal Hardy and D. Gupta, for the
respondent.
1960, December 14. The Judgment of the Court
was delivered by SHAH, J.-These appeals relate to Excess Profits Tax liability
of the appellants in respect of two chargeable accounting periods April 1. 1944,
to March 31., 1945, and April 1, 1945, to March 31, 1946.
The appellants were under an agreement dated
July 11, 1945, appointed managing agents for 20 years of the Coimbatore
Spinning and Weaving Co, 273 Ltd.-hereinafter referred to as the company. Prior
to October 1, 1944, the appellants were the Managing Agents of the Coimbatore
Mills Agency Ltd--hereinafter referred to as the Agency Company who were the
Managing Agents of the company. The year of account of the appellants ended on
March 31, of the company on June 30, and of the Agency Company on September 30.
Under the agreement by which the appellants were appointed 'managing agents,
the following remuneration was provided:
1. Office allowance at Rs. 1,500 per mensem;
2. Commission at 1% on all purchases of
cotton and stores and 21/2 on all capital expenditure incurred from time to
time; and
3. Commission at 10% on the net profits of
the company due and payable yearly immediately after the accounts of the
company were closed.
For the assessment year 1945-46, the
appellants submitted a return of their income inclusive of the following items:
1. Remuneration from the Agency Company Rs.
36,000.
2. Commission at 10% on profits from the
Agency Company upto 30-9-1944 Rs. 37,953.
3. Remuneration from company from 1-10-1944
to 31-3-1945 Rs. 9,000.
4. Commission at 1% on cotton and stores
purchased during this period Rs. 21,704.
This return was accepted by the Additional
Income-tax Officer, Coimbatore I & II Circles, and the appellants were
assessed to income-tax. Excess Profits Tax was also worked out on the same
basis for the chargeable accounting period ending March 31, 1945. For the
assessment year 1946-47, the appellants submitted a return of their income
which included the following items:
1. Remuneration from the company for one year
from 1-4-1945 Rs. 18,000.
2. Commission at 10% on the profits of the
company paid in December 1945 (1-10-1944 to 30-6-1945) Rs. 1,90,889. 35 274
3. Commission at 1% on purchases of cotton
and stores from 1-4-1945 to 30-6-1945 Rs. 16,777.
4. Commission at 2 12/ %on capital
expenditure from 1-10-1944 to 30-6-1945 Rs. 1,690.
The Tax Officer in charge of the assessment
directed that the commission on purchases and capital expenditure be taken into
account for the year April 1, 1945, to March 31, 1946, and that the receipts-be
computed accordingly. The amount of Rs. 1,127 attributable out of item 4 was
accordingly taken into the account of the previous year after reopening the
assessment under s. 34 of the Income-tax Act, and the commission on the profits
of the company was apportioned between the period October 1, 1944, to March 31,
1945, and April 1, 1945, to June 30, 1945, by the application of r. 9 of Sch. 1
of the Excess Profits Tax Act. The Tax Officer also determined the
proportionate commission payable under items 3 and 4, for the period ending
March 31, 1946, and as a result of the apportionment, the liability of the
appellants, original and revised, for income tax and Excess Profits Tax for the
assessment year 1945-46 and chargeable accounting period April 1, 1944, to
March 31, 1945, stood as follows:
Original assessment of income tax Rs.
1,04,654.
Excess Profits Tax Rs. 45,292.
Revised figures Income-tax (loss) Rs. 36,182.
Excess Profits Tax Rs. 1,41,962-11-0.
For the assessment year 1946-47 and
chargeable accounting period April 1, 1945, to March 31, 1946, tax liability
was computed at:
Income-tax Rs. 1,66,271.
Excess Profits Tax Rs. 1,13,163-5-0.
The orders of assessment for income tax and
Excess Profits Tax were confirmed by the Appellate Assistant Commissioner and
the Income-tax Appellate Tribunal. On the applications of the appellants 275
for reference under s. 66(1) of the Income-tax Act and s. 21 of the Excess
Profits Tax Act, the Tribunal drew up a statement of the case and submitted the
following four questions to the High Court of Judicature at Madras:
1.Whether on the facts and in the
circumstances of the case, the Income-tax Officer/Excess Profits Tax Officer
was right in taking action under s. 34 and 15 of the Income-tax and the Excess
Profits Tax Act ? 2.Whether on the facts and in the circumstances of this case,
the provisions of r. 9, s. 1, were properly applied ? 3.Whether on the facts
and in the circumstances of the case, the Income-tax Officer/Excess Profits Tax
Officer was correct in including the proportionate commission income of Rs.
1,127 for income-tax assessment 1945-46 and Rs. 1,43,163 plus Rs. 1,127 for
Excess Profits Tax assessment Tax for the chargeable accounting period ending 31st
March 1945, and 4.Whether on the facts and in the circumstances of the case,
the proportionate commission of Rs. 37,129 and Rs.
2,299 were rightly assessed for the
assessment year 1946-47 ? The High Court answered all the questions against the
appellants and in favour of the Department. Against the order passed by the
High Court, these appeals have been preferred with certificate granted under s.
66A(2) of the Income-Tax Act read with s. 21 of the Excess Profits Tax Act.
Two questions were canvassed in these
appeals:
1.Whether it was open to the Taxing Officer
to re-open the assessment for 1945-46; and 2.Whether the commission received by
the appellants was liable to be apportioned under r. 9 of Sch. 1 of the Excess
Profits Tax Act.
The appellants maintained their books of
account on cash basis and commission received from the company was credited
after the accounts of the company were closed. The amounts received by the
appellants from the company were included in their return and assessment for
the year 1945-46 was completed 276 for the purposes of the Excess Profits Tax
by the Tax Officer without apportionment appropriate to the chargeable
accounting periods. In so doing, the Tax Officer committed an error. He
overlooked the fact that the chargeable accounting period for the as assessment
of Excess Profits Tax and the year of account of the company did not tally.
Under s. 15 of the Excess Profits Tax Act, if
the Tax Officer discovers, in consequence of definite information which has
come into his possession that profits of any chargeable accounting period
chargeable to excess profits tax have escaped assessment, or have been under
assessed, he may serve on the person liable to pay such tax a notice containing
all or any of the requirements which may be included in a notice under s. 13
and may proceed to assess or reassess the profits. The provision is
substantially similar to s. 34(1) of the Income-tax Act before it was amended
in the year 1948. It is manifest that by the assessment of income made on the
assumption that the chargeable accounting period and the accounting period of
the company tallied, there resulted under assessment in the computation of tax
liability for Excess Profits Tax, and it was open to the Tax Officer to take
action under s. 15 of the Excess Profits Tax Act.
Determination of the second question depends
upon r. 9, Sob.
1, of the Excess Profits Tax Act. By s. 2(19)
of the Excess Profits Tax Act, the expression " profits " means
profits as determined in accordance with Sch. 1. That schedule sets out rules
for computation of profits for the purpose of the Excess Profits Tax Act; and
by r. 9, it is provided in so far as it is material that:
" Where the performance of a contract
extends beyond the accounting period, there shall (unless the Excess Profits
Tax Officer, owing to any special circumstances, otherwise directs) be
attributed to the accounting period such proportion of the entire profits or
loss which has resulted, or which it is estimated will result, from the
complete performance of the contract as is properly attributable to the 277
accounting period, having regard to the extent to which the contract was
performed therein." The performance of the contract of managing agency
extended beyond the period of account of the company which was July 1, 1945, to
June 30, 1946: it covered parts of two accounting periods. The Tax Officer was
therefore obliged to apportion to the, chargeable accounting periods the entire
profits resulting from the complete performance of the contract in proportions
properly attributable to the accounting periods and this, he proceeded to do.
Counsel for the appellants contends that the contracts contemplated by r. 9 are
those of the nature of engineering or works contracts and the like where
execution of the contract involves a profit making operation de die in diem and
not contracts where remuneration is payable at a certain time for services
performed throughout the stipulated period. It is true that remuneration was
paid to the appellants after the expiry of the year of account of the company ;
but the contract was one the performance of which extended throughout the year
of account of the company. The appellants were the managing agents of the
company and they had to perform their duties as managing agents for the whole
year. It is not disputed that the contract of agency for 20 years is to be
regarded for assessment of excess profits tax as an annual contract. The
performance of the contract unmistakably cut across the accounting period is
also manifest. The remuneration for performance of the contract is not computed
at a daily rate, but is computed on a percentage of the commission on the
profits of the company for the whole year, but on that account, the contract is
not one in which performance does not extend throughout the year of account.
Normally in a managing agency contract, the managing agent may not suffer loss,
but that does not rule out the application of r. 9 to managing agency
contracts. The terms in which r. 9 is enacted are general:
the rule is applicable to all contracts which
are intended to be operative for a fixed period. If, for the performance of the
entire contract, 278 remuneration is payable at rates stipulated, the profit
earned out of that remuneration must be apportioned in the manner provided by
r. 9 if the performance of the contract extends beyond the accounting period
The judgment of this Court in E. D. Sassoon & Co., Ltd. v. The Commissioner
of Income Tax, Bombay City(1) on which strong reliance was placed by the
appellants has no application to this case. In that case, M/s. E. D. Sassoon
& Co., Ltd. who were managing agents of three different companies
transferred the managing agencies to three other companies on several dates
during the accounting year. A question arose in the computation of income-tax
payable by M/s. E. D. Sassoon & Co., Ltd. whether the managing agency
commission was liable to be apportioned between M/s. E. D. Sassoon & Co.,
Ltd. and their respective transferees in the proportion of the services rendered
as managing agents for the respective periods of the accounting year. It was
held by this court (Jagannadhadas, J., dissenting) that on a true
interpretation of the managing agency agreements in each case, the contract of
service between the companies and the managing agents was entire and
indivisible and the remuneration or commission became due by the companies to
the managing agents only on completion of definite periods of service and at
stated intervals ; that complete performance was a condition precedent to the
recovery of wages or salary in respect thereof and the remuneration payable
constituted a debt only at the end of each period of service completely
performed, no remuneration or commission being payable to the managing agents
for broken periods; that no income was earned by or accrued to M/s. E. D.
Sassoon & Co., Ltd. and as the transfer of the agencies did not include any
income which E. D. Sassoon & Co., Ltd. had earned, they were not liable to
be taxed under the Income Tax Act. But that was a case dealing with liability
of the assessees who did not receive any income and to whom no income had
accrued to pay (1)[1955] 1 S.C. R. 313.
270 income tax on the amounts of remuneration
paid to their transferees. The court was not called upon to apply to income
received by the assessee the principle of apportionment under r. 9 of Sch. 1 of
the Excess Profits Tax Act, or any provision similar thereto. It is r. 9 of
Sch. I which attracts the principle of apportionment. The rule enunciated in
M/s, E. D. Sassoon & Co.'s case (1) has therefore no application to this
case, and the High Court was right in holding that the assessment made by the
Excess Profits Tax Officer by apportionment of the commission income between
the chargeable accounting periods was correct.
The appeals therefore fail and are dismissed
with costs.
One hearing fee.
Appeals dismissed.
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