The State of Madhya Pradesh Vs. Binod
Mills Company Ltd. [1962] INSC 120 (3 April 1962)
03/04/1962 AYYANGAR, N. RAJAGOPALA AYYANGAR,
N. RAJAGOPALA GAJENDRAGADKAR, P.B. (CJ) SARKAR, A.K.
WANCHOO, K.N.
GUPTA, K.C. DAS
CITATION: 1966 AIR 1143 1963 SCR (1) 205
ACT:
War Profits Tax-Assessment of company's
profits--Deduction of managing agent's remuneration-"Included in the
profits of the managing agency business"-Gwalior War Profits Tax
Ordinance, Samvat 2001, ss.2(5), 2(10), 4(1), 5(1), Sch.1, r.4(1), proviso (b).
HEADNOTE:
Sub-rule (1) of r. 4 of Sch. 1 to the
Gwalior. War Profits Tax Ordinance, Samvat 2001, provided: "In computing
the profits of a business carried on by a company, no deduction shall be made
in respect of the remuneration paid to directors if during any part of the
accounting period concerned, they had controlling interest in the company;
provided that this sub-rule shall not apply
(a)........ (b) to the remuneration of any managing agent where such
remuneration is included in the profits of the managing agents' business for
the purposes of the War Profits Tax".
The respondent company was' managed by a
managing agency firm which had, by reason of its shareholding exceeding 50% of
the issued share-capital, a controlling interest in the company. The company
was assessed to War Profits Tax under the provisions of the Gwalior War Profits
Tax Ordinance, Samvat 2001, for three chargeable accounting periods between
1944 and 1946. During each of these accounting periods the company had paid remuneration
to its managing ,agent and claimed to deduct the remuneration so paid in the
computation of its business profits during these three periods. The assessing
officer disallowed the claim on the ground that as the remuneration received by
the managing agency firm had not been factually assessed in the hands of the
managing agent, proviso (b) to r.4(1) of Sch. I was not applicable. It was
found that the managing agents had in their statement of their own Profit and
Loss account for the relevant years disclosed the managing agency commission
received by them but they claimed before the assessing authority that the sum
was not liable to be taxed and this claimed was accepted.
Held, that the remuneration paid to the
managing agents, even though they had a controlling interest in the 206
company, was a permissible deduction for the purpose of computing the profits
of the company under the War Profits Tax Ordinance, Samvat 2001,' because by
virtue of proviso (b) to r.4(i) of Sch. 1 to the Ordinance, the managing agent
was liable to include this remuneration in his assessable profits.
The words "is included" in proviso
(b) to r.4(1) refer to the inclusion under the provisions of the Ordinance.
Neither the default of the managing agent as
an assessee nor of the assessing authority to include the sum in the profits of
the managing agent could prejudice the rights of the company in the matter of
the computation of its income.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 228 to 230 of 1960.
Appeals from the judgment and decree dated
February' 4, 1957, of the Madhya Pradesh High Court (Indore Bench) at Indore in
Civil Reference No.15 of 1952.
B. Se??,, B. K. B. Yaidu and 1. N. Shroff,
for the appellants.
A. V. Viswanatha Sastri, K. A. Chitale, J. B.
adachanji, S. N. Andley, Rameshwar Nath and P. L. Vohra for the respondents.
1962. April 3. The Judgment of the Court was
delivered by.
AYYANGAR, J.-Rule 4 (1)(b) of Sch. 1 headed
((Rules for the computation of profits for the purposes of War Profits
Tax" of the Gwalior War Profits Tax Ordinance, Samvat 2001 (hereinafter
referred to as the Ordinance), provided:
"4. In computing the profits of a
business carried on by a company, no deduction shall be made in respect of(1)
remuneration paid to directors if during any part of the accounting period
concerned they had controlling interest in the company;
207 Provided that this sub-rule shall not
apply-(a).............................................
(b) to the remuneration of any managing agent
where such remuneration is included in the profits of The managing agents'
business for the purposes of the War Profits Tax".
The respondent-Binod Mills Co. Ltd. which had
its business at Ujjain in the State of Gwalior was a company whose profits were
liable to War Profits Tax under the Ordinance.
The company was managed by a managing agency
firm-M/s. Binodiram Balchand which had, by reason of its shareholding exceeding
50% of the issued sharecapital, a controlling interest in the company. The
respondent-company was assessed to War Profits Tax for three chargeable
accounting, periods-July 1, 1944, to December 31, 1944 , January 1, 1945, to
December 31, 1945, and January 1, 1946, to June 30, 1946. During each of these
accounting-periods the respondent-company had paid remuneration to its managingagents
and claimed to deduct the remuneration so paid in the computation of its
business profits during these three periods. The assessing officer disallowed
the claim on the ground that the remuneration received by the managing-agency
firm had not been factually assessed in the hands of the managing-agent and
that consequently the matter was covered by the opening words of r. 4 and not
saved by proviso (b) to the rule. An appeal against this order of assessment
was dismissed by the appellate authority and thereafter by the Commissioner of
War Profits Tax in revision. But at the request of the respondent the
Commissioner submitted a reference under s. 46 (1) of the Ordinance to the 208
High Court of Madhya Pradesh of the following question for its decision:
"Whether in computing the profits of a
business carried on by a company deduction shall be made in respect of any
remuneration to any managing-agent where such remuneration is included in the
profits of the managing agent's business for the purposes of the War Profits
Tax ?" There was a consolidated reference in respect of the three
chargeable accounting periods. The learned Judges of the High Court answered
the question in favour of the respondent and held that the remuneration, even
though paid to a managingagent who had a controlling interest in the company,
was a permissible deduction for the purpose of computing the profits of the
company for the purposes of the War Profits Tax. The High Court was thereafter
moved by the appellant for the grant of certificates of fitness for appeals to
this Court under s. 47 of the Ordinance and the certificates having been
granted these three appeals, which relate to the three chargeable accounting
periods have been preferred to this Court.
Before proceeding further it might be
convenient to set out certain facts to appreciate the form of the question
which might provoke some enquiry. There was not much dispute, and even if there
was, it was abandoned fairly early, that M/s. Binodiram Balchand were
"directors" of the company within the meaning of the Ordinance and
bad a controlling interest in the company. In this connection we might advert
to the definition of ,director' in s. 2(10) of the Ordinance:
"2. (10). 'director' includes any person
occupying the position of a director by whatever name called and also includes
any person who(i) is a manager of the company or 209 concerned in the
management of the business;
and (ii) is remunerated out of the funds of
the business; and (iii) is the beneficial owner of not less than 20 per cent of
the ordinary share capital of the company".
The controlling interest being established,
it was common ground that the remuneration paid to the managing-agent could not
be deducted in computing the profits of the company unless it fell within
proviso (b) of r. 4(1).
Before the departmental authorities it was
suggested on behalf of the company that the expression 'included' in proviso
(b) meant ",disclosed in the return of the director" and on this
basis it was contended that as M/s Binodiram Balchand had., in the statement of
their own Profit & Loss account for Samvat 2000, 2001 and 2002, disclosed
the managing agency commission received by them the remuneration had been
"included" in their profits for the purposes of the War Profits Tax,
though for reasons which are unnecessary to discuss they claimed that the sum
was not liable to be brought to tax and this claim was accepted. This argument
which was rejected by the departmental authorities is however responsible for
the form of the question referred to the High Court. This contention however
was not apparently repeated before the High Court and does not figure in the
judgment as part of the reasoning of the learned Judges in the judgment now
under appeal and has not been relied upon before us. We shall therefore say no
more about it, but proceed to deal with the substantial question raised.
The facts being as above stated the entire
question in the appeals turns on the mean of the 210 expression "is
included in the profits of the managing Agency business" in r.4(1) proviso
(b) of Sch. 1 of the Ordinance. Before however entering on a discussion of the
words underlined and of proviso (b) in particular, it would be necessary to set
out broadly the scheme underlying the levy of the tax under the Ordinance.
Section 4(1) of the Ordinance is the charging section and it enacts :
"4. (1) Subject to the provisions of
this Ordinance, there shall, in respect of any business to which this Ordinance
applies, be charged, levied and paid on the amount by which the profits during
any chargeable period exceed the standard profits, an excess profit tax (in
this Ordinance referred to as the 'War Profits Tax') which shall be equal to 60
per cent. of the aforesaid amount." The "business" to which the
Ordinance applies has to be gathered from the terms of s. 2 (5) which defines
the term 'business'. That clause reads :
" business' includes any trade, commerce
or manufacture or any adventure in the nature of trade, commerce or manufacture
or any profession or vocation' but does not include a profession carried on by
an individual or by individuals in partnership, if the profits of the
profession depend wholly or mainly on his or their personal qualifications,
unless such profession consists wholly or mainly in the making of contracts on
behalf of other persons or the giving to other persons of advice of a
commercial nature in connection with the making of contracts :
Provided that where the functions of a
company or of a society incorporated by or under any enactment consist wholly
or mainly in the holding of investments or other property or both, the holding
thereof shall be 211 deemed for the purpose of this definition to be a business
carried on by such company or society;
Provided further that all businesses to which
this Ordinance applies carried on by the same person shall be treated as one
business for the purposes of this Ordinance".
The second proviso uses the term 'person'
which is defined by s. 2 (13) to include "any company or body of
individuals or any other association of persons whether incorporated or not and
also includes a Hindu undivided family". The 'Profits' which is referred
to in the charging section is, by reason of the definition of the term in s. 2
(16), to mean ,profits as determined in accordance with the provisions of this
Ordinance and its First Schedule". The provisions of the Ordinance
relating to the computation of profits do not bear upon the point now in
controversy, but what is of relevance are certain of the Rules for the
computation of the profits in Sch.1.
From the terms of the charging section read
with the other provisions of the Ordinance to which we have adverted it would
be seen that it is the profits accruing from business that is brought to charge
and that each person whether he be an individual or comprehended within the
inclusive definition of the term ',person" is an independent unit of
assessment whose profits are computed by aggregation of all of its sources of
income from every business which that unit may carry on. How the profits of
each unit is to be computed for the purposes of tax has to be gathered, apart
from the provisions of the Ordinance which, as stated earlier, are not relevant
to the present case, from Sch. 1 headed "Rules for the computation of
profits for the purposes of War Profits Tax". Rule 1 of these Rules which
generally follows the pattern of the Indian Income-Tax Act in setting out the
list of 212 permissible deductions, provides as one of such deductions in r. I.
(1)'(xi) ,,any expenditure (not being in the nature of capital expenditure or
personal expense of the person to whose business this Ordinance applies) laid
out or expanded wholly and exclusively for the purposes of such business".
If this provision were applied for computing
the profits of a company as an unit of assessment, there, could be no dispute
that generally speaking the remuneration paid to a managing-agent would be an
admissible deduction. It hardly needs to be mentioned that the remuneration received
by a managing-agent would be profits from business on which he would be, liable
to tax under the Ordinance, being a profit from business as defined in s. 2(5)
subject only to the condition that the amount of the profit brought it within
the taxable limit. To this prima facie rule as regards the manner in which the
profits derived by a company are to be computed r. 4 enacts an exception, in
the case of those companies in which the Directors have a controlling interest.
But the application of this special rule as regards companies under the
management of Directors with controlling interest is, however, subject, among
others, to proviso (b) not applying to the case. In other words, if proviso (b)
saved the case, the special rule as to controlled companies would cease to be
applicable and the remuneration paid would be deductible in the computation of
the companies' profits. This turns on whether the remuneration paid to the
managing-agent "is included in the profits of the managing agent's
business". The words used being "is included" there is no doubt
that an actual inclusion is posited. But this, however, does not solve the
problem, for the ,-'inclusion in the profits" might refer to three
distinct "inclusions" : (1) the inclusion by the managing agents as an
assessee for the purposes of his individual assessment, i.e., in his return,
(2) the inclusion by the assessing authority in the order of 213 assessment
made against the managing agent, (3) the inclusion under the terms of the
Ordinance of the remuneration as an amount chargeable to the tax as part of the
profits of the managing agent. In passing we might observe that r. 7 (2) (b) of
Sch. 1 to the Excess Profits Tax Act, 1940, on which the Ordinance is modeled
is in the same terms as the proviso (b) to r.4(1) of the Ordinance but the
proper interpretation of the rule in the Excess Profits Tax Act has never come
up before the Courts for decision.
The contention urged on behalf of the
appellant, before the learned Judges of the High Court was that the inclusion
referred to an inclusion by the "essment officer of the remuneration in
the assessment of the managing-agent and that unless the remuneration sought to
be excluded in the computation of the profits of the company was actually
assessed in the hands of the managing, the company could not claim the benefit
of proviso (b). The learned Judges repelled this submission by holding that the
proviso could not be construed as to vest in the assessing authority an
absolute discretion to assess either the company or the managing-agent. They
read the words ",is included" as equivalent to "is liable to be
included" and that as it was not contested before them that if the
assessment-officer had been so minded he could have included this sum in the
profits of the managing-agent's business, the terms of proviso (b) were
satisfied.
Mr. Sen-learned Counsel for the appellant did
not pursue the same line of argument as in the Court below. We should add that
we consider that Mr. Sen was right in not attempting to support the argument
which was rejected by the learned Judges of the High Court. Though tax laws
occasionally make provision for the assessing-authority to proceed against a
particular unit of assessment on one or 214 more alternative bases, it would
require 'very explicit and unambiguous language to permit an
assessing-authority to choose one of two units for assessment, particularly in,
the context of there being no provision for the inter se adjustment of the
rights and liabilities in the event of one unit benefiting at the expense of
the other by reason of the exercise of the option and when admittedly the unit
does not receive the income as agent for the other unit. Besides, if the
company had been first assessed to tax-because let us say its return had been
filed earlier, or the enquiry as regards the correctness of the return was
completed earlier, there is no provision /in the Ordinance or in the Rules for
excluding the sum in the personal assessment of the managing agent, so that it
could not be urged that the assessing authority had any option in the matter to
tax either the company or the managing-agent. If the managing-agent is ex ron cess
is liable to have his remuneration included in his assessment for the tax,
unless the income or the business is not within the Ordinance, it would be most
anomalous to suggest that in order that the benefit of proviso (b) should be
available to a company, the assessment of the managing agent should have been
completed first a matter not always within the control of a company. We do not
think it necessary to dilate further on this construction since Mr. Sen did not
commend it for our acceptance.
His submission, on the other hand, was that
this was a special provision designed to meet the cases of companies in which
the directors had a controlling interest. In such cases it was these directors
who had to submit and submitted the return on behalf of the company and who, of
course, had to submit their own returns in their individual capacity as persons
in receipt of taxable profits. In these circumstances 215 he urged that the
proviso should be read as conferring an option upon the directors either to
include their remuneration in their own returns, get them taxed and pay the tax
themselves or to include it in the company's return and have the amount taxed
in the company's assessment. His further submission was that having regard to
the manner in which the proviso was worded, where the managing-agent failed to
include his remuneration in his own return and have it assessed as part of his
profits, the effect was the same as if he had opted to have the sum taxed in
the company's assessment. The option, it was urged, was that of the
managing-agent who controlled the affairs of a company and therefore in effect
represented it and who in one capacity acted for himself and in another acted
for the company. In effect the submission of learned Counsel was that the
provision was designed to obviate double taxation of the same income and for
this purpose vested the controlling-Director with a discretion to render the
company immune from tax where the sum was included in his own return and was
assessed in his hands.
The theory propounded regarding the provision
being one for avoidance of double taxation in the manner above indicated by
vesting a discretion in the controlling-Director breaks even on a cursory
examination. Let us assume that the managingagent opts to have the company
taxed and submits a return on behalf of the company in which no deduction is
claimed in respect of this item and an assessment is made accepting that
return. On the terms of the Ordinance this would not afford any relief to the
managing agent in his personal assessment, for admittedly there is, as pointed
out earlier, no provision in the Ordinance or in the Schedule exempting the
managing agent from the inclusion of this remuneration in his taxable profits,
and this 216 must obviously be so, because for the purposes of the charging
section he would be an independent unit of assessment. He would have to include
in the computation of his personal income for the purpose of the War Profits
Tax the remuneration received by him. This might be expressed in a slightly
different form by stating that proviso (b) to r. 4(1) does not operate in the
reverse direction, that is by exempting the managing-agent from tax on the
remuneration derived by him, merely because the deduction of that item has been
denied to the company. Obviously therefore r. 4(1)(b) is not a rule designed
for the avoidance of double taxation in the sense in which learned Counsel for
the appellant suggests that it is. There are also other reasons why we find it
unable to accept the submission of Mr. Sen that by the words is
"included" is meant the inclusion in the return by the managing-agent
with the result that in cases where he does not so include, the company would
not be entitled to the deduction. The option suggested by Mr. Sen to the
managing-agent was that he might either elect to pay the tax himself or get the
company to pay it. Obviously it would always be in the interest of the
managing-agent to have the tax paid by the company if by that means, as is
suggested by Mr. Sen, he could obtain absolution from the obligation of paying
the tax himself, for if the tax is paid by the company the loss involved in the
payment of the tax would fall on him only to the extent of his shareholding,
being for the rest shared by the other share-holders of the company. It is
really difficult to understand the principle by which one could construe a rule
of this nature as enabling a managing-agent who holds, say 51% of the
share-capital of the company to visit 49% of the burden of tax which normally
one would expect to be paid by him, to be paid by the other shareholders of the
company merely because 217 he happens to be the managing-agent holding a
controlling interest by the extent of his share-holding. We consider that the
construction suggested by Mr. Son which leads to such an unreasonable result
and inflicts an unjust injury on the other shareholders is not any proper interpretation
of the provision. Besides, there are other grounds why the meaning attributed
to the words "is included" as referring to "included' by the
managing-agent" cannot be accepted.
Suppose the managing-agent includes it in his
return but the assessing authority does not include it in the computation of
his return but prefers to disallow the deduction in the case of a company.
Would that be "inclusion in his profits?" Again, suppose the
managing-agent does not include it in his return but the assessing authority
does, and tax is paid by the managing-agent, would there be no exclusion? These
illustrations serve to bring out the anomalies that would arise if it were held
that the words ",is included" meant "is included in his return by
the managing-agent".
This leaves for consideration the meaning
that "is included" refers to the inclusion under the provisions of
the Ordinance. If this meaning were accepted it would not matter whether the
managing agent has or has not included the sum in his return or whether the
assessing authorities have or have not done their duty by having the
remuneration included in the taxable profits of the managing agent. If the
managing-agent has not done so being under an obligation imposed by the law to
include it, the return would be liable to be revised by the assessing officer
and if the failure to include the sum was due to any suppression, the managing agent
would, besides having the sum included in his assessable profits, be liable to
appropriate penalties for filing a wailfully incorrect return. Similarly, the
assessing officer being under a statutory duty to include the sum in the
assessment of the managing agent would, if he failed to do so, render the order
218 liable to be revised. The remedy for the failure either of the
managing-agent or of the assessing authorities to conform to the requirements
of the law certainly cannot be the disallowance of the sum in the computation
of the profits of the company. The entirety of this reasoning, it would be
noted, proceeds on the basis that the managing agent was liable to include his
remuneration in his assessable profits. In such a contingency it stands (to
reason that neither the default of the managing-agent as an assessee or of the
assessing authority to include the sum in the profits of the managing-agent
could prejudice the rights of the company in the matter of the computation of
its income.
Where the remuneration of the managing agent
was not under the Ordinance liable to be brought to tax the position would be
different and that is just what is indicated as that which would render the
proviso inapplicable. For instance, s. 5(1) of the Ordinance enacts;
".
Provided further that this Ordinance shall
not apply to(a)..................................................
(b) profit from a business carried on wholly
on behalf of a religious or charitable institution and the profits of which are
applied solely to the purpose of the institution and enure for the benefit of
the public, and(i) the business is carried on in the course of the carrying out
of a primary purpose of the institution, and (ii) the work in, connection with
the business is carried on by the beneficiaries of the institution".
If for instance, the business of the
managing-agency was being carried on for or on behalf of a trust of 219 the
character indicated by the provision just now read, the remuneration of the
managing-agent would not be liable to tax for the reason that it is outside the
ambit of the Ordinance and to such a case the terms of proviso (b) to r. 4(1)
would not be attracted, with the result that the managing agent not being
liable to tax under the Ordinance on the remuneration derived by him, the
company, if it were a controlled company. would not be entitled to the
deduction of that remuneration in the computation of its profits.
Except in case where the remuneration
received by a managing agent is not liable to tax under the Ordinance, it is
the managing-agent that would be liable to pay tax on his remuneration and
notwithstanding that the company is a controlled company the remuneration paid
by it to the managing agent would be a permissible deduction by reason of the
exception to the opening words of r. 4(1) contained in proviso (b). It is
unnecessary for our present purpose to consider whether besides S. 5(1)(b),
already referred to, there are other contingencies in which remuneration
received by a Director could be held not to be ,included' in the latter's
profits under the Ordinance, since in the case before us it is admitted that the
remuneration received by the managing-agent was liable to be include in the
computation of his profits for the purposes of the War Profits Tax and
therefore neither the fact that the managing-agent did not "include"
the sum in his return, nor the default of the assessing authority to correct
this error by "'including" the sum in his assessment, is any reason
for depriving the respondent company of the benefit of proviso (b) to r. 4(1).
We therefore consider that the learned Judges
of the High Court answered the question referred to them correctly. The appeals
fail and are dismissed with costs.
Appeals dismissed.
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