The Nandlal Bhandari Mills Ltd., Indore
Vs. The State of Madhya Bharat  INSC 223 (17 July 1961)
CITATION: 1963 AIR 332 1962 SCR (2) 854
Agent-Commission paid out net profits-If
deductible from assessable income--The Indore Industrial Tax Rules-
By a Cabinet Resolution of the Holkar State
certain Rules known as The Indore Industrial Tax Rules were framed for the
purpose of levying industrial tax. After the decision of the Privy Council in
cherry Railway Go., Ltd. v. Commissioner Income,-tax, (1931) L. R. 58 1. A.
239, disallowing deduction , of Commission paid out of profits to agents from
the assessable profits; the Government of Holkar State of which the Maharaja
was the Supreme Ruler; issued certain Notifications ordering that the Agents'
Commission on profits should not be allowed to be deducted from the assessable
profits. The appellants who under an agreement paid commission to their agents
out of the company's net profits contended, inter alia, that the Notifications
in question did not have the force of law and was not enforceable against the
Held, that every general order emanating from
the sovereign ruler having its roots in a resolution of the cabinet must be
regarded as a law binding on the subject and the Notifications disallowing
commission paid to, agents to be deducted from the assessable profits were
therefore binding on the appellants, because that was the normal mode by which
laws were made in the Holkar State.
Rajkumar Mills Ltd. v. Madhya Bharat State,
A. I. R. 1953 Madhya Bharat 135, approved.
Ameer-un-nissa Begum v. Mahboob Begum, A. I.
R. 1955 S.C. 352, followed.
The Union Cold Storage Co., Ltd. v. Anderson,
(1931) 16 T.
C. 293 and The Indian Radio and Cable
Communications Co., Ltd. v. Commissioner of Income-tax, (1937) I. T. R. 270,
Madharao v. State of Madhya Bharat, A.I.R.
1961 S. C. 298, referred to.
CIVIL APPELLATE JURISDICTION: Civil, Appeals
Nos. 344-346 of 1960.
Appeals by special leave from the judgment
and order dated September 8. 1958, of the Madhya Pradesh High-Court (Indore
Bench), Indore, in Civil Second Appeals Nos. 11.0-1,12 of, 1952.
S. T.Desai and J. B. Dadachanji for the
B. Sen,J. Bhave and 1. N. Shroff, for the
1961. July 17. The Judgment of the Court was
delivered by HIDAYATULLAH, J.-These three consolidated appeals by special leave
are against a common judgment and order of the High Court of Madhya Pradesh,
dated September 8, 1958, in three second appeals filed under R. 13 of the
Indore Industrial Tax Rules, 1927 of the former Holkar State, which were in
force before the State became part of Madhya Bharat State.
They concern three assessments relating to
the assessment years, 1941,1942 and 1943 respectively. These second appeals
were originally filed in the Madhya Bharat High Court as early as 1952 ; but
the records of the appeals 'were destroyed by fire and had to be reconstructed.
By the time the appeals were ready, Madhya Bharat had merged in the new state
of Madhya Pradesh, and the appeals were accordingly heard by a Divisional Bench
of that High Court.
The appellant is a Textile Mill and a public
Joint Stock Company called the Nandlal Bhandari Mills, Ltd. The appellant had
appointed a" firm, Messrs Nandlal Bhandari and Sons as agents, secretaries
and treasurers of the Mills, and under cl. (6) of the agreement of agency, it
agreed to pay to the agents an office allowance, commission on the Company's net
profits and commission on the sale proceeds.
of sales of yam, cloth, etc. The 861
remuneration of the agents for the three accounting years was as follows :
Remuneration As per Accounting Years, agreement. 1941 1912 1943 Rs. Rs. Rs. __________________________________________________________
Clause 6 1500 18,000 18,00018,000 (a) Fixed P.M. for the for the monthly allowance
- year. year. as office allowance.
(b) Commission @ 16% 2,68,335 6,15,946
10,52,939 on the Company's - net on Net profits Profits.
(c) Commission @ 1-9-0 1,10,156 1,10156
1,64,751 2,71,672 on the sale Per Cent, proceeds of on sales sales of yarn,
In computing the tax, the Mills claimed to deduct under R.
3(2)(ix) of the Rules the above amounts paid
as remuneration. The Rule reads :
"(ix) any expenditure (not being in the
nature of capital) incurred solely for the purposes of earning such profits or
gains." The Assessing Officer accepted the appellant's claim for deduction
but only as. to a part. We are not required in these appeals to consider the
correctness of the quantum of the deduction in view of what transpired later.
The Assessing Officer also disallowed certain other claims made by the
appellant, which again need 'not be mentioned. The appellant then. appealed to
the Appellate Authority, and on December 31, 1951 the Appellate Authority,
while accepting some of 862 the appellant's other contentions upheld the order
refusing to deduct the agent,s commission on profits under R.
3(2)(ix). Three second appeals were preferred
in the Madhya Bharat High Court under R. 13 of the amended Rules. They were
dismissed by the High Court of Madhya Pradesh, and hence the present appeals.
The Indore Industrial Tax Rules were first
promulgated in 1926 by a Cabinet Resolution (No. 373 dated March 22, 1926).
In 1927, by, Cabinet Resolution No. 1991
dated November 23 1927, the Rules were modified, and the new Rules, were made
applicable retrospectively from May 1, 1926. These Rules were framed for the
levy of the tax and for ascertainment and determination of the income of cotton
mills. The tax called the "Industrial Tax" was leviable under R. 3,
which imposed the charge. It says that the Industrial Tax shall be payable by
an assessee in respect of the profits or gains of any Cotton Mill industry
carried on by him in the Holkar State. Sub-r. (2) of R. 3 provides that such
profits or gains are to be computed after making allowances, inter alia, for
any expenditure incurred solely for the purpose of earning such profits or
gains, R. 6, which is a part of the Rule imposing a charge, lays down the rates
which are : (a) on all incomes up to Rs. 50,000, at 1-1/2 annas per rupee, and
(b) above, at 2-1/2 annas per rupee. The short question thus was whether in
computing the profits and gains of the appellant, the remuneration paid to the
agents was deductible under R. 3 (2) (ix).
It is necessary At this stage to see the
legislative machinery existing in the Holkar State in 1927 and onwards.
On February 27, 1926, His Highness Maharaja
Tukoji Rao III abdicated, and, his son, H.H. Maharaja Yeshwant Rao Holkar,
became the Ruler, whose installation ceremony' was performed on March 11, 1926.
A Regency Council was appointed under the orders of the 863 Government of India
for the administration' of the State during the minority of the Maharaja. This
Regency Council, which was called the Cabinet, was entrusted with the
administration of the State according to existing rules and practice, under the
supervision and with the advice of the Agent to the Governor-General in Central
India. Prime Minister of the State was the Chairman. H. H. Maharaja Yeshwant
Rao Holkar attained majority on September 6, 1929 and resumed sovereign powers
on May 9, 1930. It was during the minority of the Ruler that the Cabinet had
promulgated the amended Rules of 1927. In 1931, the decision of the Privy
Council in the well-known case of Pondicherry Railway Co., Ltd. v. Commissioner
of Income-tax (1) was rendered.
In that case, a Railway Company had agreed to
make over to the French Colonial Government half of the Company's net profits
in consideration of a 99-year concession. This was sought to be deducted by the
Company from its assessable profits as an expenditure incurred solely for the
purpose of earning such profits. The Privy Council disallowed the deduction.
Lord Macmillan observed as follows :
"A payment out of profits and conditional
on- profits being earned cannot accurately be described as a payment made to
It assumes that profits have first come into
existence. But profits on their coming into existence attract tax at that point
and the revenue is not concerned with the subsequent application of the
profits." It seems that, as a result of this decision, a notification was
issued in August, 1931, and another on February 2/3, 1932 by the Commerce. and
Industry Department of the Holkar State. The latter notification reads as
follows (1) (1931) L.R. 38 I.A. 239.
864 "Commerce and Industry Department
Notification No. 1 dated the 2nd/3rd Feb. 19
32. In continuation of this office
Notification No. 4733 dated the 6th December, 1927 (Vide Issue No. 11 dated the
12th December, 1927, of the Holkar Sirkar Gazette) embodying modified rules for
the levy of the Industrial Tax the Cabinet in their Resolution No. 1072 dated
the 25th August, 1931, have ordered that the Agents' Commission on 'Profits'
should not be allowed to be deducted from the assessable profits." It is,
to be noticed that this notification refers to the earlier notification No.
4733 of December 6, 1927, under which were published the amended Industrial Tax
Rules, 1927, and to the notification of August 1931. The latter has not been
produced before us.
This notification led to representations by
the persons affected by it. The Maharaja of Holkar thereupon referred the
matter for the opinion of the, Full Bench of the High Court of the State. It appears
that the opinion of the High Court was in favour of disallowing such
deductions. On July 14, 1933, another notification (No. 13) was issued which
reads as follows :
"In continuation of this office
Notification No. 1 dated 3rd February,, 1932, it is hereby published for the
information of the mills and factories concerned that on submission of the
Prime Minister's (Legal Department) report No. 25 dated 11th May, 1933, His
Highness the Maharaja is please to order (vide Huzur Shri Shankar, Order No. 173
dated 29th June,1933) that the opinion of the Full Bench of the High Court
being that the Managing Agent's Commission an profit's is 865 not an item of
expenditure incurred solely for the purpose of earning the said profit within
the meaning of Rule 3(2)(ix) of the said Industrial Tax Rules and this being.
also the view of the Cabinet as expressed in their resolution No. 1072 dated
28th August, 1931, the aforesaid Cabinet Resolution be given effect to and the
industrial tax due on the amount of the managing agent's commission on profits
be recovered with effect from the date of the said Cabinet Resolution."
This notification, it is contended before this Court had not the force of law
and was not enforceable against the appellants, who claim that they are entitled
to show that the remuneration paid to the agents was deductible from the
profits of the Mills before. computing the Industrial Tax.
In this connection, the appellants wish to
use the later decisions of the House of Lords in The Union Cold &wage Co.,
Ltd. v. Adamson(1) and of the Privy Council in The Indian Radio and Cable
Communication Co., Ltd. v. Commissioner of I Income-tax (2), in which the
decision in the Pondicherry Railway Company case (3) was explained. In the case
before the Privy Council, Lord Maugham observed:
"It is not universally true to say that
a, payment the making of which is conditional on profits being earned cannot
properly be described as an expenditure incurred for the purpose of earning
such profits. The typical exception is that of a payment to a, director or a
manager of a commission on the profits of a company'....If a company having
made; an apparent net profit, of pound 10,000 has then to pay pound 1,000 to
directors, or managers as the contractual recompense for their service during
the year, it: is plain that the real net profit is only pound 9,000." (1)
(1931) 16 T. C. 293. (2) (1937) I.T.R. 270 (3) (1931) L.R. 58 (1) A. 239.
866 Lord Macmillan in the former case
observed that the Pondicherry Railway Company case (1) must be read in the
context of the facts of that case, and the obligation was first to find out the
net profits of the company and then to divide them. These two sets of cases
proceed upon different principles. If the agreement is to share the profits the
expenditure cannot properly be treated as one incurred solely for the purpose
of earning such profits; but if a slice of the profits is;to be paid to persons
as remuneration to help in the earning of the profits, the deduction can be
All this would of course be pertinent to
consider, if there was no legislative enactment on the subject. If the matter
was not one concluded by law, then there would be room for judicial
interpretation of the Rule. The rival claims in these appeals are thus confined
to the legislative force of the notifications issued in 1931, 1932 and 1933
respectively,. The appellant's contention is that the notifications were not an
act of legislation but an interpretation by the Sovereign. Mr. Desai concedes
that if they be regarded as legislation, then the later decisions of the Privy
Council and some of this Court cannot be called in aid, because where the law
itself speaks with clarity, judicial interpretation is out of place. He
contends, how- ever that the two notifications were not framed as rules and
were not expressly stated to be amendments of the rules then existing. He
points out that after the first notification which was nothing more than an
administrative direction to the assessing officers to include in the profits the
remuneration of the agents, the opinion of the High Court was obtained, and the
second notification merely pointed out that the earlier notification was to be
given effect to, and did no more than add a second administrative direction. On
the other side, it is contended that the Cabinet could make laws as often as it
pleased and that (1) (1931) L. R. 58 I. A. 239.
867 the notifications must be read either as
independent rules or as a legislative explanation of R. 3 (2) (ix). In so far
as the legislative supremacy of the Cabinet was concerned, no question was
raised before us. When the Indore Industrial Tax Rules, 1926 were framed, they
came into existence by virtue of a Cabinet Resolution of that year. When they
were modified, they were superseded by yet another Cabinet Resolution of the
year 1927, which promulgated the new Rules with retrospective effect from May
1926. The source of the Rules 'was thus a Resolution of the Cabinet on both the
occasions, and it is not denied that the Rules thus framed had legislative
sanction and were unquestionable. When the Cabinet promulgated its
notifications in 1931, 1932 and 1933, it followed the same procedure, and it
stated that the notification of 1932 was "'in continuation of this office
Notification No. 4733 dated December 6, 1927." This has reference to that
notification under which the Indore Industrial Tax Rules, 1927 were originally
published. From this, it follows that new Rules were framed by a resolution of
the Cabinet and were promulgated by a notification in the Gazette as part of
the Rules. The mode followed in 1926 and 1927 was repeated in 1932 and 1933 and
also presumably in 1931, though the notification of that year has not been
printed in the record of this case.
This view was taken by the Full Bench of the'
Madhya Bharat High Court in Raj Kumar Mills Ltd. v. Madhya Bharat State (1).
The question which is involved in these appeals also arose in that case. It was
observed by the Full Bench :
"This Notification makes it abundantly
clear that His Highness the Maharaja ordered that the industrial tax due on the
amount of the managing agent's commission on profits be recovered. This being.
an order of the (1) A.I.R. 1953 Madbya Bharat 135.
868 ruler, who enjoyed sovereign Powers, that
order is not open to challenge. This is a mandate emanating from a sovereign
and as such has the force of law. This Court has, therefore, no power to go
behind the order and enquire as to whether the managing agent's commission on
profits is an item of expenditure solely incurred for the 'purpose of earning
profits or not: In this view of the matter the point at issue is concluded by
Huzur Shri Shanker order No. 173 dated 29th June, 1933." Thus view was
affirmed by the High Court of Madhya Pradesh in the judgment under appeal.
In our judgment, the two notifications cannot
be described as "judicial ,interpretation". If any this, they must be
interpreted as legislative exposition of R. 3(2)(ix) and in the nature of an
explanation. This Court in Ameer-un-nissa Begum v. Mahboob Begum in dealing
with the 'Firmans" of His Exalted Highness the Nizam of Hyderabad,
observed as follows :
"It cannot be disputed that prior to the
integration of Hyderabad State with the Indian Union and the coming into force
of the Indian Constitution, the Nizam of Hyderabad enjoyed uncontrolled
sovereign powers. He was the supreme legislature, the supreme judiciary and
the, supreme head of the executive, and there were no ;constitutional
limitations upon his authority to act in any of these capacities.
The 'Firmans' were expressions of the
sovereign will of the Nizam and they were binding in the same way as any other
law;- nay they would override all other laws which were in conflict with them.
so long as a particular 'Firman' held the field, that alone would govern or
regulate (1)A.I.R. 1955 S.C. 352.
869 the rights of the parties concerned,
though it could be annulled or modified by a latter 'Firman' at any time that
the Nizam willed." The same can be said of the Ruler of the Holkar State.
When to the order of the Ruler was added the usual mode of making and
promulgating rules, the-position which emerges is really unassailable.
Mr. Desai in attempting to show that the
ruling does not apply to the case, raised two contentions. The first was based
upon a more recent decision of this Court in Madhaorao v. State of Madhya
Bharat (1), where certain Kalambandis of the Maharaja of Gwalior were
considered. This Court in deciding whether the Kalambandis were existing law
under Art. 372 of the Constitution, observed :
"In dealing with the question as to
whether the orders issued by such an absolute monarch amount to a law or
regulation having the force of law, or whether they constitute merely
administrative orders, it is important to bear in mind that the distinction
between executive orders and legislative commands is likely to be merely
academic where the Ruler is the source of all power. There was no
constitutional limitation upon the authority of the Ruler to act in any
capacity he liked ;
he would be the supreme legislature, the
supreme judiciary and the supreme head of the executive, and all his orders,
however issued, would have the force of law and would govern and regulate the
affairs of the State including the rights of its citizens.", It was,
however, pointed out in the case that even where an order is issued by the
sovereign ruler, one must look to the character of the order and its content to
find out whether it enacted a binding rules (1) A.I.R. 1961 S.C. 298.
870 Mr. Desai has constructed his entire argument
on the basis of these observations, and has contended that the orders only
expressed an opinion and did not bind. He pointed out as the second limb of his
argument that these notifications were not expressed as a rule but as an order,
and that they did not seek to amend the rules, nor to add to them. He referred
to other notifications in which a legislative act was clearly discernible, as
for example, Notification No. 22/Com. dated May 17, 1946, by which for the
existing Rule 4, a new Rule was substituted. An examination of the Rules,
however, shows that there was no set pattern of language.
Some of the Rules do not read like rules at
all. Notes have been appended to the rules, which are not rules proper, and R.
29 says :
"All matters not dealt with in these
rules may be submitted to the member-in-charge., Commerce and Industry
Department for decision." The existence of such a rule seems to obliterate
the frontiers between legislative, judicial and executive exercise of the power
of a State, such as we understand it.
There being no invariable use of a clear-cut
legislative language, each general order emanating from the sovereign ruler and
promulgated in the same manner as any other rule and having its roots in a
resolution of the Cabinet must be regarded as one binding upon the subject.
This is the purport of the decisions of this Court, and the present case falls
in line with those which have been previously decided.
There is nothing in the content, the
character or the nature of these notifications, which would put them on a level
lower than the Rules, which had been earlier promulgated.
In our opinion., the judgment of the High
Court under appeal is correct, and the appeals are accordingly dismissed with
costs, one set.