Case: The Commissioner Of Excessprofits Tax, Madras Vs. N. M. Rayaloo Iyer &amp; Sons

year Extra commission received by the assessee. Amount of commission paid by the assessee.Rs. Rs.1945-46 1,28,533 1,00,7151946-47 3,20,391 2,44,6981947-48 3,15,934 1,28,5061948-49 3,70,964 1,75,07921. 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 :(1) that even though the I. C. I. 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 I. C. I.(2) that this commission was paid to the employees in branches in which the annual turnover did not exceed Rs. 1,00,000/- 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. 1 lakh and(3) that the basic salaries of the employees had been substantially increased from time to time and generous dearness allowance and Deepavali bonus were given besides the annual bonus to the employees.22. An analysis of annexure "L" 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. 15,000/- to Rs. 23,000/- when his basic salary was Rs. 2,100/- per annum; one K. N. Rajagopalachari was paid commission varying from Rs. 16,000/- to Rs. 12,000/- when his basic salary was Rs. 1,260/- per annum; one S. L. Radhakrishnan was paid commission varying from Rs. 5,700/- to Rs. 13,000/- when his salary varied between Rs. 516/- and Rs. 636/- per annum and one K. R. Rama Rao was paid commission varying from Rs. 4,600/- to Rs. 10,520/- his salary being Rs. 492/- and later increased to Rs. 612/- per annum.23. There was thus ample evidence in support of the conclusion of the E. P. T. Officer which was confirmed by the Tribunal.As we have already observed, it is the province of the E. P. T. 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 S. 10 (2)(x) 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.24. In our view, the High Court was not justified in seeking to reappreciate the evidence on which the conclusion of the E. P. T. 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 reapplication 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 had, if it disagreed with the taxing authorities, still to answer the questions submitted and leave to the consideration of the E. P. T. Officer what in the circumstances was reasonable and necessary.25. Counsel for the assessees submitted that it any event, the Tribunal having in its supplementary statement of case stated that payment in excess of what was recommended by the I. C. I. was unjustified, this Court may so modify the order of the High Court that deductions of the amounts which were recommended by the I. C. I. may be regarded as permissible deductions. The I. C. I. 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 I. C. I. 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. 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.26. In our view the answer to the question whether the disallowance by the E. P. T. 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. 494/1958 will be allowed, but there will be no order as to costs.

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

Explanation:
1[ds]9. In the opinion of the High Court, in computing the taxable income, the deductions claimed by the assessees fell to be considered not under s. 10(2)(xv) of Income-tax Act but properly under S. 10(2)(x) 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 S. 10(2)(x) 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 his case being whether in allowing deduction of commission at the rate of 12 1/2% on the net profits, the Excess Profits Tax paid by the assessees was to be taken intoHigh 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 mangers 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 S. 10(2)(x), (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 I. C. I., and nothing in excess satisfied the test of reasonableness under R. 12, Sch. 1, of the Excess Profit Tax Act." They then observed that, whether the test of reasonableness is that prescribed by S. 10(2)(x) 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 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 thethe 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 12 1/2% 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 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 basis salary, (b) that the emolument 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 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 E. P. T. 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 E. P.T. Officer observed that while the net profit according to the Profit and Loss Account of the firm was Rs. 20,487/- leaving a share of Rs. 6,800/- only to each of the partners, some of the managers got more than this amount. It appears that the E. P. T. 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.99,435/- and not Rs. 20,487/-; but that error did not affect the ultimate conclusion recorded by the E. P. T. Officer. According to the books of account of the assesses for the year 1943-44 of the business in dyes, the profits were Rs. 99,435/- and they claimed to have distributed a commission of Rs. 1,00,715/- to their employees out of the emergency commission, which was prima facie wholly disproportionate to the amount received by them.There was thus ample evidence in support of the conclusion of the E. P. T. Officer which was confirmed by the Tribunal.As we have already observed, it is the province of the E. P. T. 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 S. 10 (2)(x) 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 conclusion of the E. P. T. 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 reapplication 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 had, if it disagreed with the taxing authorities, still to answer the questions submitted and leave to the consideration of the E. P. T. Officer what in the circumstances was reasonable and necessary.In our view the answer to the question whether the disallowance by the E. P. T. 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. 494/1958 will be allowed, but there will be no order as to costs.