HIDAYATULLAH, - (1.) THE following Judgment of the court was delivered by :
(2.) THIS appeal by special leave of this court, has been filed against the judgment and order of the Bombay High court dated 27/08/1954, by the Ahmedabad Manufacturing and Calico Printing Co.' Ltd.. Ahmedabad, hereinafter called the assessee Company. By that judgment, the High court of Bombay answered the first of the two following questions referred to it by the Income-tax Appellate tribunal, Bombay, in the negative, and declined to answer the second question, inasmuch as. in its opinion, that question did not arise in view of 'the answer to the first question : 1. "Whether in law, if there is an obligation on the employer to pay a certain bonus, the E. P. T. Officer is bound to allow it as a deduction and is precluded from exercising his discretion under Rule 12(1) of the First Schedule of the Excess Profits Tax Art. 2. If the answer to the first question is in the affirmative whether on a true construction of the agreement between the assessee and his employees and the Provident Fund Rules, the assessee Company is under obligation to pay the bonus without deducting the Excess Profits Tax." The facts out of which the reference arose were as follows: The assessee Company is a limited liability Company, and is one of the well-known manufacturers of textile goods. We are concerned with three chargeable accounting periods corresponding to the Calendar years 1943, 1944 and 1945. While making the assessment of the assessee Company, the Excess Profits Tax Officer found that large payments had been made to five of the employees of the Company during the chargeable accounting periods. He also found that in the case of 53 employees of the assessee Company, excessive contributions had been made by the Company to their Provident Funds. These payments and contributions were on the basis of a percentage of the profits of the assessee Company made in the years of account. In determining the profits on which the said percentage was to be calculated, the assessee Company did not first deduct either the income-tax or the excess profits tax. The Income-tax Officer upheld thand action of the assessee Company in not deducting the income-tax, but he objected to its not deducting the excess profits tax before calculating the amounts payable to the five employees and to the Provident Fund. The Excess Profits Tax Officer also held, applying R. 12 of the First Schedule of the Excess Profits Tax Act, that it was not necessary for the assessee Company for the purpose of its business to make the calculations. on the basis of net profits without the deduction of excess profits tax. The appellate tribunal also upheld the Excess Profits Tax Officer's decision. It, however, declined to state a case to the High court of Bombay, and the assessee Company moved and obtained from the Bombay High court a rule nisi, by which the High court asked the Department to show cause why it should not state a case on the following two questions : 1. "Whether on a true and proper construction of the Provident Fund Rules and of the five agreements with the five officer employees, the amount of Excess Profits Tax determined to be payable should be deducted in the first instance for the purposes of determining the amount of bonus or commission payable to the said employees and the five officer employees. 1299 2. Whether in the circumstances of the case the finding of the tribunal that the full amount of commission or bonus paid to the employees of the Petitioners under the Provident Fund Rules and to the five officer employees under their respective agreements is not an allowable deduction in computing the taxable profits of the Petitioners for the purpose of Excess Profits Tax is justifiable in law." It appears that when the rule nisi came to be heard, the High court of Bombay accepted the contentions of counsel for the Department, and modified the questions to those which have been stated at the commencement of this judgment. We mention this fact, because in the hearing before us, it was contended that the proper questions which arose from the order of the appellate tribunal were the questions which were formulated by the High court in the rule nisi" and not the ones, which were subsequently set down when the rule was made absolute. A few further facts are necessary to indicate what exactly was the arrangement between the assessee Company and the five employees with regard to payment of bonus to them and also what the existing rules were under which the Company's contribution to the Provident Fund came to be made. The tribunal in staling the case has forwarded five agreements entered into with the said employees. Of these, four agreements are between the years 1933 and 1935 and the fifth agreement is of 1944. In all these agreements, it is provided that the employee in question would receive in addition to the salary, if any, bonus or remuneration calculated at a certain percentage of the profit: in accordance with the following formula: X per cent. of the Block value Rs....... profit of the Comx --------------------- pany for the year Block for the year for which bonus or remuneration payable. The percentage of the block value is shown differently under different agreements, but that is not much to the purpose. There was, however, a condition which was common to all the agreements, by which it was provided that profits meant the Company's profit for each complete official year of the Company as shown in the balance sheet for that year before providing for depreciation and income-tax and super-tax.
(3.) IN respect of the Provident Fund. it may be stated that the Provident Fund Regulations were framed with effect from 30/06/1935, and were recognised by the Commissioner of INcome-tax, as required by the Rules regarding Recognised Provident Funds framed by the governor-General in council on 15/03/1930. The amount payable by the Company was determined in accordance with Regulation 12(b), which reads as follows: "If the profits of the Company come to 4% and over on the cost value of the Block as shown in the Balance Sheet in a particular year, then the amount payable by the Company as Bonus in respect of an employee will be equal to Profit for a year 'R' x ---------------------x 100 Block value for that year Where 'R' is a certain pre-assigned constant corresponding to each appointment." It was also provided (Regulation 13) that profits for a year meant profits as shown in the balance-sheet of the Company for that year before providing for depreciation and income-tax charges but after providing for bonus. The dispute naturally arose whether the term "income-tax and super-tax" could be said to include excess profits tax, which came into being in 1940. It was also a question whether the Excess Profits Tax Officer could, under the powers conferred on him by R. 12(1) of First Schedule of the Excess Profits Tax Act, 1940, order that the deduction of excess profits tax should be made before applying the percentage. Rule 12(1) reads as follows : "In computing the profits of any chargeable accounting period no deduction shall be allowed in respect of expenses in excess of the amount which the Excess Profits Tax Officer considers reasonable and necessary having regard to the requirements of the business and, in the case of directors' fees or other payments for services, to the actual services rendered by the person concerned. Provided that no disallowance under this rule shall be made by the Excess Profits Tax Officer unless he has obtained the prior authority of the Commissioner of Excess Profits Tax." In the assessment year 1944-1945, which corresponded to the chargeable accounting period ending 31/12/1943, the Income-tax Officer had notallowed the claim of the assessee Company with regard to excess profits tax in the income-tax assessment. In that year the Excess Profits Tax Officer also acting under R. 12 above quoted, disallowed the claim for excess profits tax assessment. In the two subsequent assessment years corresponding to the chargeable accounting periods ending 31/12/1944 and De 31/12/1945 respectively, the Income-tax Officer computed the assess1300 able profits by allowing bonus to the employees and contribution to the Provident Fund on the basis of net profits after deduction of excess profits tax. The Excess Profits Tax Officer also took the same action, but he did it not only on the acceptance of the assessment of the "Income-tax Officer but also under special power conferred on him under R. 12 above quoted. The Excess Profits Tax Officer, however, did not give a finding of fact: that the payments of bonus and contributions to the Provident Fund of the employees were in excess of the amount which he considered reasonable and necessary, having regard to the requirements of the business and in the case of bonus, to the actual services rendered by the persons concerned. When the matter came before the Income-tax Appellate Tribunal, Bombay, on appeal, it remanded the case to the Excess Profits Tax Officer for a finding on these points. The Excess Profits Tax Officer thereupon drew up a remand report, in the light of which the tribunal came to the conclusion that the order of the Excess Profits Tax Officer was justified. The assessee Company when it made the application for reference to the tribunal as well as to the High court set out no less than 13 questions which, it considered, arose from the order of the tribunal. These questions were compressed into two by the High court when it issued a rule nisi to the Department to show cause why the tribunal should not be asked to state a case. Those two questions bore upon the two matters which we have referred, namely, the construction of the agreements as well as the Provident Fund Regulations to determine whether the amount of excess profits tax was deductible or not before the payments and/or contributions were made by the Company, and whether in the circumstances of the case, the amount paid and the contribution made by the assessee Company was justifiable in law. If appears that, at the stage of showing cause, the learned counsel for the Department was able to convince the High court that no question of evidence on which the orders of the Excess Profits Tax Officer and the tribunal were based, could be raised. The questions were accordingly modified to the two questions which are set out in the beginning of this judgment, and which may, for convenience, be again reproduced 1. "Whether in law, if there is an obligation on the employer to pay a certain bonus, the E. P. T. Officer is bound to allow it as a deduction and is precluded from exercising his discretion under Rule 12(1) of the First Schedule of the Excess Profits Tax Act. (2) If the answer to the First question is in the affirmative, whether on a true construction of the agreement between the assessee and his employees and the Provident Fund Rules, the assessee Company is under obligation to pay the bonus without deducting the Excess Profits Tax." ;