- (1.) This appeals are by special leave against the judgment of the Allahabad High Court in a reference under S. 21 of the Excess Profits Tax Act, 1940 (Hereinafter called the 'Act') read with S. 66 (2) of the Indian Income-tax Act, 1922. The questions referred were in respect of the two chargeable accounting periods being January 1, 1945 to December 31, 1945 and January 1, 1946 to March 31, 1946 and are given below : 1. Whether on the facts and circumstances of this case the amount of Rs. 5,39,057/- was rightly disallowed under rule 12 (1) of the Schedule to the Excess Profits Tax Act 2. Whether on the facts and circumstances of this case the amount of Rs. 1,28,743/- was rightly disallowed under rule 12 (1) of Schedule I to the Excess Profits Tax Act Both these questions were answered in the affirmative.
(2.) The facts and circumstances of the case on which these answers were given are: The assessee is a public limited company (hereinafter called the 'Corporation') having several branches and subsidiary companies. It has a Board of Directors which looks after its business. The branches of the Company are looked after by managers who are members of the Board of Directors. It appears that for a long time and even before the Act came into force the corporation has been remunerating its directors including the Managing Director and branch managers by way of commission based on a certain fixed percentage of its net audited profits. This commission was in addition to the directors' fees and/or stipulated monthly salary. In the case of a branch manager the amount of commission to be paid was calculated on the profits of the branch of which he was in charge. In the case of others the profits made by the Corporation as a whole were taken into consideration . The commission to be paid was either fixed at the time of appointment or by resolution passed subsequently. In so far as the two chargeable accounting periods are concerned, the position in regard to the payment of the commission has been set out in the statement of the case but this is not relevant for the purpose of these appeals except to note, as we have earlier mentioned, that the commission was to be calculated with reference to the net audited profits which phrase was clarified by a resolution of the Corporation dated February 24, 1940. That resolution is as follows : "Commission. In order to regularise previous Resolutions on the subject of Managerial commission, the Board resolved that commission on profits would be payable to the Managing Director and the Branch Managers entitled thereto, on net audited profits, only after depreciation had been allowed for but prior to any allocation or appropriation of such profits including provisions for taxation." Though it is not mentioned in the statement of the case we can take judicial notice of it that the Excess Profits Tax Bill was introduced in the Central Legislative Assembly on January 27, 1940 and after it was passed, received the assent of the Governor-General on April 5, 1940. On July 27, 1940 the phrase 'including provision for taxation' was further clarified by the following resolution :- "The Board, therefore, resolved that the words 'including provision for taxation' were intended to and did specifically cover all forms of taxation including the Excess Profits Tax and other like impositions and, therefore, no deduction of excess profits tax and other like impositions from the audited profits should be made prior to the calculation of Managerial commissions. The Board also resolved that this ruling, which could only be regarded as fair and reasonable should have effect retrospectively to the commission paid in respect of the year 1939." In respect of the chargeable accounting period ending December 31, 1945 the Excess Profits Tax Officer had observed in his order dated December 15, 1947 as follows : "For reasons stated in the order dated 30-3-1945 and Rule 12 Schedule I for the chargeable accounting period up to 31-12-1943, I hold that, having regard to the requirements of the business and the actual services rendered by the persons concerned, the commission allowed to the management and directors is both unreasonable and unnecessary. Any payment in excess of the agreed proportion of the net profits after deduction of Excess Profits Tax is not justified." The Excess Profits Tax Officer accordingly held that Rs. 11,47,143 for the first chargeable accounting period and Rs. 11,06,693 for the second chargeable accounting period could not be allowed and was further of the view that a portion of it was not reasonable and necessary having regard to the requirements of the business and the actual services rendered by the persons concerned. It was pointed out that the commission of the nature under consideration was being paid by the Corporation even before the Act came into force and that such commission was being allowed in its entirety for purposes of computing profits under S. 10 of the Income-tax Act, 1922 in the two corresponding assessments made under S. 10 of the Income-tax Act. Though this was so under the Income-tax Act the Excess Profits Tax Officer on the facts of the case and having regard to rule 12 of the Schedule to the Act took the view that since the commission in the respective chargeable accounting periods were paid out of the profits which could not be retained by the Corporation, a portion of the commission attributable to the Excess Profits Tax Act earned in the peculiar circumstances of a national calamity was not "reasonable and necessary" within the meaning of the said rule. It was found that for the first chargeable accounting period the Excess profits payable were approximately Rs. 64,36,000/- but if the commission was to be paid on the net audited profits of Rupees 1.37 crores, the whole excess profits which could not be retained by the Corporation for its own use would be taken into account for the payment of the commission as such be determined the portion to be disallowed was at 8.4% of the said excess profits which will be payable to the State on account of the Excess Profits Tax liability. On this basis the amount worked out was Rs. 5,39,057. Applying the same method for the following accounting chargeable period ended March 31, 1946 he determined the amount as Rs. 1,28,743/-. These two amounts were disallowed in the assessments for the respective chargeable accounting periods. In arriving at these amounts, the Excess Profits Tax Officer ignored the terms of appointment and the resolutions and drew support from the orders passed by the Tribunal in respect of the two prior assessments for the accounting periods ended December 31, 1943 and December 31, 1946, against which orders of the Tribunal a reference had earlier been made to the Allahabad High Court. This reference was then pending before it when the subsequent assessments were being dealt with. In the appeals against assessments made for the accounting periods in the instant case, it was admitted on behalf of the Corporation before the Tribunal that there was no new material other than what was on record in the Excess Profits Tax assessment files and the Tribunal files relating to the chargeable accounting periods for the years 1943 and 1944. These files were produced before the Tribunal in the appeals for the assessments in question. The Tribunal however dismissed those appeals following its earlier decision relating to the chargeable accounting periods for 1943 and 1944. Against that order the High Court on a reference under the Act considered a similar question, viz. whether the amounts claimed by the Corporation in respect of each of the assessment year was rightly disallowed under rule 12 (1) of the First Schedule to the Act.
(3.) In the earlier reference for the assessment in respect of the assessment years 1943 and 1944, a Bench of the Allahabad High Court in British India Corporation Ltd. v. Commr. of E. P. T. (1958) 33 ITR 826 (All) consisting of Bhargava, J. (as he was) and Mehrotra, J. were of the view that the findings of the Excess Profits Tax Officer that the payments were both not necessary and not reasonable amounted to holding that the previous practice and agreements gave no indication that the commission had to be paid without deducting the excess profits tax from the net profits and that the payments made were beyond the terms of the agreement. According to that court this was not the basis of which the question of reasonableness and necessity of the payments had to be decided. But what the Officer and the Tribunal ought to have decided is the question whether or not these payments were necessary and justified, having regard to the ordinary commercial practice and commercial expediency and taking into account the services rendered by the persons to whom the payments were made. Bhargava, J. who delivered the judgment of the Bench in arriving at the conclusion that the disallowance of the amounts was not justified followed a Full Bench judgment of that Court in Shyamlal Pragnarain v. C.I.T. 27 ITR 404 = (AIR 1955 All 299). In that Full Bench it was observed that what the Excess Profits Tax Officer had to bear in mind is that the amount could be disallowed in whole or in part if it was found that it was not reasonable and it was not necessary having regard to the requirements of the business and the actual services rendered by the managers. The question as to the terms of the contract, it said "may have been a matter of importance as between the employer and the employee but not for the purposes of the determination of the question of reasonableness or necessity either under the Income-tax Act or the Excess Profits Tax Act" which had to be judged in the light of the requirements of business and to the exigencies of the business keeping in view ordinary commercial practice and commercial expediency.;