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PETITIONER: THE NANDLAL BHANDARI MILLS LTD.,INDORE

       Vs.

RESPONDENT: THE STATE OF MADHYA BHARAT

DATE OF JUDGMENT: 17/07/1961

BENCH: HIDAYATULLAH, M. BENCH: HIDAYATULLAH, M. DAS, S.K. SHAH, J.C.

CITATION:  1963 AIR  332            1962 SCR  (2) 854

ACT: Agent-Commission  paid  out net profits-If  deductible  from assessable   income--The  Indore   Industrial   Tax   Rules- Notifications.

HEADNOTE: By  a Cabinet Resolution of the Holkar State  certain  Rules known as The Indore Industrial Tax Rules were framed for the purpose  of levying industrial tax.  After the  decision  of the   Privy   Council  in  cherry  Railway  Go.,   Ltd.   v. Commissioner  Income,-tax,  (1931)  L.  R.  58  1.  A.  239, disallowing deduction , of Commission paid out of profits to agents from the assessable profits; the Government of Holkar State  of which the Maharaja was the Supreme  Ruler;  issued certain  Notifications ordering that the Agents’  Commission on  profits  should not be allowed to be deducted  from  the assessable  profits.  The appellants who under an  agreement paid  commission  to their agents out of the  company’s  net profits  contended,  inter alia, that the  Notifications  in question  did  not  have  the  force  of  law  and  was  not enforceable against the appellants. Held, that every general order emanating from the  sovereign ruler  having its roots in a resolution of the cabinet  must be  regarded  as  a  law binding  on  the  subject  and  the Notifications  disallowing commission paid to, agents to  be deducted from the assessable profits were therefore  binding on the appellants, because that was the normal mode by which laws were made in the Holkar State. Rajkumar Mills Ltd. v. Madhya Bharat State, A. I. R. 1953 Madhya Bharat 135, approved. Ameer-un-nissa Begum v. Mahboob Begum, A. I. R. 1955 S.C. 352, followed. The  Union Cold Storage Co., Ltd. v. Anderson, (1931) 16  T. C.  293 and The Indian Radio and Cable  Communications  Co., Ltd.  v.  Commissioner of Income-tax, (1937) I. T.  R.  270, discussed. Madharao  v. State of Madhya Bharat, A.I.R. 1961 S. C.  298, referred to. 860

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JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil, Appeals Nos. 344-346 of 1960. Appeals  by special leave from the judgment and order  dated September 8. 1958, of the Madhya Pradesh High-Court  (Indore Bench),  Indore, in Civil Second Appeals Nos. 11.0-1,12  of, 1952. S. T.Desai and J. B. Dadachanjifor the  appellant. B. Sen,J. Bhave and 1. N. Shroff,for the  respondent. 1961.  July 17.  The Judgment of the Court was delivered by HIDAYATULLAH, J.-These three consolidated appeals by special leave  are against a common judgment and order of  the  High Court  of Madhya Pradesh, dated September 8, 1958, in  three second  appeals filed under R. 13 of the  Indore  Industrial Tax  Rules, 1927 of the former Holkar State, which  were  in force  before the State became part of Madhya Bharat  State. They  concern three assessments relating to  the  assessment years,  1941,1942  and  1943  respectively.   These   second appeals  were  originally filed in the  Madhya  Bharat  High Court  as  early as 1952 ; but the records  of  the  appeals ’were destroyed by fire and had to be reconstructed.  By the time the appeals were ready, Madhya Bharat had merged in the new   state  of  Madhya  Pradesh,  and  the   appeals   were accordingly heard by a Divisional Bench of that High Court. The  appellant  is a Textile Mill and a public  Joint  Stock Company  called  the  Nandlal  Bhandari  Mills,  Ltd.    The appellant had appointed a" firm, Messrs Nandlal Bhandari and Sons as agents, secretaries and treasurers of the Mills, and under  cl. (6) of the agreement of agency, it agreed to  pay to  the  agents  an  office  allowance,  commission  on  the Company’s  net profits and commission on the sale  proceeds. of sales of yam, cloth, etc.  The                     861 remuneration  of the agents for the three  accounting  years was as follows : ___________________________________________________________ Remuneration        As per          Accounting Years,             agree  -------------------------------              ment.    1941     1912     1943                       Rs.       Rs.        Rs. __________________________________________________________ Clause 6            1500      18,000    18,00018,000 (a) Fixed            P.M.       for the for the monthly allow-                  year.   year. ance as office allowance. (b)  Commission @ 16%    2,68,335    6,15,946    10,52,939 on the Com-           net on painy’s Net           profits Profits. (c)  Commission  @ 1-9-0 1,10,156 1,10156 1,64,751 2,71,672 on the sale      Per Cent, proceeds of      on sales sales of yarn, cloth etc. ___________________________________________________________ In  computing the tax, the Mills claimed to deduct under  R. 3(2)(ix)   of   the  Rules  the  above   amounts   paid   as remuneration.  The Rule reads :       "(ix) any expenditure (not being in the nature       of  capital) incurred solely for the  purposes       of earning such profits or gains." The  Assessing  Officer accepted the appellant’s  claim  for deduction  but only as. to a part.  We are not  required  in

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these appeals to consider the correctness of the quantum  of the  deduction  in  view  of  what  transpired  later.   The Assessing Officer also disallowed certain other claims  made by  the appellant, which again need ’not be mentioned.   The appellant then. appealed to the Appellate Authority, and  on December  31, 1951 the Appellate Authority, while  accepting some of 862 the appellant’s other contentions upheld the order  refusing to  deduct  the  agent,s  commission  on  profits  under  R. 3(2)(ix).  Three second appeals were preferred in the Madhya Bharat  High Court under R. 13 of the amended  Rules.   They were  dismissed  by the High Court of  Madhya  Pradesh,  and hence the present appeals. The  Indore Industrial Tax Rules were first  promulgated  in 1926 by a Cabinet Resolution (No. 373 dated March 22, 1926). In  1927, by, Cabinet Resolution No. 1991 dated November  23 1927, the Rules were modified, and the new Rules, were  made applicable  retrospectively from May 1, 1926.   These  Rules were  framed for the levy of the tax and  for  ascertainment and  determination  of  the income  of  cotton  mills.   The taxcalled  the  "Industrial Tax" was leviable  under  R.  3, which  imposed the charge.  It says that the Industrial  Tax shall be payable by an assessee in respect of the profits or gains  of any Cotton Mill industry carried on by him in  the Holkar State.  Sub-r. (2) of R. 3 provides that such profits or  gains are to be computed after making allowances,  inter alia, for any expenditure incurred solely for the purpose of earning such profits or gains, R. 6, which is a part of  the Rule imposing a charge, lays down the rates which are :  (a) on  all incomes up to Rs. 50,000, at 1-1/2 annas per  rupee, and (b) above, at 2-1/2 annas per rupee.  The short question thus  was whether in computing the profits and gains of  the appellant,   the  remuneration  paid  to  the   agents   was deductible under R. 3 (2) (ix). It  is  necessary  At  this stage  to  see  the  legislative machinery existing in the Holkar State in 1927 and  onwards. On  February 27, 1926, His Highness Maharaja Tukoji Rao  III abdicated, and, his son, H.H. Maharaja Yeshwant Rao  Holkar, became the Ruler, whose installation ceremony’ was performed on  March 11, 1926.  A Regency Council was  appointed  under the orders of the                     863 Government  of  India for the administration’ of  the  State during the minority of the Maharaja.  This Regency  Council, which  was  called  the  Cabinet,  was  entrusted  with  the administration of the State according to existing rules  and practice,  under the supervision and with the advice of  the Agent  to  the  Governor-General  in  Central  India.  Prime Minister  of  the State was the Chairman.   H.  H.  Maharaja Yeshwant  Rao Holkar attained majority on September 6,  1929 and resumed sovereign powers on May 9, 1930.  It was  during the  minority of the Ruler that the Cabinet had  promulgated the  amended  Rules of 1927.  In 1931, the decision  of  the Privy Council in the well-known case of Pondicherry  Railway Co.,  Ltd. v. Commissioner oF Income-tax (1)  was  rendered. In  that case, a Railway Company had agreed to make over  to the  French  Colonial Government half of the  Company’s  net profits in consideration of a 99-year concession.  This  was sought  to  be deducted by the Company from  its  assessable profits as an expenditure incurred solely for the purpose of earning  such  profits.  The Privy  Council  disallowed  the deduction.  Lord Macmillan observed as follows :       "A payment out of profits and conditional  on-       profits  being  earned  cannot  accurately  be

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     described  as a payment made to earn  profits.       It  assumes that profits have first come  into       existence.   But profits on their coming  into       existence  attract tax at that point  and  the       revenue  is not concerned with the  subsequent       application of the profits." It seems that, as a result of this decision, a  notification was  issued  in August, 1931, and another on  February  2/3, 1932 by the Commerce. and Industry Department of the  Holkar State.  The latter notification reads as follows (1)  (1931) L.R. 38 I.A. 239. 864       "Commerce     and     Industry      Department       Notification.       Notification  No. 1 dated the 2nd/3rd Feb.  19       32.    In   continuation   of   this    office       Notification No. 4733 dated the 6th  December,       1927  (Vide  Issue  No.  11  dated  the   12th       December, 1927, of the Holkar Sirkar  Gazette)       embodying  modified rules for the levy of  the       Industrial Tax the Cabinet,in their Resolution       No.  1072  dated the 25th August,  1931,  have       ordered   that  the  Agents’   Commission   on       ’Profits’ should not be allowed to be deducted       from the assessable profits." It  is, to be noticed that this notification refers  to  the earlier  notification  No. 4733 of December 6,  1927,  under which were published the amended Industrial Tax Rules, 1927, and  to the notification of August 1931.  The latter has not been produced before us. This  notification  led to representations  by  the  persons affected  by it.  The Maharaja of Holkar thereupon  referred the  matter for the opinion of the, Full Bench of  the  High Court of the State.  It appears that the opinion of the High Court was in favour of disallowing such deductions.  On July 14,  1933,  another notification (No. 13) was  issued  which reads as follows :       "In  continuation of this office  Notification       No. 1 dated 3rd February,, 1932, it is  hereby       published for the information of the mills and       factories concerned that on submission of  the       Prime Minister’s (Legal Department) report No.       25  dated  11th May, 1933,  His  Highness  the       Maharaja  is please to order (vide Huzur  Shri       Shankar,  Order No. 173 dated 29th  June,1933)       that the opinion of the Full Bench of the High       Court   being   that  the   Managing   Agent’s       Commission an profit’s is                            865       not an item of expenditure incurred solely for       the purpose of earning the said profit  within       the  meaning  of  Rule 3(2)(ix)  of  the  said       Industrial Tax Rules and this being. also  the       view  of  the Cabinet as  expressed  in  their       resolution  No. 1072 dated 28th August,  1931,       the  aforesaid  Cabinet  Resolution  be  given       effect  to and the industrial tax due  on  the       amount  of the managing agent’s commission  on       profits be recovered with effect from the date       of the said Cabinet Resolution." This notification, it is contended before this Court had not the  force  of  law  and was  not  enforceable  against  the appellants,  who claim that they are entitled to  show  that the remuneration paid to the agents was deductible from  the profits  of the Mills before. computing the Industrial  Tax.

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In  this  connection, the appellants wish to use  the  later decisions of the House of Lords in The Union Cold &wage Co., Ltd.  v. Adamson(1) and of the Privy Council in  The  Indian Radio and Cable Communication Co., Ltd. v. Commissioner of I Income-tax  (2),  in which the decision in  the  Pondicherry Railway Company case (3) was explained.  In the case  before the Privy Council, Lord Maugham observed:       "It  is  not universally true to say  that  a,       payment the making of which is conditional  on       profits   being  earned  cannot  properly   be       described  as an expenditure incurred for  the       purpose of earning such profits.  The  typical       exception is that of a payment to a,  director       or a manager of a commission on the profits of       a  company’....If  a company having  made;  an       apparent net profit, of pound 10,000 has  then       to  pay pound 1,000 to directors, or  managers       as   the  contractual  recompense  for   their       service during the year, it: is plain that the       real net profit is only pound 9,000." (1) (1931) 16 T. C. 293.  (2) (1937) I.T.R. 270 (3) (1931) L.R. 58 (1) A.  239. 866 Lord  Macmillan  in  the  former  case  observed  that   the Pondicherry  Railway Company case (1) must be  read  in  the context  of the facts of that case, and the  obligation  was first to find out the net profits of the company and then to divide them.  These two sets of cases proceed upon different principles.   If the agreement is to share the  profits  the expenditure  cannot  properly  be treated  as  one  incurred solely  for  the purpose of earning such profits; but  if  a slice   of  the  profits  is;to  be  paid  to   persons   as remuneration  to  help in the earning of  the  profits,  the deduction can be claimed. All this would of course be pertinent to consider, if  there was no legislative enactment on the subject.  If the  matter was  not one concluded by law, then there would be room  for judicial  interpretation of the Rule.  The rival  claims  in these appeals are thus confined to the legislative force  of the   notifications   issued   in  1931,   1932   and   1933 respectively,.   The  appellant’s  contention  is  that  the notifications  were  not  an  act  of  legislation  but   an interpretation by the Sovereign.  Mr. Desai concedes that if they be regarded as legislation, then the later decisions of the Privy Council and some of this Court cannot be called in aid,  because  where  the law itself  speaks  with  clarity, judicial interpretation is out of place.  He contends,  how- ever that the two notifications were not framed as rules and were not expressly stated to be amendments of the rules then existing.   He points out that after the first  notification which  was nothing more than an administrative direction  to the  assessing  officers  to  include  in  the  profits  the remuneration  of the agents, the opinion of the  High  Court was obtained, and the second notification merely pointed out that the earlier notification was to be given effect to, and did no more than add a second administrative direction.   On the other side, it is contended that the Cabinet could  make laws as often as it pleased and that (1)  (1931) L. R. 58 I. A. 239.                     867 the  notifications must be read either as independent  rules or as a legislative explanation of R. 3 (2) (ix).  In so far as  the legislative supremacy of the Cabinet was  concerned, no question was raised before us. When the Indore Industrial Tax  Rules,  1926 were framed, they came into  existence  by

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virtue of a Cabinet Resolution of that year.  When they were modified,  they  were  superseded  by  yet  another  Cabinet Resolution of the year 1927, which promulgated the new Rules with retrospective effect from May 1926.  The source of  the Rules  ’was  thus a Resolution of the Cabinet  on  both  the occasions,  and it is not denied that the Rules thus  framed had legislative sanction and were unquestionable.  When  the Cabinet  promulgated  its notifications in  1931,  1932  and 1933, it followed the same procedure, and it stated that the notification  of 1932 was "’in continuation of  this  office Notification  No.  4733 dated December 6,  1927."  This  has reference  to  that  notification  under  which  the  Indore Industrial  Tax Rules, 1927 were orginally published.   From this, it follows that new Rules were framed by a  resolution of the Cabinet and were promulgated by a notification in the Gazette as part of the Rules.  The mode followed in 1926 and 1927  was repeated in 1932 and 1933 and also  presumably  in 1931,  though  the notification of that year  has  not  been printed in the record of this case. This view was taken by the Full Bench of the’ Madhya  Bharat High  Court in Raj Kumar Mills Ltd. v. Madhya  Bharat  State (1).   The question which is involved in these appeals  also arose in that case.  It was observed by the Full Bench :       "This  Notification makes it abundantly  clear       that  His Highness the Maharaja  ordered  that       the  industrial tax due on the amount  of  the       managing  agent’s  commission  on  profits  be       recovered.  This being. an order of the (1)  A.I.R. 1953 Madbya Bharat 135. 868       ruler,  who  enjoyed  sovereign  Powers,  that       order  is  not open to challenge.  This  is  a       mandate emanating from a sovereign and as such       has  the  force  of  law.   This  Court   has,       therefore, no power to go behind the order and       enquire  as  to whether the  managing  agent’s       commission   on   profits  is   an   item   of       expenditure  solely incurred for the  ’purpose       of earning profits or not: In this view of the       matter  the  point at issue  is  concluded  by       Huzur  Shri Shanker order No. 173  dated  29th       June, 1933." Thus  view was affirmed by the High Court of Madhya  Pradesh in the judgment under appeal. In  our judgment, the two notifications cannot be  described as  "judicial ,interpretation".  If any this, they  must  be interpreted as legislative exposition of R. 3(2)(ix) and  in the nature of an explanation.  This Court in  Ameer-un-nissa Begum v. Mahboob Begum in dealing with the ’Firmans" of  His Exalted Highness the Nizam of Hyderabad, observed as follows :       "It  cannot  be  disputed that  prior  to  the       integration of Hyderabad State with the Indian       Union and the coming into force of the  Indian       Constitution,  the Nizam of Hyderabad  enjoyed       uncontrolled  sovereign  powers.  He  was  the       supreme legislature, the supreme judiciary and       the, supreme head of the executive, and  there       were  no ;constitutional limitations upon  his       authority  to act in any of these  capacities.       The   ’Firmans’   were  expressions   of   the       sovereign  will  of the Nizam  and  they  were       binding in the same way as any other law;- nay       they would override all other laws which  were       in conflict with them. so long as a particular

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     ’Firman’   held   the    field,   that   alone       would govern or regulate       (1)A.I.R. 1955 S.C. 352.       869       the rights of the parties concerned, though it       could  be  annulled or modified  by  a  latter       ’Firman’ at any time that the Nizam willed." The same can be said of the Ruler of the Holkar State.  When to the order of the Ruler was added the usual mode of making and promulgating rules, the-position which emerges is really unassailable. Mr.   Desai in attempting to show that the ruling  does  not apply  to the case, raised two contentions.  The  first  was based upon a more recent decision of this Court in Madhaorao v. State of Madhya Bharat (1), where certain Kalambandis  of the  Maharaja  of Gwalior were considered.   This  Court  in deciding  whether  the Kalambandis were existing  law  under Art. 372 of the Constitution, observed :       "In  dealing with the question as  to  whether       the orders issued by such an absolute  monarch       amount to a law or regulation having the force       of  law,  or whether  they  constitute  merely       administrative orders, it is important to bear       in mind that the distinction between executive       orders  and legislative commands is likely  to       be  merely  academic where the  Ruler  is  the       source   of   all   power.    There   was   no       constitutional  limitation upon the  authority       of the Ruler to act in any capacity he liked ;       he  would  be  the  supreme  legislature,  the       supreme judiciary and the supreme head of  the       executive, and all his orders, however issued,       would  have the force of law and would  govern       and   regulate  the  affairs  of   the   State       including the rights of its citizens.", It was, however, pointed out in the case that even where  an order is issued by the sovereign ruler, one must look to the character  of the order and its content to find out  whether it enacted a binding rules (1)  A.I.R. 1961 S.C. 298. 870 Mr.  Desai has constructed his entire argument on the  basis of  these  observations, and has contended that  the  orders only expressed an opinion and did not bind.  He pointed  out as the second limb of his argument that these  notifications were not expressed as a rule but as an order, and that  they did  not  seek to amend the rules, nor to add to  them.   He referred  to other notifications in which a legislative  act was  clearly discernible, as for example,  Notification  No. 22/Com.  dated May 17, 1946, by which for the existing  Rule 4, a new Rule was substituted.  An examination of the Rules, however,  shows that there was no set pattern  of  language. Some of the Rules do not read like rules at all.  Notes have been appended to the rules, which are not rules proper,  and R. 29 says :       "All matters not dealt with in these rules may       be submitted to the member-incharge., Commerce       and Industry Department for decision." The  existence  of  such  a rule  seems  to  obliterate  the frontiers   between  legislative,  judicial  and   executive exercise of the power of a State, such as we understand  it. There  being  no invariable use of a  clear-cut  legislative language,  each general order emanating from  the  sovereign ruler  and promulgated in the same manner as any other  rule and having its roots in a resolution of the Cabinet must  be

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regarded  as  one  binding upon the subject.   This  is  the purport of the decisions of this Court, and the present case falls in line with those which have been previously decided. There is nothing in the content, the character or the nature of  these  notifications, which would put them  on  a  level lower than the Rules, which had been earlier promulgated. In our opinion., the judgment of the High Court under appeal is  correct, and the appeals are accordingly dismissed  with costs, one set. Appeals dismissed.                     871