V.Bhargava, J. - (1.) This is a reference under Section 66 (l), Income-tax Act, read with Section 21, Excess Profits Tax Act. The question referred to us for opinion runs as follows: "Whether in the circumstances of this case the applicant firm is liable to be assessed to Excess Profits Tax for the chargeable accounting period 30-10-1940 to 19-10-1941 on the income, profits and gains derived by it from: (a) the selling agency of the Cawnpore Cotton Mills Co. (branch of the British India Corporation, Ltd.) and (b) the running or the management of the retail cloth shop of the Cawnpore Cotton Mills Co.?"
(2.) Messrs. L.N. Gadodia & Company, which is a registered partnership firm, secured the selling agency business of the Cawnpore Cotton Mills Company, which is a branch of the British India Corporation, Limited, by means of a written agreement drawn up on 1-3-1938. The case of the firm is that the income derived by it from this selling agency business is not the income, profits or gains from a business but is the payment for services rendered by the Company in the capacity of a servant, the master being the British India Corporation, Limited. The claim thus was that all the income received from this selling agency business was salary which was outside the scope of the Excess Profits Tax Act. The Excess Profits Tax Officer, the appellate Assistant Commissioner, Excess Profits Tax, the Income-tax Appellate Tribunal held that the receipts from this business were business profits and consequently assessed Excess Profits Tax on it.
(3.) In addition to this selling agency business, a retail cloth shop was also run at Kanpur which was managed by this firm. For the chargeable accounting period, the Company was paid a sum of Rs. 27,030-15-0 purporting to be payment for meeting costs of advertisement and salaries of: travelling representatives in respect of the running and management of this retail shop. The Excess Profits Tax Officer treated this amount also as income, profits or gains from business and assessed this amount to Excess Profits Tax. The contention of the firm was that this amount was paid to it to meet the expenses so that it was not the income, profits or gains at all; and, in the alternative, it was contended that, in any case, this amount must be treated as salary paid to the firm for managing and running the retail shop and it did not represent the income, profits or gains from the business of this shop. The appeal to the Appellate Assistant Commissioner, Excess Profits Tax, failed and so did the appeal to the Income- tax Appellate Tribunal. The Income-tax Appellate Tribunal, in addition, held that, even if this amount be deemed to have been paid to the Company to meet the expenses incurred by the firm in running the retail shop, the amount would be liable to be added to the income, profits or gains of the Company, because this amount was already included in the expenses shown by the Company in its accounts, so that if this amount is not taxed separately as income, profits or gains, the expenses set off in the accounts should be reduced by this amount and the income, profits Or gains calculated according to the accounts should thereby be increased to the extent of this amount.;