Appeals Nos 494 and 495 of 1958
Appeals from the judgment and order dated April 18 1955 of the Madras High Court in Case referred Nos 53 of 1952 and 44 of 1953
Hardayal Hardy and D Gupta for the appellant
A V Viswanatha Sastri R Ganapathy Iyer section Padmanabhan and G Gopalakrishnan for the respondent
December 8
The Judgment of the Court was delivered by SHAH J
These are two appeals filed with certificates of fitness granted by the High Court of Judicature at Madras
Appeal No 494 of 1958 arises out of orders passed in certain Excess Profits Tax Appeals and Appeal No 495 of 1958 arises out of orders passed in certain Income tax References Excess Profits Tax Appeals and Business Profits Tax Appeals
Ms N M Rayaloo Iyer  Sons hereinafter referred to as the assessees are a firm carrying on business principally in dyes and chemicals
They are the chief representatives in South India of the products of the Imperial Chemical Industries Company India Ltd hereinafter referred to as the ICI
The business in dyes and chemicals was in the years material to these appeals conducted in the name and style of Colours Trading Company with its Head Office at Madura and in thirteen branch offices in different 63 towns in South India
The busines was carried on originally in partnership by three brothers N M R Venkatakrishna Iyer N M R Subbaraman and N M  R Krishnamurti
On April 13 1946 N M R Subbaraman retired from the firm and the share of N M R Venkatakrishna Iyer was taken over by a private limited company N M R Venkatakrishna Iyer  Sons Ltd but the business was notwithstanding the changes in the personnel continued in the original name and style
One N M R Mahadevan son of N M R Venkatakrishna Iyer hereinafter referred to as Mahadevan was employed by the assessees as the General Manager of the Colours Trading Co
By letter dated April 17 1940 the assessees wrote to Mahadevan agreeing to pay him remuneration at the rate of Rs 1800 per annum and 5 of the net profits of the concern Colours Trading Company calculated by deducting from the gross profits of the business salaries wages and other outgoings but without making any deduction for capital
By letter dated March 30 1943 the salary of Mahadevan was fixed at Rs 3000 per annum and the commission was enhanced to 12 12 of the net profits of the Colours Trading Company
The branch offices were managed by local managers and assistant managers who were paid in addition to monthly salary annual and special bonus and dearness allowance
The assessees received from the I C I commission at rates varying between 7 12 and 12 on different products sold to them
With effect from April 1 1944 the I C I allowed a special emergency commission of 5 on all dyes and dye stuffs sold to the assessees
This special emergency commission was increased to 15  on all sales on or after March 1 1945 but was subsequently reduced to 10 on sales on and after September 1 1946
These appeals relate to the liability of the assessees to Excess Profits Tax for the chargeable accounting periods ending April 13 1943 April 12 1944 April 12 1945 and March 31 1946 and for Business Profits Tax for the chargeable accounting periods ending April 12 1946 March 31 1947 April 13 1947 March 31 1948 and April 12 1948
64 The assessees claimed that they had paid to their employees in the years of account 1942 43 to 1947 48 under agreements executed from time to time a share in the special emergency commission received from the I C I in addition to monthly salary dearness allowance and general and special bonus
The I C I in allowing the emergency commission by its letter dated January 24 1944 recommended that 1 out of the 5 commission allowed may be passed on by the assessees to their sub distributors
The assessees claimed that pursuant to this recommendation they paid to their employees commission at rates varying between 1 12 to 4 and when the emergency commission was increased to 15 and the I C I by letter dated February 23 1945 recommended that 6 out of this commission may be passed on to the sub distributors the assessees claimed to have distributed commission at rates varying from 2 to 7 12 and in some cases at a rate as high as 12
Under the service agreements commission was payable to the employees only if the turnover in dyes exceeded Rs 100000 net in any year but to employees in several branches the assessees claimed to have paid commission at generous rates even when the turnover fell far short of that amount
In the year of account ending April 12 1945 there was a revision of the scales of salaries of the employees and the assessees commenced giving to their employees dearness allowance and special bonus which in the aggregate exceeded 50 of the basic annual salary and also annual bonus equal to the annual salary
The result of this revision of emoluments was that each employee received an amount equal to at least 21 times his enhanced basic salary
In addition to this remuneration the assessees claimed that they had paid a share in the commission which in some cases exceeded 12 times the basic salary
In computing the total income of the assessees for the years 1943 44 and 1944 45 for purposes of income tax the Income tax Officer disallowed the payment of 12 12 of the net profits of the Colours Trading Co to Mahadevan and in computing the income for the 65 assessment years 1945 46 1946 47 1947 48 and 194849 the Income tax Officer disallowed the commission
paid to the branch managers and other employees
In appeal the Appellate Assistant Commissioner set aside the order which disallowed the amount of commission paid to Mahadevan and following the order of the Income tax Appellate Tribunal in certain Excess Profits Tax appeals allowed 5 of the net profits without deduction of Excess Profits Tax or Business Profits Tax or 121 after deduction of Excess Profits Tax or  Business Profits Tax whichever was higher
That order was confirmed in appeal by the Income tax Appellate Tribunal
The Tribunal also confirmed the order disallowing the emergency commission paid to the branch managers and other employees and in the computation of taxable income for purposes of Income tax Excess Profits Tax and Business Profits Tax added back all those payments
At the instance of the assessees the Tribunal referred two sets of questions to the High Court under section 661 of the Income tax Act read with section 21 of the Excess Profits Tax Act
Questions 1 to 3 in Referred Case No 44 of 1953 were 1 Whether in allowing a deduction under section 102 xv of the Income tax Act the Income tax Officer is precluded from going into the question whether the amount was paid wholly and exclusively for the purpose of the assessee s business 2 Whether there was any material before the Tribunal to hold that the commission payment to N M R Mahadevan at 121  before deduction of Excess Profits Tax or Business Profits Tax was not wholly and exclusively laid out for the purpose of the assessee s business 3 Whether the commission payment to the branch managers assistant managers and other employees is an expenditure laid out wholly and exclusively for the purpose of the business Questions referred in Referred Case No 53 of 1952 were 66 1 Whether the Appellate Tribunal erred in law in holding that in accordance with the terms of letters dated 17th April 1940 and 30th March 1943 and the conduct of the parties the Excess Profits Tax payable by the assessee should be deducted from the profits before the commission of 12 12 payable to M N R Mahadevan is calculated 2 Whether there is any material on evidence sufficient in law for the Appellate Tribunal to hold that the commission of 12 12 on profits paid to Mahadevan was unreasonable within the meaning of Rule 12 of Schedule 1 of the Excess Profits Tax Act 3 Whether on the facts and circumstances of the case the disallowance by the Excess Profits Tax authorities of the commission paid to branch managers is justified under Rule 12 of Schedule 1 of the Excess Profits Tax Act The material provisions relating to allowances under the Excess Profits Tax Act and the Business Profits Tax Act which Act superseded the Excess Profits Tax Act as from March 30 1946 were on the questions arising in this case substantially the same and hereafter reference to the Excess Profits Tax Act will in respect of the period after March 30 1946 be deemed to be a reference to the Business Profits Tax Act
In the opinion of the High Court in computing the taxable income the deductions claimed by the assessees fell to be considered not under section 102xv of Income tax Act but properly under section 102x of the Income tax Act the latter being a specific provision in the Act relating to deduction of commission or bonus paid to an employee
The High Court observed that in assessing liability to Excess Profits Tax the bonus or commission paid to the employees of the tax payer may be permitted as a deduction in the light of section 102x of the Income tax Act and r 12 of Sch 1 to the Excess Profits Tax Act
The case of Mahadevan according to the High Court did not present much difficulty the only question which fell to be determined in this case being whether in allowing deduction of commission at the rate of 12 12 on the net profits the 67 Excess Profits Tax paid by the assessees was to be taken into account
Following a judgment of the Punjab High Court in Commissioner of Income tax Delhi vs Delhi Flour Mills Ltd 1 the High Court observed that in computing net profits Excess Profits Tax could not be deducted but on the materials on the record the question whether the commission paid to the branch managers and other employees was properly deductible could not be decided and accordingly the High Court called for and obtained from the Tribunal a supplementary statement of facts
The High Court after considering the supplementary statement observed that the assessees had undoubtedly distributed substantial sums out of the emergency commission to its managers and assistant managers in the branches at rates well above the minima recommended by the I C I but the distribution was at rates within the percentages allowed by the I C I as additional commission and the balance retained by the appellants out of the emergency Commission was also substantial
In the view of the High Court the Tribunal had to consider three factors 1 the reasonableness of the commission in the light of the conditions laid down in section 102x 2 the reasonableness of the percentages above the minima suggested by the I C I and 3 the need for maintaining the reputation of the I C I and the distributor in conditions that prevailed during that period when black marketing was rampant but observed the High Court the Tribunal had made no real attempt to analyse the evidence before it to justify its conclusion that only the minima recommended by the ICI and nothing in excess satisfied the test of reasonableness under r 12 Sch 1 of the Excess Profits Tax Act
They then observed that whether the test of reasonableness is that prescribed by section 102x of the Income tax Act or whether reasonableness has to be judged in the light of commercial expediency under r 12 Sch 1 of the Excess Profits Tax Act the expenditure was to be judged from the point of view of a businessman and not by the application of any subjective standard of a taxing 1 68 officer and that on an analysis of the materials furnished they were unable to see anything per se unreasonable in the amounts of commission actually paid by the assessees to the branch managers and assistant managers in the branches
The High Court also observed that the minima recommended by the I C I did not provide the only or an absolute standard for judging the reasonableness of the payments made and stated No doubt the employees of the assessee were in receipt of regular salaries and bonuses
But then a sub distributor if he had not been paid a salary would have had to be paid a share of the basic commission itself
What the assessee got in the years in question was in the nature of a windfall
It shared it with its employees
It had been instructed to share it
The emergency commission was allowed by the Imperial Chemical Industries so that the distributors could maintain the reputation of the Imperial Chemical Industries in the market even under the disturbed conditions that prevailed in those years
If to maintain that reputation and to maintain its own the assessee paid to its employee s even on a liberal basis a share of that emergency commission it is a little difficult to hold that while receipt of the emergency commission was reasonable sharing it beyond a particular point would per se be unreasonable in the sense that no prudent businessman in that line of business in those years and in the market condition that prevailed then with ample scope for black marketting would have paid out commission on such a basis
They then concluded Though of course it was for the assessee to show that it was entitled to the deduction claimed under section 102x of the Income tax Act and r 12 of Sch 1 of the Excess Profits Tax Act there was really no basis on record to show that judged from the point of view of a businessman payments in excess of the minima recommended by the Imperial Chemical Industries were not reasonable
We are of 69 opinion that the entire claim should have been allowed both under section 102x of the Income tax Act and under r 12 of Sch 1 of the Excess Profits Tax Act on the ground that the statutory requirements were satisfied by the assessee
 The High Court accordingly answered the questions about the disallowance of commission paid to the employees of the assessees being justified under r 12 Sch 1 of the Excess Profits Tax Act in the negative
Against those orders these two appeals have been preferred with certificates of fitness from the High Court
The first question which falls to be considered is whether in the computation of taxable income for purposes of Income tax and Excess Profits Tax commission allowed to Mahadevan at 12 12 should be allowed after deducting the Excess Profits Tax paid
By the agreement dated April 17 1940 as modified by the agreement dated March 30 1943 Mahadevan was to be paid remuneration at the rate of Rs 3000 per annum and 121  of the net profits of the Colours Trading Company
In the view of the High Court in determining the net profits under the agreement in accordance with the principles of commercial accountancy and the principles laid down under the Excess Profits Tax Act the Excess Profits Tax which is a tax on profits could not be deducted
In our judgment the question is one of the true interpretation of the agreement
Mahadevan was under the agreement to receive 121 commission on the net profits of the Colours Trading Co calculated by deducting from the gross
profits of the business the salaries wages and other outgoings
The expression outgoings is not restricted to business or commercial outgoings
The agreement specifically disentitles the employers to make deductions of capital expenditure but there is no indication that the outgoings are to be business outgoings only
There is nothing in the agreement or in the context justifying the view that in the expression outgoings  is not included the Excess Profits Tax paid by the assessees
In Commissioner of Income Tax Delhi vs Delhi 70 Flour Mills Co Ltd 1 it was observed by this Court in construing a similar agreement that the Excess Profits Tax was a part of the profits itself but it was no part of the net profits contemplated by the parties if it was a part which had to be deducted in arriving at the net profits that is to say the divisible profits which alone the parties had in mind as a matter of construction the net profits meant divisible profits and were to be ascertained after deduction of Excess Profits Tax
Counsel for the Revenue has not challenged the decision of the High Court that in computing taxable income for the purpose of income tax commission paid to the various employees is a permissible deduction under section 102x of the Income tax Act
The only question which survives on this branch for consideration is therefore whether those deductions are permissible in the assessment of Excess Profits Tax
By section 21 of the Excess Profits Tax Act amongst other provisions section 10 of the Income tax Act is made applicable with modifications if any as may be prescribed as if it were a provision of the Excess Profits Tax Act and refers to the Excess Profits Tax instead of Income tax
By section 219 the expression profits means profits determined in accordance with Sch 1 of the Act which lays down the rules for computation of profits for the purpose of Excess Profits Tax Act
Rule 12 of Sch 1 which was added by section 4 of the Excess Profits Tax Ordinance 1943 provided as follows 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 of the business and in the case of directors  fees or other payments for services to the actual services rendered by the person concerned Provided that no disallowance under this rule shall be made by the Excess Profits Tax Officer unless he has obtained the prior authority of the Commissioner of Excess Profits Tax
2 1959 Supp 1 SCR 28
71 2 Any person who is dissatisfied with the decision of the Excess Profits Tax Officer under this rule may
appeal in the prescribed time and manner to the Appellate Tribunal
3 In relation to chargeable accounting periods ending after the 31st day of December 1942 the Central Government may make rules for determining the extent to which deductions shall be allowed in respect of bonuses or commissions paid
We were informed at the bar that though authorised the Central Government did not make rules for determining the extent to which deductions shall be allowed in respect of bonuses or commissions paid
The Excess Profits Tax Act was substituted as from the year 1946 by the Business Profits Tax Act 1947
That Act also defined by  section 2 cl
16 the expression profits as meaning profits determined in accordance with Sch 1 and by section 19 the provisions of the sections of the Indian Income tax Act as applied to the Excess Profits Tax Act by virtue of sections 21 and 21A in so far they were not repugnant to the provisions of the Business Profits Tax Act applied to that Act as they applied to Excess Profits Tax Act and by cl
3 of Sch 1 a provision substantially similar to cls
1  2 of cl 12 Sch 1 of the Excess Profits Tax Act was incorporated
Profits of a business for purposes of Excess Profits Tax Act have to be ascertained by reference to section 10 of the Income tax Act modified to the extent directed by Sch 1 of the Excess Profits Tax Act
By cl
12 of Sch 1 of the Excess Profits Tax Act a deduction in respect of expenses in excess of the amounts which the Excess Profits Tax Officer considers reasonable and necessary having regard to the requirements of the business and in the case of payments for services to the actual services rendered by the persons concerned is not to be allowed
The deduction to be allowed it is true does not depend upon any subjective satisfaction of the Excess Profits Tax Officer but on objective standards as to what is reasonable and necessary having regard to the requirements of the business and in the case of payments for services 72 to the actual services rendered by the persons concerned
The order passed by the Excess Profits Tax  Officer is open to review by the Tribunal to which appeal against the order of the Excess Profits Tax Officer lies
But in considering whether the deduction is properly claimed the primary duty is vested by the Legislature in the Excess Profits Tax Officer
It is for him subject to review by the Tribunal to decide whether the deduction is reasonable and necessary having regard to the requirements of the business and in case of payments for services to the actual services rendered
The jurisdiction which the High Court exercises on questions referred to it under the Excess Profits Tax Act is merely advisory the High Court is not sitting in appeal over the judgment of the taxing authorities
If the taxing authorities having regard to the circumstances come to a conclusion that expenditure claimed as a deduction is not reasonable and necessary it is not open to the High Court to substitute its own view as to what may be regarded as reasonable and necessary
Even if the High Court holds that the taxing authorities have committed an error in law by misconceiving the evidence or by applying erroneous tests or otherwise by acting perversely the High Court may in answering the questions submitted lay down the true principles applicable to the ascertainment of the permissible deductions and leave it to the taxing authorities to adjudicate upon the reasonableness and necessity of the expenses in the light of the requirements of the business
In the case in hand the Excess Profits Tax Officer held a that the employees of the assessees were being amply remunerated for services rendered by adequate salary generous dearness allowance and annual bonus equal to the basic salary b that the emoluments of the employees had been increased year after year and there was no material to show that the employees had made a persistent demand for increased emoluments c that the commission was credited to the employees  account at the end of the year and was carried forward but no payments were made to 73 them  d that the agreements which had been produced by the assessees were fabricated with a view to reduce tax liability and e that the expenditure  claimed was not proved to have been laid out wholly and exclusively for the purpose of the business
Taking into account these circumstances the Excess Profits Tax Officer held that the remuneration paid to the employees was adequate and any additional commission paid was in excess of what was reasonable and necessary
The only criticism urged by counsel for the assessees against the grounds given is that the Excess Profits Tax Officer observed that while the net profit according to the Profit  Loss Account of the firm was Rs 20487 leaving a share of Rs 6800 only to each of the partners some of the managers got more than this amount
It appears that the Excess Profits Tax Officer committed an error in so observing
The profits of the Colours Trading Co as disclosed by the order of assessment for the year 1945 46 were Rs 99435 and not Rs 20487 but that error did not affect the ultimate conclusion recorded by the Excess Profits Tax Officer
According to the books of account of the assessees for the year 1943 44 of the business in dyes the profits were Rs 99435 and they claimed to have distributed a commission of Rs 100715 to their employees out of the emergency commission which was prima facie wholly disproportionate to the amount received by them
The order passed by the Excess Profits Tax Officer was confirmed in appeal by the Appellate Tribunal
In the view of the Appellate Tribunal no additional incentive was required to sell dyes and chemicals in the years in question because dyes and chemicals were in short supply and there was a rise in demand
The Tribunal also referred to the table setting out the distribution among the employees of dearness allowance bonus and salary in the relevant years and observed In addition to the generous allowances the payment of this sum appears to us a payment made in order to dissipate the profits
It would be sufficient to say that including the commission alleged 10 74 to have been paid the total emoluments would be something like 1200 and in some cases even more than the basic annual salary
There is no doubt in our mind that this was wholly unnecessary for business purposes
 Observing that the assessees having no sub distributors the direction given by the ICI did not require the assessees to pass on the commission to their employees they concluded that the expenditure alleged to have been incurred was not reasonable and necessary within the meaning of r 12 Sch 1 of the Excess Profits Tax Act
The following table which is incorporated in the statement of case of the Tribunal sets out for the four years in question the emergency commission received by the assessees and the aggregate amount paid by them to their employees
Extra commis Amount of commis Assessment sion received sion paid by the year
by the assessee
assessee
Rs Rs 1945 46 128533 100715 1946 47 320391 244698 1947 48 315934 128506 1948 49 370964 175079 This distribution out of the emergency commission to the employees has to be viewed in the context of the following circumstances set out by the Tribunal 1that even though the ICI recommended payment to sub distributors and the assessees had no sub distributors they claimed to have paid commission to their employees at rates in excess of the minimum rates recommended by ICI 2 that this commission was paid to the employees in branches in which the annual turnover did not exceed Rs 100000 even though the agreements which the assessees had executed expressly provided that the commission was to be paid only if the annual turnover in a branch exceeded Rs
I lakh and 3that the basic salaries of the employees had been substantially increased from time to time and generous dearness allowance and Deepavali bonus 75 were given besides the annual bonus to the employees
An analysis of annexure IL to the supplemental statement of case made by the Tribunal discloses some striking instances of Payments to employees
One Themaswamy was paid annually commission varying from Rs 15000 to Rs 23000 when his basic salary was Rs 2100 per annum one K N Rajagopalachari was paid commission varying from Rs 16000 to Rs 12000 when his basic salary was Rs 1260 per annum one section L Radhakrishnan was paid commission varying from Rs 5700 to Rs 13000 when his salary varied between Rs 516 and Rs 636 per annum and one K R Rama Rao was paid commission varying from Rs 4600 to Rs 10520 his salary being Rs 492 and later increased to Rs 612 per annum
There was thus ample evidence in support of the conclusion of the Excess Profits Tax Officer which was confirmed by the Tribunal
As we have already observed it is the province of the Excess Profits Tax Officer and the Tribunal to assess the permissible deductions in the context of reasonableness and necessity having regard to the requirements of the business and interference with the conclusion is permissible if the view of the taxing authorities is vitiated by an error of law or is not based on any materials or the conclusion is such that no man instructed in law could have arrived at
It is true that in considering whether the deduction claimed by the assessees for payments made as bonus or commission paid to an employee is to be allowed the taxing officer must have regard to the provisions of section 102x of the Income tax Act and cl
12 of Sch 1 of the Excess Profits Tax Act and in assessing the reasonableness consideration of commercial expediency must undoubtedly be taken into account
But commercial expediency must be viewed in the light of the requirements of the business and the actual services rendered by the persons concerned
Any abstract consideration of commercial expediency is out of place
In our view the High Court was not justified in seeking to reappreciate the evidence on which the 76 conclusion of the Excess Profits Tax Officer which was confirmed by the Tribunal was based
Their jurisdiction being advisory the High Court had to answer the questions submitted for opinion on the facts found if the High Court held the view that the taxing authorities had misdirected themselves in law or had made a wrong inference in law or had failed to apply the correct tests or had misconceived the evidence it was
open to them to invite the attention of taxing authorities to the error committed by them but the High Court could not set aside the decision of the taxing authorities on a reappreciation of the evidence
We may also point out that even if the High Court concluded that the total disallowance of the deduction claimed was not justified the High Court could not substitute its own view as to what was reasonable and necessary
The High Court bad if it disagreed with the taxing authorities still to answer the questions submitted and leave to the consideration of the Excess Profits Tax Officer what in the circumstances was reasonable and necessary
Counsel for the assessees submitted that in any event the Tribunal having in its supplementary statement of case stated that payment in excess of what was recommended by the ICI was unjustified this court may so modify the order of the High Court that deductions of the amounts which were recommended by the ICI may be regarded as permissible deductions
The ICI recommended distribution of a certain percentage out of the emergency commission to the sub distributors but in the administrative set up of the assessees the sub distributors did not find a place
The assessees carried on their business through paid employees
In terms therefore the recommendation by the ICI had no application to the assessees
It is true that even if the assessees did not carry on the business through sub distributors payment made to its employees if reasonable and necessary having regard to the requirements of the business may still be deductible but that in our judgment is a matter to be decided by the taxing authorities and not by us
77 The Tribunal had come to the conclusion that no payment in addition to the salary annual bonus and special bonus was justified and any expression of opinion to the contrary in the supplementary statement pursuant to the order for statement of case could not in our judgment affect the conclusion originally recorded
In our view the answer to the question whether the disallowance by the Excess Profits Tax authorities of the commission paid to branch managers was justified under r 12 Sch 1 of the Excess Profits Tax Act should have been answered in the affirmative
On the view taken by us Appeal No 4941958 will be allowed but there will be no order as to costs
Appeal No 495 of 1958 will be allowed with costs
Appeals allowed


Summary:
The respondents a firm carrying on business in dyes and chemicals under the name and style of Colours Trading Com pany with their head office at Madurai and thirteen branch offices in different towns were the chief representatives in South India of the products of the I C I a manufacturing concern
M was employed as the General Manager of the respondents and by virtue of an agreement he was to be paid remuneration at the rate of Rs 3000 per annum and 12 12 of the net profits of the company calculated by deducting from the gross profits of the business the salaries wages and other outgoings
The branch offices were managed by local managers and assistant managers who were paid in addition to monthly salary annual and special bonus and dearness allowance
The respondents received from the I C I commission at varying rates on the different products sold to them and with effect from April 1 1944 the ICI allowed a special emergency commission of 5 recommending that 1 out of the commission allowed may be passed on by the respondents to their sub distributors
The respondents claimed to have distributed to their employees commission pursuant to the recommendation of the ICI at rates varying between 2 and 7 12 and in some cases at a rate as high as 12
Though under the service agreement commission was payable to the employees only if the turnover exceeded Rs 100000 net in any year the respondents claimed to have paid them commission at generous rates even when the turnover fell far short of that amount
In the year of account ending April 12 1945 there was a revision of the scales of salaries of the employees as a result of which the employees received an amount equal to 2 12 times the enhanced basic salary and also commission sometimes exceeding 12 times the basic salary
In computing the total income of the respondents for the years 1943 44 and 1944 45 for purposes of income tax the income tax Officer disallowed the payment Of 12 12 of the net 61 profits to M and for the years 1945 49 he disallowed the commission paid to the branch managers and other employees on the ground that taking into account all the circumstances the remuneration paid to the employees was adequate and that any additional commission paid was in excess of what was reasonable or necessary
The Appellate Tribunal confirmed the order of the Income tax Officer except in the case of M to whom payment of 5 of the net profits without deduction of Excess Profits Tax or Business Profits Tax or 12 after deduction of Excess Profits Tax or Business Profits Tax whichever was higher was regarded as permissible deduction
The High Court on reference took the view inter alia that in determining the net profits under the agreement with M the excess profits tax could not be deducted that in considering the question whether the bonus or commission paid to the employees in the present case might be permitted as a justifiable deduction in the light of section 102X Of the Income tax Act and r 12 of Sch 1 of the Excess Profits Tax Act the test of reasonableness of the expenditure was to be judged from the point of view of a business man and not by the application of any subjective standard of a taxing officer and that on an analysis of the materials furnished there was nothing per se unreasonable in the amounts of commission actually paid by the respondents to the branch managers and assistant managers
Held i that the question whether in the computation of the taxbale income the commission payable to M under the agreement entered into with him by the respondents should be allowed before deducting the excess profits tax depended on the true interpretation of the agreement the expression outgoing in the agreement was not restricted to business or commercial outgoings but included the excess profits tax paid by the assessees and that consequently the net profits of which M was to be given a percentage by way of commission should be computed after deducting the excess profits tax paid
Commissioner of Income tax Delhi vs Delhi Flour Mills Co Ltd 1959 SUPP
1 SCR 28 relied on
2 that under cl
12 Of Sch
1 of the Excess Profits Tax Act 1940 it was for the Excess Profits Tax Officer subject to review by the Tribunal to decide whether the deduction was reasonable and necessary having regard to the requirements of the business and in case of payments for services to the actual services rendered by the persons concerned it was not open to the High Court exercising its jurisdiction on questions referred to it under the Excess Profits Tax Act to substitute its own view as to what may be regarded as reasonable and necessary and to set aside the decision of the taxing authorities on a re appreciation of the evidence
If the High Court considered that the taxing authorities had committed an error in law by misconceiving the evidence or by applying erroneous tests or 62 otherwise by acting perversely the proper course for it was in answering the questions submitted to lay down the true principles applicable to the ascertainment of the permissible deductions and to leave it to the taxing authorities to adjudicate upon the reasonableness and necessity of the expenses in the light of the requirements of the business
3 that there was ample evidence in support of the conclu sion of the Excess Profits Tax Officer which was confirmed by the Tribunal and that the question whether the disallowance by the excess profits tax authorities of the commission paid to branch managers was justified under r 12 of Sch
1 of the Excess Profits Tax Act should have been answered in the affirmative