SHAH, J.: - (1.) THE following Judgment of the court was delivered by ,
(2.) 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 and 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 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 13/04/1946, 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 and 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 17/04/1940, the assessees wrote to Mahadevan agreeing to pay him remuneration at the rate of Rs. 1,800.00 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 30/03/1943, the salary of Mahadevan was fixed at Rs. 3,000.00 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 1/04/1944, 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 1/03/1945, but was subsequently reduced to 10% on sales on and after 1/09/1946. These appeals relate to the liability of the assessees to Excess Profits Tax for the chargeable accounting periods ending 13/04/1943, April 12/04/1944, April 12/04/1945, and, 31/03/1946, and for Business Profits Tax for the chargeable accounting periods ending April 12, 19 4/03/1947, April 13, 19 4/03/1948, and 12/04/1948. 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 24/01/1944, 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 23/02/1945, 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. 1,00,000.00 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 12/04/1945, 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 Incometax 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 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.
(3.) 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: (1) Whether the Appellate tribunal erred in law in holding that in accordance with the terms of letters dated 17/04/1940, and 30/03/1943, 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 30/03/1946) 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 30/03/1946, be deemed to be a reference to the Business Profits Tax Act. ' ;