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PETITIONER: THE STATE OF MADHYA PRADESH

       Vs.

RESPONDENT: BINOD MILLS COMPANY LTD.

DATE OF JUDGMENT: 03/04/1962

BENCH: AYYANGAR, N. RAJAGOPALA BENCH: AYYANGAR, N. RAJAGOPALA GAJENDRAGADKAR, P.B. (CJ) SARKAR, A.K. WANCHOO, K.N. GUPTA, K.C. DAS

CITATION:  1966 AIR 1143            1963 SCR  (1) 205

ACT: War  Profits Tax-Assessment of company’s  profits--Deduction of managing agent’s remuneration-"Included in the profits of the  managing  agency  business"-Gwalior  War  Profits   Tax Ordinance,  Samvat 2001, ss.2(5), 2(10), 4(1), 5(1),  Sch.1, r.4(1), proviso (b).

HEADNOTE: Sub-rule (1) of r. 4 of Sch.  1 to the Gwalior.  War Profits Tax  Ordinance,  Samvat 2001, provided:  "In  computing  the profits of a business carried on by a company, no  deduction shall     be  made  in respect of the remuneration  paid  to directors if  during  any  part  of  the  accounting  period concerned,     they had controlling interest in the company; provided that this sub-rule shall not apply (a)........  (b) 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 exceeding  50% of  the issued share-capital, a controlling interest in  the company.  The company was assessed to War Profits Tax  under the  provisions  of the Gwalior War Profits  Tax  Ordinance, Samvat 2001, for three chargeable accounting periods between 1944 and 1946.  During each of these accounting periods  the company  had  paid remuneration to its managing  ,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 (b) to r.4(1) of Sch.  I was not applicable.   It was found that the managing agents  had  in their statement of their own Profit and Loss account for the relevant  years  disclosed the  managing  agency  commission 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,

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even though they had a controlling interest in the 206 company,  was  a permissible deduction for  the  purpose  of computing  the profits of the company under the War  Profits Tax  Ordinance, Samvat 2001,’ because by virtue  of  proviso (b)  to  r.4(i) of Sch.  1 to the  Ordinance,  the  managing agent  was  liable  to  include  this  remuneration  in  his assessable profits. The  words "is included" in proviso (b) 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 profits of  the  managing agent could prejudice the  rights  of  the company in the matter of the computation of its income.

JUDGMENT: CIVIL APPELLATE 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.   Se??,,  B.  K.  B.  Yaidu and 1.  N.  Shroff,  for  the appellants. A.   V.  Viswanatha Sastri, K. A. Chitale, J. B.  adachanji, S.  N.  Andley,  Rameshwar  Nath and P.  L.  Vohra  for  the respondents. 1962.  April 3. The Judgment of the Court was delivered by. AYYANGAR, J.-Rule 4 (1)(b) of Sch.  1 headed ((Rules for the computation of profits for the purposes of War Profits  Tax" of  the  Gwalior  War Profits  Tax  Ordinance,  Samvat  2001 (hereinafter referred to as the Ordinance), provided:               "4.  In  computing the profits of  a  business               carried on by a company, no deduction shall be               made in respect of-               (1)   remuneration paid to directors if during               any  part of the accounting  period  concerned               they had controlling interest in the company;               207               Provided that this sub-rule shall not apply--               (a).............................................               (b)   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-Binod Mills Co. Ltd. which had its  business at  Ujjain  in  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. Binodiram Balchand which had, by reason of its  shareholding exceeding  50%  of the issued  sharecapital,  a  controlling interest   in  the  company.   The  respondent-company   was assessed to War Profits Tax for three chargeable accounting, periods-July  1,  1944, to December 31, 1944  ,  January  1, 1945, to December 31, 1945, and January 1, 1946, to June 30, 1946.    During   each  of  these   accounting-periods   the respondent-company  had paid remuneration to  its  managing- agents and claimed to deduct the remuneration so paid in the computation  of  its  business profits  during  these  three periods.   The assessingofficer 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 managing-agent and that consequently the matter was  covered by the opening words of r. 4 and not saved by proviso (b) to

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the  rule.  An appeal against this order of  assessment  was dismissed  by the appellate 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 (1) of the Ordinance to the 208 High  Court of Madhya Pradesh of the following question  for its decision:               "Whether   in  computing  the  profits  of   a               business  carried  on by a  company  deduction               shall  be made in respect of any  remuneration               to any managing-agent where such  remuneration               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 respect of the  three chargeable  accounting periods.  The learned Judges  of  the High Court answered the question in favour of the respondent and  held  that  the remuneration, even  though  paid  to  a managingagent who had a controlling interest in the company, was a permissible 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 granted these three appeals, which relate to the three  chargeable accounting periods have been preferred  to this Court. Before proceeding further it might be convenient 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 there was, it was abandoned fairly early, that  M/s. Binodiram  Balchand were "directors" of the  company  within the meaning of the Ordinance and bad a controlling  interest in  the company.  In this connection we might advert to  the definition of ,director’ in s. 2(10) of the Ordinance:               "2.  (10).   ’director’  includes  any  person               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               209               concerned  in the management of the  business;               and               (ii)  is  remunerated out of the funds of  the               business; and               (iii) is the beneficial owner of not less than               20  per cent of the ordinary share capital  of               the company". The  controlling interest being established, it  was  common ground  that  the remuneration paid  to  the  managing-agent could  not  be  deducted in computing  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 ",disclosed 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  Samvat  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

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however responsible for the form of the question referred to the High Court.  This contention 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 and has not been relied  upon before  us.   We shall therefore say no more about  it,  but proceed to deal with the substantial question raised. The  facts being as above stated the entire question in  the appeals turns on the mean of the 210 expression  "is  included  in the profits  of  the  managing Agency  business"  in r.4(1) proviso (b) of Sch.  1  of  the Ordinance.   Before however entering on a discussion of  the words underlined and of proviso (b) in particular, it  would be  necessary to set out broadly 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 period               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,  commerce  or               manufacture 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  his               or their personal qualifications, unless  such               profession  consists wholly or mainly  in  the               making of contracts on behalf of other persons               or the giving to other persons of advice of  a               commercial  nature  in  connection  with   the               making of contracts :               Provided that where the functions of a company               or  of a society incorporated by or under  any               enactment  consist  wholly or  mainly  in  the               holding  of investments or other  property  or               both, the holding thereof shall be               211               deemed  for the purpose of this definition  to               be  a business carried on by such  company  or               society;               Provided further that all businesses to  which               this Ordinance applies carried on by the  same               person  shall be treated as one  business  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  individuals or any other association of persons whether incorporated  or not  and  also  includes a  Hindu  undivided  family".   The ’Profits’  which is referred 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 profits  do not bear upon the point now in controversy,  but

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what  is  of  relevance are certain of  the  Rules  for  the computation of the profits in Sch.1. 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  business that is brought to charge and that each person whether he be an   individual   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 to be gathered,  apart from  the  provisions  of the  Ordinance  which,  as  stated earlier, are not relevant to the present case, from Sch.   1 headed  "Rules  for  the  computation  of  profits  for  the purposes  of War Profits Tax".  Rule 1 of these Rules  which generally  follows the pattern of the Indian Income-Tax  Act in setting out the list of 212 permissible  deductions, provides as one of such  deductions in r. I. (1)’(xi) ,,any expenditure (not being in the nature of capital expenditure or personal expense of the person  to whose business this Ordinance applies) laid out or  expanded 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 generally 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 Ordinance, 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 which the profits derived by a company are to  be computed  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  Directors  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 included in  the profits  of the managing agent’s business".  The words  used being  "is  included"  there  is no  doubt  that  an  actual inclusion is posited.  But this, however, does not solve the problem, for the ,-’inclusion in the profits" 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 assessing authority in the order of 213 assessment   made  against  the  managing  agent,  (3)   the inclusion   under  the  terms  of  the  Ordinance   of   the remuneration  as an amount chargeable to the tax as part  of the  profits  of the managing agent.  In  passing  we  might observe  that r. 7 (2) (b) of Sch.  1 to the Excess  Profits Tax  Act, 1940, on which the Ordinance is modeled is in  the same terms as the proviso (b) to r.4(1) of the Ordinance but the proper 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 appellant, before  the

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learned  Judges  of the High Court was  that  the  inclusion referred  to  an inclusion by the "essment  officer  of  the remuneration  in  the assessment of the  managing-agent  and that  unless the remuneration sought to be excluded  in  the computation  of  the  profits of the  company  was  actually assessed in the hands of the managing, the company could not claim  the  benefit  of proviso  (b).   The  learned  Judges repelled  this submission 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 included" 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 satisfied. 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 make provision  for the assessing-authority to proceed against  a particular unit of assessment on one or 214 more alternative bases, it would require ’very explicit  and unambiguous  language  to permit an  assessing-authority  to choose one of two units for assessment, particularly in, the context  of  there  being  no provision  for  the  inter  se adjustment of the rights and liabilities in the event of one unit benefiting at the expense of the other by reason of the exercise of the option and when admittedly the unit does not receive the income as agent for the other unit.  Besides, if the  company had been first assessed to tax-because  let  us say  its  return had been filed earlier, or the  enquiry  as regards the correctness of the return was completed earlier, there is no provision /in the Ordinance or in the Rules  for excluding the sum in the personal assessment of the managing agent,  so  that it could not be urged that  the  assessing- authority  had  any option in the matter to tax  either  the company or the managing-agent.  If the managing-agent is  ex roncessis  liable to have his remuneration included  in  his assessment for the tax, unless the income or the business is not  within  the Ordinance, it would be  most  anomalous  to suggest that in order that the benefit of proviso (b) should be  available to a company, the assessment of  the  managing agent  should have been completed first a matter not  always within  the  control  of  a company.  We  do  not  think  it necessary  to dilate further on this construction since  Mr. Sen did not commend it for our acceptance. His  submission,  on  the other hand, was that  this  was  a special provision designed to meet the cases of companies in which  the  directors had a controlling interest.   In  such cases it was these directors who had to submit and submitted the return on behalf of the company and who, of course,  had to submit their own returns in their individual capacity  as persons   in   receipt  of  taxable   profits.    In   these circumstances 215 he  urged that the proviso should be read as  conferring  an option   upon   the  directors  either  to   include   their remuneration  in   their own returns, get them taxed and pay the tax themselves or to include it in the company’s  return and have the amount taxed in the company’s assessment.   His further  submission was that having regard to the manner  in which  the  proviso  was worded,  where  the  managing-agent

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failed  to  include his remuneration in his own  return  and have it assessed as part of his profits, the effect was  the same  as  if  he  had opted to have the  sum  taxed  in  the company’s assessment.  The option, it was urged, was that of the  managing-agent who controlled the affairs of a  company and  therefore  in  effect represented it  and  who  in  one capacity  acted  for himself and in another  acted  for  the company.   In effect the submission of learned  Counsel  was that  the provision was designed to obviate double  taxation of  the  same  income  and  for  this  purpose  vested   the controlling-Director with a discretion to render the company immune from tax where the sum was included in his own return and was assessed in his hands. The theory propounded regarding the provision being one  for avoidance  of double taxation in the manner above  indicated by  vesting a discretion in the controlling-Director  breaks even  on  a  cursory examination.  Let us  assume  that  the managingagent  opts to have the company taxed and submits  a return  on  behalf of the company in which no  deduction  is claimed  in respect of this item and an assessment  is  made accepting  that return.  On the terms of the Ordinance  this would  not  afford any relief to the managing agent  in  his personal assessment, for admittedly there is, as pointed out earlier,  no provision in the Ordinance or in  the  Schedule exempting  the  managing agent from the  inclusion  of  this remuneration in his taxable profits, and this 216 must  obviously  be  so, because for  the  purposes  of  the charging  section  he  would  be  an  independent  unit   of assessment.  He would have to include in the computation  of his  personal income for the purpose of the War Profits  Tax the  remuneration received by him.  This might be  expressed in a slightly different form by stating that proviso (b)  to r.  4(1) does not operate in the reverse direction, that  is by exempting the managing-agent from tax on the remuneration derived  by him, merely because the deduction of  that  item has  been  denied to the company.   Obviously  therefore  r. 4(1)(b)  is not a rule designed for the avoidance of  double taxation  in  the  sense in which learned  Counsel  for  the appellant suggests that it is. There are also other reasons why we find it unable to accept the submission of Mr. Sen that by the words is "included" is meant the inclusion in the return by the managing-agent with the  result that in cases where he does not so include,  the company would not be entitled to the deduction.  The  option suggested by Mr. Sen to the managing-agent was that he might either  elect to pay the tax himself or get the  company  to pay it.  Obviously it would always be in the interest of the managing-agent  to  have the tax paid by the company  if  by that  means,  as is suggested by Mr. Sen,  he  could  obtain absolution  from the obligation of paying the  tax  himself, for  if the tax is paid by the company the loss involved  in the payment of the tax would fall on him only to the  extent of his shareholding, being for the rest shared by the  other share-holders  of  the company.  It is really  difficult  to understand the principle by which one could construe a  rule of  this nature as enabling a managing-agent who holds,  say 51% of the share-capital of the company to visit 49% of  the burden of tax which normally one would expect to be paid  by him,  to  be paid by the other shareholders of  the  company merely because                             217 he  happens to be the managing-agent holding  a  controlling interest  by the extent of his share-holding.   We  consider that  the construction suggested by Mr. Son which  leads  to

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such an unreasonable result and inflicts an unjust injury on the  other shareholders is not any proper interpretation  of the  provision.   Besides, there are other grounds  why  the meaning  attributed to the words "is included" as  referring to  "included’  by the managing-agent" cannot  be  accepted. Suppose the managing-agent includes it in his return but the assessing  authority does not include it in the  computation of  his return but prefers to disallow the deduction in  the case  of  a company.  Would that be "inclusion in  his  pro- fits?" Again, suppose the managing-agent does not include it in  his return but the assessing authority does, and tax  is paid  by  the managing-agent, would there be  no  exclusion? These  illustrations serve to bring out the  anomalies  that would  arise if it were held that the words  ",is  included" meant "is included in his return by the managing-agent". This leaves for consideration the meaning that "is included" refers  to  the  inclusion  under  the  provisions  of   the Ordinance.   If  this  meaning were accepted  it  would  not matter  whether the managing agent has or has  not  included the  sum in his return or whether the assessing  authorities have or have not done their duty by having the  remuneration included-  in the taxable profits of the managingagent.   If the managing-agent has not done so being under an obligation imposed by the law to include it, the return would be liable to be revised by the assessing officer and if the failure to include  the sum was due to any suppression,  the  managing- agent  would,  besides  having  the  sum  included  in   his assessable  profits, be liable to appropriate penalties  for filing   a  wailfully  incorrect  return.   Similarly,   the assessing  officer being under a statutory duty  to  include the sum in the assessment of the managingagent would, if  he failed to do so, render the order                             218 liable to be revised.  The remedy for the failure either  of the  managing-agent  or  of  the  assessing  authorities  to conform  to the requirements of the law certainly cannot  be the  disallowance  of  the sum in  the  computation  of  the profits of the company.  The entirety of this reasoning,  it would  be  noted, proceeds on the basis that  the  managing- agent  was  liable  to  include  his  remuneration  in   his assessable  profits.   In such a contingency it  stands  (to reason that neither the default of the managing-agent as  an assessee or of the assessing authority to include the sum in the profits of the managing-agent could prejudice the rights of  the  company  in the matter of the  computation  of  its income. Where  the remuneration of the managingagent was  not  under the Ordinance liable to be brought to tax the position would be  different  and that is just what is  indicated  as  that which would render the proviso inapplicable.  For instance, s.   5(1) of the Ordinance enacts; ".               Provided further that this Ordinance shall not               apply to-               (a)..................................................               (b)   profit from a business carried on wholly               on   behalf  of  a  religious  or   charitable               institution  and  the  profits  of  which  are               applied   solely   to  the  purpose   of               the  institution and enure for the benefit  of               the public, and-               (i)   the business is carried on in the course               of  the carrying out of a primary  purpose  of               the institution, and               (ii)  the  work in, connection with the  busi-

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             ness is carried on by the beneficiaries of the               institution". If  for  instance, the business of the  managing-agency  was being carried on for or on behalf of a trust of 219 the character indicated by the provision just now read,  the remuneration  of the managing-agent would not be  liable  to tax  for  the  reason that it is outside the  ambit  of  the Ordinance and      to such  a case the terms of proviso  (b) to r. 4(1) would not be attracted, with the result that  the managingagent not being liable to tax under the Ordinance on the  remuneration derived by him, the company, if it were  a controlled  company. would not be entitled to the  deduction of  that  remuneration in the computation  of  its  profits. Except in case where the remuneration received by a managing agent  is not liable to tax under the Ordinance, it  is  the managing-agent  that  would  be liable to  pay  tax  on  his remuneration  and  notwithstanding  that the  company  is  a controlled  company  the  remuneration paid  by  it  to  the managing agent would be a permissible deduction by reason of the  exception to the opening words of r. 4(1) contained  in proviso  (b).  It is unnecessary for our present purpose  to consider  whether besides S. 5(1)(b), already  referred  to, there are other contingencies in which remuneration received by  a  Director could be held not to be  ,included’  in  the latter’s  profits  under the Ordinance, since  in  the  case before  us it is admitted that the remuneration received  by the   managing-agent  was  liable  to  be  include  in   the computation  of  his  profits for the purposes  of  the  War Profits  Tax  and  therefore  neither  the  fact  that   the managing-agent did not "include" the sum in his return,  nor the default of the assessing authority to correct this error by "’including" the sum in his assessment, is any reason for depriving  the respondent company of the benefit of  proviso (b) to r. 4(1). We  therefore consider that the learned Judges of  the  High Court answered the question referred to them correctly.  The appeals fail and are dismissed with costs. Appeals dismissed. 220