Case: State of Madhya Pradesh Vs. Binod Mills Company Ltd

of paying the tax himself, for if the tax is paid by the company the loss involved in the payment of the tax would fall on him only to the extent of his shareholding, being for the test shared by the other shareholders of the company. It is really difficult to understand the principle by which one could construe a rule of this nature as enabling a managing-agent who holds, say 51 per cent of the share capital of the company to visit 49 per cent of the burden of tax which normally one would expect to be paid by him, to be paid by the other shareholders of the company merely because he happens to be the managing-agent holding a controlling interest by the extent of his shareholding. We consider that the construction suggested by Mr. Sen which leads to such an unreasonable result and inflicts an unjust injury on the other shareholders is not any proper interpretation of the provision. Besides, there are other grounds why the meaning attributed to the words "is included as referring to "included by the managing-agent cannot be accepted. Suppose the managing-agent includes it in his return but the assessing authority does not include it in the computation of his return but prefers to disallow the deduction in the case of a company. Would that be "inclusion in his profits? Again, suppose the managing-agent does not include it in his return but the assessing authority does, and tax is paid by the managing-agent, would there be no exclusion? These illustrations serve to bring out the anomalies that would arise if it were held that the words "is included meant "is included in his return by the managing-agent.11. This leaves for consideration the meaning that "is included refers to the inclusion under the provisions of the Ordinance. If this meaning were accepted it would not matter whether the managing-agent has or has not included the sum in his return or whether the assessing authorities have or have not done their duty by having the remuneration included in the taxable profits of the managing-agent. If the managing-agent has not done so being under an obligation imposed by the law to include it, the return would be liable to be revised by the assessing officer and if the failure to include the sum was due to any suppression, the managing-agent would, besides having the sum included in his assessable profits, be liable to appropriate penalties for filing a wilfully incorrect return. Similarly, the assessing officer being under a statutory duty to include the sum in the assessment of the managing-agent would, if he failed to do so render the order liable to be revised. The remedy for the failure either of the managing-agent or of the assessing authorities to conform to the requirements of the law certainly cannot be the disallowance of the sum in the computation of the profits of the company.The entirety of this reasoning, it would be noted, proceeds on the basis that the managing agent was liable to include his remuneration in his assessable profits. In such a contingency it stands to reason that neither the default of the managing-agent as an assessee or of the assessing authority to include the sum in the profits of the managing-agent could prejudice the rights of the company in the matter of the computation of its income.12. Where the remuneration of the managing-agent was not under the Ordinance liable to be brought to tax the position would be different and that is just what is indicated as that which would render the proviso inapplicable. For instance S. 5(1) of the Ordinance enacts:Provided further that this Ordinance shall not apply to -(a)(b) profits from a business carried on wholly on behalf of a religious or charitable institution and the profits of which are applied solely to the purposes of the institution and enure for the benefit of the public, and -(i) the business is carried on in the course of the carrying out of a primary purpose of the institution, and(ii) the work in connection with the business is carried on by the beneficiaries of the institution."If for instance the business of the managing-agency was being carried on for or on behalf of a trust of the character indicated by the provision just now read, the remuneration of the managing-agent would not be liable to tax for the reason that it is outside the ambit of the Ordinance and to such a case the terms of proviso (b) to R. 4(1) would not be attracted, with the result that the managing-agent not being liable to tax under the Ordinance on the remuneration derived by him, the company, if it were a controlled company, would not be entitled to the deduction of that remuneration in the computation of its profits. Except in cases where the remuneration received by a managing-agent is not liable to tax under the Ordinance, it is the managing-agent that would be liable to pay tax on his remuneration and notwithstanding that the company is a controlled company the remuneration paid by it to the managing agent would be a permissible deduction by reason of the exception to the opening words of R. 4(1) contained in proviso (b).It is unnecessary for our present purpose to consider whether besides Section 5(1)(b), already referred to, there are other contingencies in which remuneration received by a Director could be held not to be "included" in the latters profits under the Ordinance, since in the case before us it is admitted that the remuneration received by the managing-agent was liable to be included in the computation of his profits for the purposes of the War Profits Tax and therefore neither the fact that the managing-agent did not "include" the sum in his return, nor the default of the assessing authority to correct this error by "including" the sum in his assessment, is any reason for depriving the respondent company of the benefit of proviso (b) to R. 4(1).

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

Explanation:
1[ds]9. The theory propounded regarding the provision being one for avoidance of double taxation in the manner above indicated by vesting a discretion in the controlling-Director breaks even on a cursory examination. Let us assume that the managing-agent opts to have the company taxed and submits a return on behalf of the company in which no deduction is claimed in respect of this item and an assessment is made accepting that return. On the terms of the Ordinance this would not afford any relief to the managing agent in his personal assessment, for admittedly there is, as pointed our earlier, no provision in the Ordinance or in the Schedule exempting the managing agent from the inclusion of this remuneration in his taxable profits, and this must obviously be so, because for the purposes of the charging section he would be an independent unit of assessment. He would have to include in the computation of his personal income for the purpose of the War Profits. Tax the remuneration received by him. This might be expressed in a slightly different form by stating the proviso (b) to R. 4(1) does not operate in the reverse direction, that is by exempting the managing agent from tax on the remuneration derived by him, merely because the deduction of that item has been denied to the company. Obviously therefore R. 4(1)(b) is not a rule designed for the avoidance of double taxation in the sense in which learned counsel for the appeal suggests that it is.10. There are also other reasons why we find it unable to accept the submission of Mr. Sen that by the words "is included is meant the inclusion in the return by the managing-agent with the result that in cases where he does not so include, the company would not be entitled to the deduction. The option suggested by Mr. Sen to the Managing-agent was that he might either elect of pay the tax himself or get the company to pay it. Obviously it would always be in the interest of the managing-agent to have the tax paid by the company if by that means, as is suggested by Mr. Sen, he could obtain absolution from the obligation of paying the tax himself, for if the tax is paid by the company the loss involved in the payment of the tax would fall on him only to the extent of his shareholding, being for the test shared by the other shareholders of the company. It is really difficult to understand the principle by which one could construe a rule of this nature as enabling a managing-agent who holds, say 51 per cent of the share capital of the company to visit 49 per cent of the burden of tax which normally one would expect to be paid by him, to be paid by the other shareholders of the company merely because he happens to be the managing-agent holding a controlling interest by the extent of his shareholding. We consider that the construction suggested by Mr. Sen which leads to such an unreasonable result and inflicts an unjust injury on the other shareholders is not any proper interpretation of the provision. Besides, there are other grounds why the meaning attributed to the words "is included as referring to "included by the managing-agent cannot be accepted. Suppose the managing-agent includes it in his return but the assessing authority does not include it in the computation of his return but prefers to disallow the deduction in the case of a company. Would that be "inclusion in his profits? Again, suppose the managing-agent does not include it in his return but the assessing authority does, and tax is paid by the managing-agent, would there be no exclusion? These illustrations serve to bring out the anomalies that would arise if it were held that the words "is included meant "is included in his return by the managing-agent.11. This leaves for consideration the meaning that "is included refers to the inclusion under the provisions of the Ordinance. If this meaning were accepted it would not matter whether the managing-agent has or has not included the sum in his return or whether the assessing authorities have or have not done their duty by having the remuneration included in the taxable profits of the managing-agent. If the managing-agent has not done so being under an obligation imposed by the law to include it, the return would be liable to be revised by the assessing officer and if the failure to include the sum was due to any suppression, the managing-agent would, besides having the sum included in his assessable profits, be liable to appropriate penalties for filing a wilfully incorrect return. Similarly, the assessing officer being under a statutory duty to include the sum in the assessment of the managing-agent would, if he failed to do so render the order liable to be revised. The remedy for the failure either of the managing-agent or of the assessing authorities to conform to the requirements of the law certainly cannot be the disallowance of the sum in the computation of the profits of the company.The entirety of this reasoning, it would be noted, proceeds on the basis that the managing agent was liable to include his remuneration in his assessable profits. In such a contingency it stands to reason that neither the default of the managing-agent as an assessee or of the assessing authority to include the sum in the profits of the managing-agent could prejudice the rights of the company in the matter of the computation of itsfor instance the business of the managing-agency was being carried on for or on behalf of a trust of the character indicated by the provision just now read, the remuneration of the managing-agent would not be liable to tax for the reason that it is outside the ambit of the Ordinance and to such a case the terms of proviso (b) to R. 4(1) would not be attracted, with the result that the managing-agent not being liable to tax under the Ordinance on the remuneration derived by him, the company, if it were a controlled company, would not be entitled to the deduction of that remuneration in the computation of its profits. Except in cases where the remuneration received by a managing-agent is not liable to tax under the Ordinance, it is the managing-agent that would be liable to pay tax on his remuneration and notwithstanding that the company is a controlled company the remuneration paid by it to the managing agent would be a permissible deduction by reason of the exception to the opening words of R. 4(1) contained in proviso (b).It is unnecessary for our present purpose to consider whether besides Section 5(1)(b), already referred to, there are other contingencies in which remuneration received by a Director could be held not to be "included" in the latters profits under the Ordinance, since in the case before us it is admitted that the remuneration received by the managing-agent was liable to be included in the computation of his profits for the purposes of the War Profits Tax and therefore neither the fact that the managing-agent did not "include" the sum in his return, nor the default of the assessing authority to correct this error by "including" the sum in his assessment, is any reason for depriving the respondent company of the benefit of proviso (b) to R. 4(1).