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PETITIONER: R. G. S. NAIDU AND CO.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX ANDEXCESS PROFITS TAX, MADRAS(And

DATE OF JUDGMENT: 14/12/1960

BENCH: SHAH, J.C. BENCH: SHAH, J.C. KAPUR, J.L. HIDAYATULLAH, M.

CITATION:  1961 AIR 1007            1961 SCR  (3) 271

ACT: Excess  Profits  Tax-Excess  Profits,  unassessed  or  under assessed--Assessment,  if can be  reopened-Apportionment  of income-Excess Profits Tax Act, 1940 (XV of 1940), s. 15,  r. 9, Sch. 1.

HEADNOTE: Under an agreement dated July 11, 1945, the appellants  were appointed  managing  agents of the Coimbatore  Spinning  and Weaving Co. Ltd., for 20 years, and certain remuneration was provided  for  them  including 10%  commission  on  the  net profits  of the company due and payable  yearly  immediately after   the  accounts  of  the  company  were   closed   and commissions  on  purchases and capital  expenditure  of  the company.  Prior to October 1, 1944, the appellants were  the managing  agents  of the Coimbatore Mills Agency  Ltd.,  who were  the  managing agents of the  Coimbatore  Spinning  and Weaving  Co.  Ltd.  The year of account  of  the  appellants ended  on  March 31, of the company on June 30, and  of  the Agency  Company  on September 30.  For the  assessment  year 1945-46  the appellants submitted a return of  their  income which included the stipulated remuneration and  commissions. This  return  was accepted by the  Income-tax  Officer,  and Excess  Profits Tax liability for the chargeable  accounting period  ending March 31, 1945, was also worked out  on  that basis.   A return of income was submitted by the  appellants for  the assessment year 1946-47 which  included  commission for the period 1-4-45 to 30-6-45 on purchases of cotton  and stores and on capital expenditure.  The Tax Officer directed that the commission on purchases and capital expenditure  be taken into account 272 for the year April 1, 1945, to March 31, 1946, and that  the receipts be computed accordingly.  The assessment for  1945- 46 was then reopened under S. 34 of the Income-tax Act under s.  15  of  the Excess Profits Tax Act and as  a  result  of apportionment  made by the application of r. 9 of Sch. 1  of the Excess Profits Tax Act, the liability of the  appellants for Income-tax and Excess Profits ’fax was revised and fresh assessments  were  made.   The  orders  of  assessment  were confirmed by the appellate authorities.

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Held, that as in the instant case the chargeable  accounting period for the assessment of Excess Profits Tax and the year of  account of the company did not tally, by the  assessment of income made on the assumption that they did tally,  there had  resulted  under assessment and it was open to  the  Tax Officer to take action under s. 15 of the Excess Profits Tax Act.   The  Excess  Profits Tax Officer  acted  properly  in apportioning under r. 9 of Sch. 1 the commission received by the appellants. Rule  9 of Sch. 1 of the Excess Profits Tax  Act is  enacted in general terms and it is applicable to all contracts which are intended to be operative for fixed periods.  If, for the performance of the entire contract, remuneration is  payable at certain rates the profits earned out of that remuneration must  be apportioned in the manner prescribed by 19  if  the performance  of  the contact extends beyond  the  accounting period. E.   D.  Sassoon & Co., Ltd. v. The Commissioner of  Income- tax, Bombay City, [1955] 1 S.C.R. 313, distinguished.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 181 to  184 of 1960. Appeals.  from the judgment and order dated March 16,  1955, of the Madras High Court in Case Referred No. 43 of 1950. A.   V.   Viswanatha  Sastri,  R.  Ganapathy  Iyer  and   G. Gopalakrishnan, for the appellants. Hardayal Hardy and D. Gupta, for the respondent. 1960,  December 14.  The Judgment of the Court was delivered by SHAH,   J.-These  appeals  relate  to  Excess  Profits   Tax liability  of  the appellants in respect of  two  chargeable accounting  periods April 1. 1944, to March 31.,  1945,  and April 1, 1945, to March 31, 1946. The appellants were under an agreement dated July 11,  1945, appointed  managing  agents for 20 years of  the  Coimbatore Spinning and Weaving Co, 273 Ltd.-hereinafter  referred  to  as the  company.   Prior  to October 1, 1944, the appellants were the Managing Agents  of the Coimbatore Mills Agency Ltd--hereinafter referred to  as the  Agency  Company  who were the Managing  Agents  of  the company.   The  year of account of the appellants  ended  on March  31,  of  the company on June 30, and  of  the  Agency Company  on September 30.  Under the agreement by which  the appellants  were appointed ’managing agents,  the  following remuneration was provided: 1.   Office allowance at Rs. 1,500 per mensem; 2.   Commission at 1% on all purchases of cotton and  stores and  21/2 on all capital expenditure incurred from  time  to time; and 3.   Commission at 10% on the net profits of the company due and  payable  yearly immediately after the accounts  of  the company were closed. For the assessment year 1945-46, the appellants submitted  a return of their income inclusive of the following items: 1.   Remuneration from the Agency Company                                Rs. 36,000. 2.   Commission  at 10% on profits from the  Agency  Company upto 30-9-1944 Rs. 37,953. 3.   Remuneration from company from 1-10-1944 to 31-3-1945                 Rs. 9,000. 4.   Commission at 1% on cotton and stores purchased  during

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this period Rs. 21,704. This  return  was  accepted  by  the  Additional  Income-tax Officer, Coimbatore I & II Circles, and the appellants  were assessed to income-tax.  Excess Profits Tax was also  worked out  on the same basis for the chargeable accounting  period ending March 31, 1945.  For the assessment year 1946-47, the appellants submitted a return of their income which included the following items: 1.   Remuneration from the company for one year from 1-4-1945       Rs. 18,000. 2.   Commission at 10% on the profits of the company paid in December 1945 (1-10-1944 to 30-6-1945)       Rs. 1,90,889. 35 274 3.   Commission at 1% on purchases of cotton and stores from 1-4-1945 to 30-6-1945                  Rs.     16,777. 4.   Commission at 2 12/ %on capital expenditure from 1-10-1944 to 30-6-1945                             Rs.       1,690. The  Tax Officer in charge of the assessment  directed  that the commission on purchases and capital expenditure be taken into account for the year April 1, 1945, to March 31,  1946, and  that the receipts-be computed accordingly.  The  amount of  Rs.  1,127 attributable out of item  4  was  accordingly taken into the account of the previous year after  reopening the  assessment under s. 34 of the Income-tax Act,  and  the commission  on  the profits of the company  was  apportioned between  the period October 1, 1944, to March 31, 1945,  and April 1, 1945, to June 30, 1945, by the application of r.  9 of  Sch. 1 of the Excess Profits Tax Act.  The  Tax  Officer also  determined the proportionate commission payable  under items 3 and 4, for the period ending March 31, 1946, and  as a  result of the apportionment, the liability of the  appel- lants,  original  and  revised, for income  tax  and  Excess Profits  Tax for the assessment year 1945-46 and  chargeable accounting period April 1, 1944, to March    31, 1945, stood as follows: Original assessment of income taxRs. 1,04,654. Excess Profits TaxRs.                  45,292. Revised figures Income-tax (loss)  Rs. 36,182. Excess Profits TaxRs. 1,41,962-11-0. For  the assessment year 1946-47 and  chargeable  accounting period  April 1, 1945, to March 31, 1946, tax liability  was computed at: Income-tax Rs. 1,66,271. Excess Profits Tax Rs. 1,13,163-5-0. The orders of assessmentfor  income tax and Excess  Profits Tax  were confirmed by the Appellate Assistant  Commissioner and the Income-tax Appellate Tribunal.  On the  applications of the appellants 275 for reference under s. 66(1) of the Income-tax Act and s. 21 of  the  Excess  Profits Tax Act, the  Tribunal  drew  up  a statement  of  the  case and submitted  the  following  four questions to the High Court of Judicature at Madras: 1.Whether  on the facts and in the circumstances  of  the case, the Income-tax Officer/Excess Profits Tax Officer  was right in taking action under s. 34 and 15 of the  Income-tax and the Excess Profits Tax Act ? 2.Whether  on the facts and in the circumstances of  this case, the provisions of r. 9, s. 1, were properly applied ? 3.Whether  on the facts and in the circumstances  of  the

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case, the Income-tax Officer/Excess Profits Tax Officer  was correct in including the proportionate commission income  of Rs. 1,127 for income-tax assessment 1945-46 and Rs. 1,43,163 plus Rs. 1,127 for Excess Profits Tax assessment Tax for the chargeable accounting period ending 31st March 1945, and 4.Whether  on the facts and in the circumstances  of  the case,  the  proportionate commission of Rs. 37,129  and  Rs. 2,299 were rightly assessed for the assessment year  1946-47 ? The  High  Court  answered all  the  questions  against  the appellants  and  in favour of the Department.   Against  the order  passed  by the High Court, these  appeals  have  been preferred  with certificate granted under s. 66A(2)  of  the Income-Tax  Act  read with s. 21 of the Excess  Profits  Tax Act. Two questions were canvassed in these appeals: 1.Whether  it was open to the Taxing Officer  to  re-open the assessment for 1945-46; and 2.Whether  the commission received by the appellants  was liable to be apportioned under r. 9 of Sch. 1 of the  Excess Profits Tax Act. The  appellants  maintained their books of account  on  cash basis and commission received from the company was  credited after the accounts of the company were closed.  The  amounts received by the appellants from the company were included in their  return  and  assessment  for  the  year  1945-46  was completed 276 for  the  purposes  of the Excess Profits  Tax  by  the  Tax Officer without apportionment appropriate to the  chargeable accounting periods.  In so doing, the Tax Officer  committed an  error.   He  overlooked the  fact  that  the  chargeable accounting  period for the as  assessment of Excess  Profits Tax  and the year of account of the company did  not  tally. Under  s.  15  of the Excess Profits Tax  Act,  if  the  Tax Officer  discovers, in consequence of  definite  information which  has  come  into his possession that  profits  of  any chargeable  accounting period chargeable to  excess  profits tax have escaped assessment, or have been under assessed, he may  serve  on the person liable to pay such  tax  a  notice containing  all  or  any of the requirements  which  may  be included  in a notice under s. 13 and may proceed to  assess or  reassess  the profits.  The provision  is  substantially similar  to  s. 34(1) of the Income-tax Act  before  it  was amended  in  the  year 1948.  It is  manifest  that  by  the assessment  of  income  made  on  the  assumption  that  the chargeable  accounting period and the accounting  period  of the company tallied, there resulted under assessment in  the computation of tax liability for Excess Profits Tax, and  it was  open to the Tax Officer to take action under s.  15  of the Excess Profits Tax Act. Determination of the second question depends upon r. 9, Sob. 1, of the Excess Profits Tax Act.  By s. 2(19) of the Excess Profits Tax Act, the expression " profits " means profits as determined in accordance with Sch. 1. That schedule sets out rules  for  computation of profits for the  purpose  of  the Excess  Profits Tax Act; and by r. 9, it is provided  in  so far as it is material that:               " Where the performance of a contract  extends               beyond  the  accounting  period,  there  shall               (unless the Excess Profits Tax Officer,  owing               to   any  special   circumstances,   otherwise               directs)  be  attributed  to  the   accounting               period  such proportion of the entire  profits               or  loss  which has resulted, or which  it  is

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             estimated  will  result,  from  the   complete               performance  of  the contract as  is  properly               attributable to the               277               accounting period, having regard to the extent               to which the contract was performed therein." The performance of the contract of managing agency  extended beyond  the period of account of the company which was  July 1,  1945,  to  June  30,  1946:  it  covered  parts  of  two accounting  periods.  The Tax Officer was therefore  obliged to  apportion  to  the, chargeable  accounting  periods  the entire  profits resulting from the complete  performance  of the  contract  in proportions properly attributable  to  the accounting  periods and this, he proceeded to  do.   Counsel for the appellants contends that the contracts  contemplated by  r.  9 are those of the nature of  engineering  or  works contracts  and  the  like where execution  of  the  contract involves  a profit making operation de die in diem  and  not contracts  where remuneration is payable at a  certain  time for services performed throughout the stipulated period.  It is  true that remuneration was paid to the appellants  after the  expiry of the year of account of the company ; but  the contract   was  one  the  performance  of   which   extended throughout  the  year  of  account  of  the  company.    The appellants were the managing agents of the company and  they had to perform their duties as managing agents for the whole year.  It is not disputed that the contract of agency for 20 years is to be regarded for assessment of excess profits tax as  an  annual contract.  The performance  of  the  contract unmistakably  cut  across  the  accounting  period  is  also manifest.  The remuneration for performance of the  contract is  not  computed  at a daily rate, but  is  computed  on  a percentage  of the commission on the profits of the  company for the whole year, but on that account, the contract is not one in which performance does not extend throughout the year of account.  Normally in a managing agency contract, the  managing agent may not suffer loss, but that  does  not rule  out  the  application  of  r.  9  to  managing  agency contracts.  The terms in which r. 9 is enacted are  general: the  rule is applicable to all contracts which are  intended to be operative for a fixed period.  If, for the performance of the entire contract, 278 remuneration  is  payable at rates  stipulated,  the  profit earned  out of that remuneration must be apportioned in  the manner  provided by r. 9 if the performance of the  contract extends beyond the accounting period The judgment of this Court in E. D. Sassoon & Co.,  Ltd.  v. The  Commissioner  of Income Tax, Bombay  City(1)  on  which strong  reliance  was  placed  by  the  appellants  has   no application to this case.  In that case, M/s.  E. D. Sassoon &  Co.,  Ltd. who were managing agents  of  three  different companies  transferred the managing agencies to three  other companies  on several dates during the accounting  year.   A question  arose in the computation of income-tax payable  by M/s.  E. D. Sassoon & Co., Ltd. whether the managing  agency commission was liable to be apportioned between M/s.  E.  D. Sassoon & Co., Ltd. and their respective transferees in  the proportion  of the services rendered as managing agents  for the respective periods of the accounting year.  It was  held by this court (Jagannadhadas, J., dissenting) that on a true interpretation  of  the managing agency agreements  in  each case, the contract of service between the companies and  the managing   agents  was  entire  and  indivisible   and   the remuneration  or commission became due by the  companies  to

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the  managing agents only on completion of definite  periods of  service and at stated intervals ; that complete  perfor- mance was a condition precedent to the recovery of wages  or salary  in  respect  thereof and  the  remuneration  payable constituted a debt only at the end of each period of service completely  performed, no remuneration or  commission  being payable  to the managing agents for broken periods; that  no income  was  earned by or accrued to M/s.  E. D.  Sassoon  & Co.,  Ltd.  and  as the transfer of  the  agencies  did  not include  any  income  which E. D. Sassoon &  Co.,  Ltd.  had earned,  they were not liable to be taxed under the  Income- Tax Act.  But that was a case dealing with liability of  the assessees  who  did not receive any income and  to  whom  no income had accrued to pay (1)[1955] 1 S.C. R. 313. 270 income  tax  on the amounts of remuneration  paid  to  their transferees.   The  court was not called upon  to  apply  to income   received   by  the  assessee   the   principle   of apportionment  under r. 9 of Sch.  1 of the  Excess  Profits Tax  Act, or any provision similar thereto.  It is r.  9  of Sch.  I which attracts the principle of apportionment.   The rule  enunciated in M/s, E. D. Sassoon & Co.’s case (1)  has therefore  no application to this case, and the  High  Court was right in holding that the assessment made by the  Excess Profits  Tax  Officer  by apportionment  of  the  commission income   between  the  chargeable  accounting  periods   was correct. The  appeals  therefore fail and are dismissed  with  costs. One hearing fee. Appeals dismissed.                     __________________