Case: The Commissioner Of Income-Tax, Delhi Vs. The Delhi Flour Mills Co., Ltd., Delhi

case.14. Nor do we think it necessary in the present case, as we have said earlier, to decide whether there are distinctions between income-tax and excess profits tax. We are not concerned with the question whether income-tax should be deducted before the net profits under the agreement can be ascertained. We will assume that it cannot be. It is common sense and also firmly established on the authorities to which reference has already been made, that in ascertaining the divisible profits excess profits tax has to be deducted. As we have construed the agreement in this case, net profits mean the divisible profits and therefore they can be arrived at only after deduction of excess profits tax.15. We wish now to refer to the minority opinions in the House of Lords in 1942-2 All ER 528 on which the High Court seems largely to have based its decision. The dissenting opinion of Viscount Simon L. C. arose from the fact that he did not think that the words profits in the agreement then before the House meant the divisible profits. With the reasons for this view we are not concerned for these turned on the wording of that agreement. Having held that the word profits did not mean the divisible profits, he proceeded to consider whether excess profits tax could be deducted in ascertaining the net profits and in doing so said that as income-tax could be deducted as held in the Ashton Gas Co. case, 1906 AC 10, neither could excess profits tax, for, both were parts of the profits. He also said that the Court of Appeal was wrong in thinking that excess profits tax could be debited to the profit and loss account and therefore held that the net profit which is usually shown in that account has to be ascertained without deducting excess profits tax. We are not concerned with this part of the opinion of the Lord Chancellor either. It was given on the basis that the profits were not the divisible profits and we are concerned only with divisible profits. The other dissentient speech was by Lord Macmillan. He said substantially what Viscount Simon had said, and therefore it is unnecessary to deal with his view separately. It does not however appear to us that the dissentient Judges in the House of Lords held that if the profits were the divisible profits, excess profits tax could not be deducted before these could be ascertained. In the view that we have taken of the agreement before us, we cannot, therefore, derive any assistance from the dissentient opinions.16. One other case, namely, N. M. Rayaloo Iyer and Sons v. Commr. of Income-tax, Madras, 1954-26 ITR 265 : ((S) AIR 1955 Mad 56 ), was brought to our attention. This case also purports to follow the reasoning adopted in the minority judgments in 1942-2 All ER 528 and actually relied on the authority of the judgment under appeal. It is therefore unnecessary to refer to it further.17. It had been contended by the learned advocate for the appellant that even it the net profits mentioned in the agreement were not the divisible profits and even if income-tax could not be deducted to ascertain these profits, excess profits tax was a proper deduction to be made. It was said that excess profits tax was for this purpose different in nature from income-tax, for, (a) under S. 12 of the Excess Profits Tax Act, 1940, excess profits tax was deductible as an expense for the purpose of income-tax assessment; (b) that where the employer is a company, as in the present case, the income-tax paid is refundable to the shareholders which excess profits tax is not; (c) that excess profits tax is a "debt of the business and therefore an outgoing, and (d) that it was in the nature of a licence fee upon the payment of which alone the business could be carried on. It is unnecessary to consider these points as in our view the net profits in this case were the divisible profits and whether excess profits tax is distinguishable from income-tax for any of these reasons or not, it is properly deductible.18. We should also refer to an argument advanced by the assesses which was founded on S. 87-C of the Indian Companies Act, 1913, introduced by an amendment made in 1936, which provides that the remuneration of the managing agents of a company shall be a fixed percentage of its net annual profits, and that in calculating the net profits no deduction in respect of any tax or duty on income is to be made.It is said that the statute incorporates the universal commercial practice and therefore in construing the present agreement excess profits tax cannot be deducted.We are not aware whether the section incorporates any practice but we think that this contention is entirely unfounded for the section was applied only to a managing agency agreement made after the amending Act came into force, while the agreement in the present case was made before that date.19. Lastly, we have to point out that nothing turns on the fact that at the date the agreement under consideration was made, Excess Profits Tax Act had not come on the statute book nor perhaps been thought of, and therefore could not have been in the contemplation of the parties. If the net profits are the divisible profits, everything necessary to be excluded to arrive at the divisible profits has to be deducted whether it was in the contemplation of the parties or not.It is easy to imagine instances. Suppose after the agreement the Government imposed a licence fee on the payment of which alone the business could have been carried on and that licence fee was not in the contemplation of the parties when the agreement had been made. None the less it has clearly to be deducted in finding out the divisible profits. In the result we would answer the question framed in the affirmative.

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

Explanation:
1[ds]The agreement is that "the net profits will be arrived at after allowing the working expenses, interest on loans and due depreciation but without setting aside anything to reserves or special funds." We can leave out the things expressly made not deductible for as to these no question arises, the question being whether something more, namely, excess profits tax, can be deducted. Working expenses, interest on loans and due depreciation have however been expressly made deductible in ascertaining the net profits. If these are all the deductions that can be made, excess profits tax cannot be deducted for it does not come under any one of them. But it seems to us that the agreement was not intended to lay down all the deductions that can be made. It is not in dispute that expenses like overhead expenses, litigation expenses and similar other expenses properly incurred for carrying on the business can be deducted in arriving at the net profits. These would not be included within "working expenses" for that expression is usually understood as referring to expenses debitable to the trading account as having been incurred directly in making the income shown there. If this were not the sense in which the expression "working expenses" was used and it was meant to cover all revenue expenses incurred, then there would have been no need to mention, interest on loans and depreciation, separately for these latter would have been included as revenue expenses in the expression "working expenses". We are therefore inclined to think that there are other items besides those expressly mentioned, which have to be deducted before the net profits can be arrivedother words, they are the divisible profits of the company, divisible that is to say, between the master and the servant. In order that the divisible profits can be ascertained, excess profits tax has of course to be deducted. As to that there does not seem to be any doubt, for, that part of the profits which is taken away by the State as excess profits tax, is not available either to the master or the servant and cannot therefore be divided betweenwe do not refer to these judgments as supporting anything that we say but because the High Court unwittingly fell into the error of thinking that the Walchand and Co. Ltd. case (AIR 1944 Bom 5  ) came before the James Finlay and Co. Ltd. case (47 Bom LR 774) and that in the later case Beaumont C. J. had doubted the correctness of what he had said in the former. These observations are wholly wrong because, the James Finlay and Co. Ltd. case (47 Bom LR 774) was decided long before the Walchand and Co. Ltd.. case (AIR 1944 Bom 5  ) had been decided. Neither do we find that there is any conflict between the two cases. In the Walchand and Co. Ltd. case (AIR 1944 Bom 5  ), Beaumont C. J. gave reasons for making a distinction betweenand excess profits tax and thought that the distinction between them made in the English cases to which we have referred, was not of substance. We do not think it necessary to say anything as to whether Beaumont C. J. was right in this view.Now it seems to us that there is nothing in the Ashton Gas Co. case, 1906 AC 10   which prevents us from holding that in ascertaining the net profits for the purpose of the agreement that is before us, excess profits tax has to be excluded. That was not a case of profit sharing. It was not concentred with deciding what sums are deductible in arriving at the divisible profits in a profit sharing agreement. That is what we have to decide. Therefore we think that the Ashton Gas Co. case, 1906 AC 10   does not assist in answering the question that has arisen in this case.e should also refer to an argument advanced by the assesses which was founded on S.of the Indian Companies Act, 1913, introduced by an amendment made in 1936, which provides that the remuneration of the managing agents of a company shall be a fixed percentage of its net annual profits, and that in calculating the net profits no deduction in respect of any tax or duty on income is to be made.It is said that the statute incorporates the universal commercial practice and therefore in construing the present agreement excess profits tax cannot beare not aware whether the section incorporates any practice but we think that this contention is entirely unfounded for the section was applied only to a managing agency agreement made after the amending Act came into force, while the agreement in the present case was made before that date.19. Lastly, we have to point out that nothing turns on the fact that at the date the agreement under consideration was made, Excess Profits Tax Act had not come on the statute book nor perhaps been thought of, and therefore could not have been in the contemplation of the parties. If the net profits are the divisible profits, everything necessary to be excluded to arrive at the divisible profits has to be deducted whether it was in the contemplation of the parties or not.It is easy to imagine instances. Suppose after the agreement the Government imposed a licence fee on the payment of which alone the business could have been carried on and that licence fee was not in the contemplation of the parties when the agreement had been made. None the less it has clearly to be deducted in finding out the divisible profits. In the result we would answer the question framed in the affirmative.