Ayyangar, J. - (1.) 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. 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 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 per cent of the issued share-capital, 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 period the respondent-company had paid remuneration to its managing-agents 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 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 managing-agent 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.
(2.) 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 had 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 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).
(3.) 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 and 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.;