Case: R.G.S. Naidu &amp; Company Vs. Commissioner of Income Tax Andexcess Profits Tax, Madras

computation of tax liability for Excess Profits Tax, and it was open to the Tax Officer to take action under S. 15 of the Excess Profits Tax Act. 11. Determination of the second question depends upon R. 9, Sch. 1, of the Excess Profits Tax Act. By S. 2 (19) of the Excess Profits Tax Act, the expression profits means profits as determined in accordance with Sch. 1. That schedule sets out rules for computation of profits for the purpose of the Excess Profits Tax Act; and by R. 9, it is provided in so far as it is material that : Where the performance of a contract extends beyond the accounting period, there shall (unless the Excess Profits Tax Officer, owing to any special circumstances, otherwise directs) be attributed to the accounting period such proportion of the entire profits or loss which has resulted, or which it is estimated will result, from the complete performance of the contract as is properly attributable to the accounting period, having regard to the extent to which the contract was performed therein. 12. The performance of the contract of managing agency extended beyond the period of account of the company which was July 1, 1945 to June 30, 1946 : it covered parts of two accounting periods. The Tax Officer was therefore obliged to apportion to the chargeable accounting periods the entire profits resulting from the complete performance of the contract in proportions properly attributable to the accounting periods and this, he proceeded to do. Counsel for the appellants contends that the contracts contemplated by R.9 are those of the nature of engineering or works contracts and the like where execution of the contract involves a profit-making operation de die in diem and not contracts where remuneration is payable at a certain time for services performed throughout the stipulated period. It is true that remuneration was paid to the appellants after the expiry of the year of account of the company; but the contract was one the performance of which extended throughout the year of account of the company. The appellants were the managing agents of the company and they had to perform their duties as managing agents for the whole year. It is not disputed that the contract of agency for 20 years is to be regarded for assessment of excess profits tax as an annual contract, The performance of the contract unmistakably cut across the accounting period is also manifest. The remuneration for performance of the contract is not computed at a daily rate, but is computed on a percentage of the commission on the profits of the company for the whole year, but on that account, the contract is not one in which performance does not extend throughout the year of account. Normally in a managing agency contract, the managing agent may not suffer loss, but that does not rule out the application of R. 9 to managing agency contracts. The terms in which R. 9 is enacted are general : the rule is applicable to all contracts which are intended to be operative for a fixed period. If, for the performance of the entire contract, remuneration is payable at rates stipulated, the profit earned out of that remuneration must be apportioned in the manner provided by R. 9 in the performance of the contract extends beyond the accounting period. 13. The judgment of this Court in E. D. Sassoon and Co., Ltd. v. Commr. of Income-Tax, Bombay City, 1955-1 S C R 313 : (AIR 1954 S C 470) on which strong reliance was placed by the appellants has no application to this case. In that case, M/s. E. D. Sassoon and Co., Ltd. who were managing agents of three different companies transferred the managing agencies to three other companies on several dates during the accounting year. A question arose in the computation of income-tax payable by M/s. E. D. Sassoon and Co., Ltd. whether the managing agency commission was liable to be apportioned between M/s E. D. Sassoon and Co., Ltd. and their respective transferees in the proportion of the services rendered as managing agents for the respective periods of the accounting year. It was held by this Court (Jagannadhadas, J. dissenting) that on a true interpretation of the managing agency agreements in each case, the contract of service between the companies and the managing agents was entire and indivisible and the remuneration or commission became due by the companies to the managing agents only on completion of definite periods of service and at stated intervals ; that complete performance was a condition precedent to the recovery of wages or salary in respect thereof and the remuneration payable constituted a debt only at the end of each period of service completely performed, no remuneration or commission being payable to the managing agents for broken periods; that no income was earned by or accrued to M/s E. D. Sassoon and Co., Ltd. and as the transfer of the agencies did not include any income which E. D. Sassoon and Co., Ltd., had earned, they were not liable to be taxed under the Income-Tax Act. But that was a case dealing with liability of the assesses who did not receive any income and to whom no income had accrued to pay income-tax on the amounts of remuneration paid to their transferees. The Court was not called upon to apply to income received by the assessee the principle of apportionment under R. 9 of Sch. 1 of the Excess Profits Tax Act. or any provision similar thereto. It is R. 9 of Sch. 1 which attracts the principle of apportionment. The rule enunciated in M/s. E. D. Sassoon and Co.s case, 1955-1 S C R 313 : (AIR 1954 S C 470) (supra) has therefore no application to this case, and the High Court was right in holding that the assessment made by the Excess Profits Tax Officer by apportionment of the commission income between the chargeable accounting periods was correct.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]10. The appellants maintained their books of account on cash basis and commission received from the company was credited after the accounts of the company were closed. The amounts received by the appellants from the company were included in their return and assessment for the year 1945-46 was completed for the purposes of the Excess Profits Tax by the Tax Officer without apportionment appropriate to the chargeable accounting periods. In so doing, the Tax Officer committed an error. He overlooked the fact that the chargeable accounting period for the assessment of Excess Profits Tax and the year of account of the company did not tally. Under S. 15 of the Excess Profits Tax Act, if the Tax Officer discovers, in consequence of definite information which has come into his possession that profits of any chargeable accounting period chargeable to excess profits tax have escaped assessment, or have been underassessed, he may serve on the person liable to pay such tax a notice containing all or any of the requirements which may be included in a notice under S. 13 and may proceed to assess or re-assess the profits. The provision is substantially similar to S. 34 (1) of the Income-tax Act before it was amended in the year 1948.It is manifest that by the assessment of income made on the assumption that the chargeable accounting period and the accounting period of the company tallied, there resulted under assessment in the computation of tax liability for Excess Profits Tax, and it was open to the Tax Officer to take action under S. 15 of the Excess Profits Tax Act11. Determination of the second question depends upon R. 9, Sch. 1, of the Excess Profits Tax Act. By S. 2 (19) of the Excess Profits Tax Act, the expression profits means profits as determined in accordance with Sch.. That schedule sets out rules for computation of profits for the purpose of the Excess Profits Tax Act; and by R. 912. The performance of the contract of managing agency extended beyond the period of account of the company which was July 1, 1945 to June 30, 1946 : it covered parts of two accounting periods. The Tax Officer was therefore obliged to apportion to the chargeable accounting periods the entire profits resulting from the complete performance of the contract in proportions properly attributable to the accounting periods and this, he proceeded to do. Counsel for the appellants contends that the contracts contemplated by R.9 are those of the nature of engineering or works contracts and the like where execution of the contract involves a profit-making operation de die in diem and not contracts where remuneration is payable at a certain time for services performed throughout the stipulated period. It is true that remuneration was paid to the appellants after the expiry of the year of account of the company; but the contract was one the performance of which extended throughout the year of account of the company. The appellants were the managing agents of the company and they had to perform their duties as managing agents for the whole year. It is not disputed that the contract of agency for 20 years is to be regarded for assessment of excess profits tax as an annual contract, The performance of the contract unmistakably cut across the accounting period is also manifest. The remuneration for performance of the contract is not computed at a daily rate, but is computed on a percentage of the commission on the profits of the company for the whole year, but on that account, the contract is not one in which performance does not extend throughout the year of account. Normally in a managing agency contract, the managing agent may not suffer loss, but that does not rule out the application of R. 9 to managing agency contracts. The terms in which R. 9 is enacted are general : the rule is applicable to all contracts which are intended to be operative for a fixed period. If, for the performance of the entire contract, remuneration is payable at rates stipulated, the profit earned out of that remuneration must be apportioned in the manner provided by R. 9 in the performance of the contract extends beyond the accounting periodThe Court was not called upon to apply to income received by the assessee the principle of apportionment under R. 9 of Sch. 1 of the Excess Profits Tax Act. or any provision similar thereto. It is R. 9 of Sch. 1 which attracts the principle of apportionment. The rule enunciated in M/s. E. D. Sassoon and Co.s case, 1955-1 S C R 313 : (AIR 1954 S C 470) (supra) has therefore no application to this case, and the High Court was right in holding that the assessment made by the Excess Profits Tax Officer by apportionment of the commission income between the chargeable accounting periods was correct.