BRITISH INDIAN CORPORATION LIMITED Vs. COMMISSIONER OF INCOME TAX
HIGH COURT OF ALLAHABAD
BRITISH INDIAN CORPORATION LTD.
COMMISSIONER OF INCOME TAX
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Desai, C.J. -
(1.)THIS is a statement of case submitted to this Court by the Income Tax Appellate Tribunal, Allahabad Bench, inviting it to answer the following two questions:
(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 Schedule 1 of the Excess Profits Tax Act?"
(2) "Whether on the facts and circumstances of this case the amount of Rupees 1,28,743/- was rightly disallowed under Rule 12 (1) of Schedule 1 of the Excess Profits Tax Act?"
The statement refers to two chargeable accounting periods (1) 1945 and (2) 1946.
(2.)THE assessee at whose instance this statement has been submitted, is a public limited company having several branches and several subsidiary companies. Its business is looked after by a Board of Directors and the working of the branches, by Managers. Generally Directors themselves are appointed as Managers. THE Directors and the Managers are paid their monthly salaries or fees and commission worked out at certain fixed percentages of the net profits THE commission is fixed at the time of the appointment or subsequently by a resolution. By a resolution the Board of Directors had decided that the commission should be paid to the Managers, the Directors and the branch Managers "on no, audited profits only after depreciation had been allowed for but prior to any allocation or appropriation of such profits including provision for taxation". This resolution was subsequently clarified by the Board resolving that the words "including provision for taxation" were intended to, and did specifically cover, all forms of taxation including excess profits tax and other like impositions". THE result was that the excess profits tax was not to be deducted for arriving at the figure of the net profits for calculating the commission. Accordingly the assessee has been calculating the commission by applying the percentages to the profits without deducting the excess profits tax payable.
In the chargeable accounting periods 1943 and 1944 the commission paid to the Directors and the Managers was worked out by applying the percentages to the net profits without deducting the excess profits tax payable for the periods. The Excess Profits Tax Officer objected to it and as required by Rule 12 of schedule 1 of the Act recalculated the commission by applying the percentages to the net profits arrived at after deducting the excess profits tax, and on 30-3-1945 assessed the tax accordingly. Excess profits tax is payable on the amount by which the profits in respect of any business during any chargeable accounting period exceed the standard profits. The profits are to be determined in accordance with the first schedule., vide Section 2 (19). The schedule was amended by the second Amendment Act No. 24 of 1941 and Rule 12 (1) given below, was added:
"12 (1) -- 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 and, in the case of directors' fees or other payments for services, to the actual services rendered by the persons concerned."
It was this duly that the Excess Profits Tax Officer performed. He took into consideration the fact that the percentages had been fixed long before the Excess Profits Tax Act came into force when there was no question of deducting the excess profits tax from the profits for determining the net audited profits. The object behind the Excess Profits Tax Act was to prevent the owner of a business from making a large fortune out of the war. So it provided for the sharing between him and the State of the excess profits, that is the excess of the profits over standard profits. If the commission payable to the Directors and the Managers was worked out on the basis of the profits without deduction of the excess profits tax they got much larger than they would have if the profits were taken into consideration after deducting the excess profits tax. Thus they obtained a greater advantage than even the assessees and this is another fact that the Excess Profits Tax Officer took into consideration. On the basis of these facts he held that it was unnecessary and unreasonable to pay them more than the agreed percentages of the profits before deduction of the excess profits lax. The orders passed by him were upheld by the Income Tax Appellate Tribunal on 22-3-1947. Though its attention was drawn to the absence of evidence regarding any extra services having been rendered by fee Directors and the Managers it recorded no finding that they had not rendered extra services. It gave no reasons of its own and contended itself with observing that the Excess Profits Tax Officer was justified In acting as he did. Subsequently it stated the case under Section 66 (.2) of the Income Tax Act; I shall come to this presently.
The Excess Profits Tax Officer took up the assessment of the excess profits tax for the next chargeable accounting periods ending 31-12-1945 and 31-3-1946 and on 15-12-1947 and 31-3-1948 passed assessment orders on the same lines as for the chargeable accounting periods 1948 and 1944. In the assessment orders he said:
"For reasons stated in the order dated 80-3-1945 under Rule 12 Schedule 1 for the chargeable accounting period 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 management and Directors is both unreasonable and unnecessary."
He also referred to the fact that the Tribunal had on 22-3-1947 confirmed his orders. The assessee preferred appeals from the two assessment orders which were dismissed by the Tribunal on 30-12-1949. It observed in its order that "the nature of the work and the service rendered by the management and the Directors has not at all changed " Then under Section 66 (2) it submitted this statement of case.
(3.)DURING the pendency of this reference the earlier statement submitted by it referring the questions arising out of its earlier order dated 22-3-1947 came up for decision before Bhargava and Mehrotra, JJ The question they had to answer was
"whether, on the facts and circumstances of this case. the amounts of . .. .. .. for the chargeable accounting period from January 1. 1943 to December 31. 1948, and of Rs. .. .. .. for the chargeable accounting period from January 1. 1944, to December 31. 1944, were rightly disallowed under Rule 12 (1) of Schedule 1 of the Excess Profits Tax Act?"
and they answered it in the negative. They took the finding of the Excess Profits Tax Officer to be that the previous practice and the agreements did not require the commission to be calculated on the basis of the profits without deduction of the excess profits tax and held that this did not furnish the reason for disallowing a part of the commission under Rule 12 (i). They relied upon Shyam Lal Prag Narain v. Commissioner of Income-tax, 1955-27 ITR 404: (AIR 1955 All 299) (FB) in which a Full Bench of this Court had set aside the disallowing of a part of commission under Rule 12 (1) merely on the ground of its being an ex gratia payment e.g., a payment which the assessee was not liable to make under the agreement. The Full Bench had decided that a payment could Hot be held to be unecessary and unreasonable merely on the ground that it was ex gratia without consideration of other facte and circumstances. The learned Judges held that this decision of the Full Bench, was fully applicable because the Excess Profits Tax Officer and the Tribunal had held that under the terms of the resolution the proper way of paying the commission was to calculate it after deducting the excess profits tax liability. They assumed that neither of them had considered whether the commission paid to the Directors and the Managers was necessary and justified or not, keeping in view the ordinary commercial practice, the commercial expediency and the services rendered by them, because there was not a word about these matters in their orders. Since the Tribunal did not record any finding of fact with regard to the necessity for the payments, the exigencies of the business and the services rendered by the recipients the learned Judges answered the question in the negative. The judgment is reported in British India Corporation Ltd. Kanpur v. Commr. of Excess Profits Tax. 1958-33 ITR 826 : AIR 1957 All 826.
There are two questions before us but they are identical with each other, the only difference being that one refers to the chargeable accounting period 1945 and the other to the charageable accounting period 1946. These questions are undisputedly identical (except for the figures) with the question answered by Bhargava and Mehrotra, JJ The Excess Profits Tax Officer has not given any reasons for applying Rule 12 (1) in the particular manner and has simply relied upon the previous assessment orders. On the other hand, the Tribunal has gone into the matter with some detail. It referred to his findings (though based on the earlier assessment orders) that the commission allowed to the recipients was unreasonable and unnecessary and to the fact that no additional material was produced by the parties during the assessment for the chargeable accounting periods 1945 and 1946 and held that the Excess Profits Tax Officer was justified in basing his orders on the earlier orders.
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