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
110 112 of 1952
section TDesai and J B Dadachanjifor the appellant
B SenJ Bhave and 1
N Shrofffor the respondent
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 19411942 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 18000 1800018000 a Fixed PM for the for the monthly allow year
ance as office allowance
b Commission  16 268335 615946 1052939 on the Com net on painy s Net profits Profits
c Commission  1 9 0 110156 110156 164751 271672 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 32ix 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 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 agents commission on profits under R 32ix
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 50000 at 1 12 annas per rupee and b above at 2 12 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 HH 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 vs 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 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 23 1932 by the Commerce
and Industry Department of the Holkar State
The latter notification reads as follows 1 1931 LR 38 IA 239 864 Commerce and Industry Department Notification
Notification No 1 dated the 2nd3rd 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 Cabinetin 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 June1933 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 32ix 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
In this connection the appellants wish to use the later decisions of the House of Lords in The Union Cold wage Co Ltd vs Adamson1 and of the Privy Council in The Indian Radio and Cable Communication Co Ltd vs 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 10000 has then to pay pound 1000 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 9000
 1 2 3 1931 LR 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 isto 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 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 vs 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 AIR 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 32ix and in the nature of an explanation
This Court in Ameer un nissa Begum vs 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 Firman  held the field that alone would govern or regulate 1AIR 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 vs 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 article 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  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 22Com
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 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


Summary:
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 vs 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 vs Madhya Bharat State A I R 1953 Madhya Bharat 135 approved
Ameer un nissa Begum vs Mahboob Begum A I R  followed
The Union Cold Storage Co Ltd vs Anderson 1931 16 T C 293 and The Indian Radio and Cable Communications Co Ltd vs Commissioner of Income tax  discussed
Madharao vs State of Madhya Bharat   referred to 860