The State of Madhya Pradesh v. Binod Mills Company Ltd.

War Profits Tax-Assessment o.f company's profits-Deduction of managing agent's remuneration-" Included in the profits of the managing agency bu,qiness"-Gwalior War Profits Tax Ordinance, Samvat 2001, ss.2(.5), 2(10), 4(1), 5(1), Sch.I, r.4( 1) proviso (b).

Sub-rule (1) of r.4 of Sch. I to the Gwalior War Pro-fits Tax Ordinance, Samvat 2001, provided: "In computing the profits of a bu~iness carried on by a company, no deduc-tion shall be made in respect of the remuneration paid to directors if during any part of the accounting period concerned, they had cuntrolling interest in the company; provided that this sub-rule shall not apply (a) ........ (h) 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 company was managed by a managing agency firm which had, by reason of its shareholding exceed-ing 50% of the issued share-capital, a controlling interest in the company. The company was assessed to War Profits Tax under the provi~ions of the Gwalior War P1 ofits Tax Ordi-nance, Samvat 2001, for three chargeable accounting periods between 1944 and 1946. During each of these accounting periods the company had paid remuneration to its manag-ing agent 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 as the remuneration received by the managing agency firm had not been factually assessed in the hands of the managing agent, proviso (h) to r.4( I) of Sch. I was not applicable. It was found that the managing agents had in their statement of their own Profit and Loss account fo~ the relevant years disclosed the managing agency commis-sion received by them but they claimed before the assessing authority that the sum was not liable to be taxed and this claimed was accepted.

Held, that the remuneration paid to the managing agents, even though they had a controlling interest in the 196r,; company, was a permissible deduction for the purp= of

compudng the profits of the company under the War Pro-Thi Sta/1 oj fits Tax Ordinance, Samvat 2001, because by virtue of Madhya P"dtsh

v. proviso (b) to r.4(1) of Sch. I to the Ordinance, the manag-Binod Mills ing agent was liable to include this remuneration in his Compan1 Ltd. assessable profits.

The words "is included" in proviso (h) to r.4(1) refer to the inclusion under the provisions of the Ordinance. Neither the default of the managing agent as an assessee nor of the assessing authority to include the sum in the pro-fits of the managing agent could prejudice the rights of the company in the matter of the computation of its income. C1v1L APPELT.ATE JURISDICTION: Civil Appeals Nos. 228 to 230 of 1960.

Appeals from the judgment and decree dated February 4, 1957, of the Madhya Pradesh High Court (Indore Bench) at Indore in Civil Reference No.15 of 1952.

B. Sen, B. K. B. Naidu and T. N. Shroff, for the appellants.

A. V. Viswanatha Sastri, K. A. Ohitale, J. B. Dadachanji. S. N. Andky. Rameshwar Nath and P. L. Volwa for the respondents.

1962. April 3. The Judgment of the Court was delivered by .

AYYANGAR, J.-Rule 4 (l )(h) of Sch. I heade•l "Rules for the computation of profits for the purposes of War Profits Tax'' of the Gwalior War Profit~ Tax Ordinance, Samvat 2001 (hereinafter referred to as the Ordinance), provided:

' 14. In computing the profits of a business carried on by a company, no deduction eball be made in respect of- ( l) remuneration. paid to directors if during any part of the accounting period concerned, they bad controlling interest in the company;

Provided that this sub-rq.le Fhall not 1061 apply-The flate of .lf1.d•.yo PradeJh Binod Mills Cam(111ny Ltd (b) to the remuneration of any AyyLngar J. managing agent where such remu~eration is included in the profits of the mana-ginp: agents' business for the purposes of the War Profits Tax".

The respondent-Binod Mills Co. Ltd. which had its business at Ujjain i.n 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.

Binodira.m Balchand which had, by re:uon of its shareholding exceeding 50% of the issued sha.re-capital, a controlling interest in the company. The respondent-company was assessed to War Profits Tax for thret:} cha.rgeable accounting periods-July l, l9H, to Dacember 31, 19H, .f anuary l, 1945, to December 3l, 1945, an:l January 1, 194f), to .June 30, 19-16. During each of these accounting-periods the respondent-company had paid rem11neration to its managing-agents and elaimed to rleduct the rem11neration so paid ia the computation of its busi-ness 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 mana·ging-agent and that consequently the matter was covered by tho 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 appel-late 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 (I) of the Ordinance to ·the

lll'OZ High Court of Madhya Pradesh of the following

question for ite decision:

The Stats of Madhya •• Pt•tltsh "Whether in computing the profits of a

Binod MlllJ business carried on by a company deduction Oqmpiny Ltd. shall be made in respect of any remuneration ..d:1yano•r .1. to any managing-agent where such remunera-tion 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 respeet of the three chargeable accounting periods. The . lear-ned Judges of the High Court answered . the ques-tion in favour of the respondent and held that the remuneration, even though paid to a managing· aj!'.ent who had a controlling interest in the com-pany, was a permiRBible 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 !?ranted these three appeals which relate to the t.hree chargeable accounting periods have been prPferred to this Court.

Before proceeding further it might be con· venient 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 thAre was, it was abandoned fairly early, that M/s. Binodiram Balchand were "directors" of the com-pany 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' ins. 2(10) of the Ordinance:

"2. (IO) 'director' includes any perAon occupying the position of a director by what-ever name called and also includes any person who- (i) is a manager of the company or

concerned in the management of the 1962 buainess; and State of Madhya Prarl1sh (ii) is remunerated out of the funds v. of the business; and Bi'lod Mills Company Ltd. (iii) is the beneficial owner of not dyyangarJ, less than 20 per cent of the ordinary share capital of the company"

The controlling interest being established, it wM common ground that the remuneration paid to the manti ging-agent could not be deducted in compnting the profits of the company unless it fell within proviso {b) of r. 4(1 ).

Before the departmental authorities it was suggested on behalf of the company that the expression 'included' in proviso (b) meant 11disclo-sed 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 & Loss account for Sa.mvat 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 con-tention 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 a.nd has not been relied upon before us. We shall therefore say no more about it, but proceed to deal with the sub-stantial question raised.

The facts being as above stated the entire question in the n.ppealli1 turns on the meaning of the

1962 expression "is included in the profits of the managing Thi Sta,. of Agency business" in r.4(1)proviso(b)ofSch. I of the JI atlliJa Pro.thsh Ordinance. Before however entering on a discus-

v.

.Binotl MiUs sion of the words underlined and of proviso (b) in Company Ltd. particular, it would be necessary to set out broadly . .l.Jyanzar J. the scheme underlying the levy of the tax under the

Ordinance. Section 4(1) of the Ordinance is the charging section and it enacts :

"4. ( 1) Subject to the provisions of this Ordinance, there shall, in respect of any business to which this Ordinance applies, be charged, levied and paid on the amount by which the profits during any chargeable perfod exceed the standard profits, an excess profit tax (in this Ordinance referred to as the 'War Profits Tax') which shall be equal to 60 per cent. of the' aforesaid amount."

The "business" to which the Ordinance applies has to be gathered from the terms of s. 2 (5) which defines the term 'business'. That clause reads : " 'business' includes any trade, commercl. or ma,nufacture or any adventure in the nature of trade, commerce or manufacture or any profession or vocation, but does not include a profession carried on by an individual or by individuals in partnership, if the profits of the profession depend wholly or mainly on bis or their personal qualifications, unless such pro-fession consists wholly or mainly in the making of contracts on behalf of other persons or the giving to other perscns of advice of a commercial nat,uro in connection with the making of contracts :

Provid'\d that " J.ere the functions ot a company or of a society incorporated by or under any enactment consist wholly or mainly in the holding of investments or other pro-perty or both, the holding thereof shall be

deemed for the purpose of this definition to be 196B & business carried on by such company or •f society; Tlte Stolt M 11dh,10 ... Pr.Us/I Provided further that all businesses to Binod Mil/1 which this Ordinance applies carried on by the Comp119 Ltd. same person shall be treatESd as one business .brangorJ. for the purposes of this Ordinance".

The second proviso uses the term 'person' which is defined by s. 2 (13) to include "any company or body of .mdividuals or any other aaBociation of persons whether incorporated or not and also includes a Hin<lu undivided family". The 'profits' which is ref erred to in the charging ·section is, by reason of the definition of the term in s. 2 ( 16), to mean "profits as determined in accordance with the provi-sions of this Ordinance and its First Schedule".

The provisions of the Ordinance relating to the ·computation of pro.fits do not hear upon the point now in controversy, but ·what is of relevance are certain of the Rules for the computation of the profits in Sch. I.

From the terms of the charging section read with the other provisions of the Ordinance to which we have adverted it would be seen that it is the profits accruing from busines~ th.at is brought to charge and that each person whether he be an indi-vidual or comprehended within the· inclusive definition of the term ''person" is an independent unit of assessment whose profits are computed by aggregation of all of its sources of income from every business which that unit may carry on: How the profits of each unit is to be. computed for the purposes of tax has ~o be gathered, apart from the prorisions of the Ordinance which, as stated earlier, are not relevant to the present case, from Sch. I headed '1 Rules for the computation of profits for the purposes of Ws.r Profits· Tax". Rule 1 of these Rules which generally follows the pattern of the Indian Income-Tax Aot in setting out the list of l9~t permissible deductions, provides as one of such T/it Slate of deductions in r. 1 ( 1) (xi) "any expenditure (not JI •dhya Pr.,,,s• being in the nature of capital expenditure or perso-

v. nal expense of the person to whose business this Binod Mills Company Ltd. Ordinance applies) laid out or expended wholly and

exclusively for the purposes of such business~'. If this provision were applied for computing the profits of a company as an unit of assessment, there could be no dispute that genera.Uy speaking the remuneration paid to a managing-agent would be an admissible deduction. It hardly needs to be mentioned that the remuneration received by a managing-agent would be profits from business on which he would be liable to tax under the Ordina-nce, being a profit from business as defined in s. 2(5) subject only to the condition that the amount of the profit brought it within the taxable limit. To this prima facie rule as regards the manner in whic~ the profits derived by a company are to be compu-ted r. 4 enacts an exception, in the case of those companies in which the Directors have a controlling interest. But the application of this special rule as regards companies under the management of Direc-tors with controlling interest is, however, subject, among others, to proviso (b) not applying to the case. In other words, if proviso (b) saved the case, the special. rule as' to controlled companies would cease to be applicable and the remuneration paid would be deductible in the computation of the companies' profits. This turns on whether the remuneration paid to the managing·agent "is includ-ed in the profit& of the managing agent's business". The words used being "is included" there is no doubt that an actual incluiion is posited. But this, however, does not sol rn the problem, for the "inclusion in the profi'.;s'' might refer to three distinct "inclusions" : (1) the inclusion by the managing agents as an assessee for the· purposes of his individual assessment, i.e., in his return, (2) the inclusion by the a1111e.11ing authority in the order of

1 s.c.R. SUPHEME COURT R.EPOR1 1S 213

assessment ·ma.de against the managing agent, (3) 1162 the inclusion under the terms of the Ordinance of tho remuneration as an amount chargeable to the Thi Stall of Madhya Praiesh tax as pa.rt of the profits of the managing a.gent. v. In passing we might observe that r. 7 (2) lb) of,Sch. Binod Mills C1m;any Ut. I to the Excess Profits Tn.x Act, 1940, on which the Ordinance is modelled is in the same terms as the ~YJ•nt" J. proviso (b) to r .4( 1 ) of the Ordinance but the propei:

interpretation of the rule in the Excess Profits Tax Act has never come up before the Courts for decision. -

The contention urged on behalf of the appell-ant before the learned Judges of the High Court was that the inclusion referred to an inclusion by the assessment officer of the remuneration in the asEessmt:nt of the managing-agent and that unless the remunera.tion sought to be excluded in the computation of the pro.fits of the company was actually assessed in the hands of the managing-agent, the company cquld not claim the benefit of proviso (b). The learned Judges repelled this sub-mission by holding that the proviso could not be construed as to vest in the assessing authority an absolute discretion to assess either the company or the managing-agent. They read the words '.'is included" as equivalent to "is liable to be includ-ed" and that ·as it was not contested before them that if the assessment-officer had been so minded he could have included this sum in the profits of the managing-agent's business, the terms of proviso (b) were sati1died.

Mr. Sen-learned Counsel for the appellant did not pursue the same line of argument as· in the Court below. We should add that we consider that Mr. Sen was right in not attempting to support the argument which was rejected by the learned Judges of the High Court. Though tax laws occasionally ma.ke provision for the assessing-authority to proce-or ed against a particular unit of assessment on one

more alternative bases, it would require very TJi, State of explicit and unambiguous language to permit an Madhya P~arle1h asRessing-authority to choose one of two units for

v. assessment, particularly ir the context of there Bi1,od Mills Company Lid being no provision for the inter Be adjustment of the

rights and liabilities h the event of one unit bene-