Case: British India Corporation Vs. Commissioner Of Income-Tax, U.P., Lucknow

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." This rule is designed to prevent the dissipation of the excess profits by inflating expenditure which has no relation to the requirements of the business. The test is, whether the expenditure is unreasonable and unnecessary 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. There is of course no reference in this rule to commercial expediency or commercial practice in considering whether an expenditure is unreasonable and unnecessary having regard to the requirements of the business. But that is another way of saying that all relevant factors must be taken into consideration by the Excess Profits Tax Officer in considering whether that expenditure is reasonable and necessary. What it means is that the Excess Profits Tax Officer could not apply the rule to increases that can be justified on ordinary commercial principles because an increase in profits may in certain cases be due to increase in the activity of the management or increase in the establishment justifying a corresponding increase in the expenditure. The Full Bench decision in Shyamlals case, 27 ITR 404 = (AIR 1955 All 299 ) came up for consideration by this Court in Ahmedabad Manufacturing and Calico Printing Co. v. Commr. of E.P.T., 38 ITR 675 = (AIR 1960 SC 1297 ). That was also a case where the question was whether in determining the profits on which the percentage had to be determined for payment of bonus to five of its employees and the contribution to be made to the provident funds of 53 employees, deduction of depreciation, income-tax and super-tax in respect of first category and deduction of income-tax or excess profits tax in respect of the second category could be made before arriving at the profits. The Excess Profits Tax Officer came to the conclusion that the payments were unnecessarily large and unreasonable having regard to the requirements of the business and without taking up each individual case he held, applying R. 12 that it was not necessary for the assessee company for the purpose of its business to calculate the bonus or the contribution on that basis of net profits before the deduction of excess profits tax. He accordingly disallowed the excess of the payment calculated without deduction of that tax. In upholding the disallowance this Court held that there was material on which the Excess Profits Tax Officer could arrive at a finding and on which the Tribunal could confirm that finding. In that case also the Excess Profits Tax Officer, in the assessment order relating to the chargeable accounting year ending 31-12-1943 gave sufficient reasons for disallowing the amounts which reasons were incorporated by reference in the assessment orders pertaining to the disallowance of the claim in the chargeable accounting yerars in question. In the earlier order the reasons given were as follows :"The rates of commission were fixed long prior to the commencement of the present war and no deduction was admittedly made for the Excess Profits Tax liability in computing the net profits of the corporation for the purpose of calculating commission payable to directors and management. As a result of war conditions the profits of the Corporation have gone up tremendously from about Rs. 10 lakhs in the pre-war period to about Rs. 2 crores during the relevant chargeable accounting period and the commission to management on the basis of net profits has arisen in the same proportion. Since the Excess Profits Tax, which is intended to prevent the owner of a business from making a large fortune out of what is a national danger, is not deducted out of net profits in calculating commission, an employee stands to benefit from the national emergency to a greater extent than an employer: (Walchand and Co. Ltd. v. The Hindustan Construction Co. Ltd. (1944) 12 ITR 104 (Bom.) It, therefore, appears both unnecessary and unreasonable to pay more than the agreed proportion of the profits after deduction of Excess Profits Tax. In the circumstances, I hold that the increased expenditure under commission although of a nature which under the provisions of S. 10 of the Income-tax Act, is in itself an allowable deduction, is unreasonable and unnecessary having regard to the requirements of the business and the actual services rendered by the persons concerned." After giving these reasons he went on to say:"Having held that the aforesaid payments of commission are unjustifiable and exceptional the question arises as to what the reasonable amount, having regard to the requirements of the business and the actual services rendered by the persons should be. As mentioned above, any payment in excess of the agreed proportion of the net profits after deduction of Excess Profits Tax is unreasonable and unnecessary." The Excess Profits Tax Officer accordingly computed what was the reasonable amount of commission which should be allowed. We can find very little justification in the criticism that no reasons have been given by the Excess Profits Tax Officer or the Tribunal for not allowing the entire commission claimed on the basis of the audited accounts without deducting the taxes paid including the excess profits tax. It is obvious that when huge profits are earned not due to any activity of the managers but due to war situation, the Government is entitled to a certain share of the excess profits computed under the Act. Any commission paid on the excess profits for which the managers or employees made no sort of contribution would ex facie be unreasonable and unnecessary and the Excess Profits Tax Officer was perfectly justified in disallowing certain proportion which according to him was unreasonable and unnecessary having regard to the requirements of the business.

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

Explanation:
0[ds]The Excess Profits Tax Officer accordingly computed what was the reasonable amount of commission which should be allowed. We can find very little justification in the criticism that no reasons have been given by the Excess Profits Tax Officer or the Tribunal for not allowing the entire commission claimed on the basis of the audited accounts without deducting the taxes paid including the excess profits tax. It is obvious that when huge profits are earned not due to any activity of the managers but due to war situation, the Government is entitled to a certain share of the excess profits computed under the Act. Any commission paid on the excess profits for which the managers or employees made no sort of contribution would ex facie be unreasonable and unnecessary and the Excess Profits Tax Officer was perfectly justified in disallowing certain proportion which according to him was unreasonable and unnecessary having regard to the requirements of the business.