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

The respondent-Binod Mills Co. Ltd. which had its business at Ujjain the State of Gwalior was a company whose profits were liable to War Profits Tax under the Ordinance. The Company was managed by a managing agency firm M/s. Binodiram Balchand which had, by reason of its shareholding exceeding 50 per cent of the issued share-capital, a controlling interest in the company. The respondent-company was assessed to War Profits Tax for three chargeable accounting periods-July 1, 1944 to December 31. 1944. January 1, 1945 to December 31, 1945, and January 1, 1946 to June 30, 1946 During each of these accounting period the respondent-company had paid remuneration to its managing-agents and claimed to deduct the remuneration so paid in the computation of its business profits during these three periods. The assessing officer disallowed the claim on the ground that the remuneration received by the managing-agency firm had not been factually assessed in the hands of the managing-agent and that consequently the matter was covered by the opening words of R. 4 and not saved by proviso (b) to the rule. An appeal against this order of assessment was dismissed by the appellate authority and thereafter by the Commissioner of War Profits Tax in revision. But at the request of the respondent the Commissioner submitted a reference under S. 46(1) of the Ordinance to the High Court of Madhya Pradesh of the following question for itsin computing the profits of a business carried on by a company deduction shall be made in respect of any remuneration to any managing-agent where such remuneration is included in the profits of the managing agents business for the purposes of the War Profitswas a consolidated reference in respect of the three chargeable accounting periods. The learned Judges of the High Court answered the question in favour of the respondent and held that the remuneration, even though paid to a managing-agent who had a controlling interest in the company was a permissible deduction for the purpose of computing the profits of the company for the purposes of the War Profits Tax. The High Court was thereafter moved by the appellant for the grant of certificates of fitness for appeals to this Court under S. 47 of the Ordinance and the certificates having been granted these three appeals which relate to the three chargeable accounting periods have been preferred to this Court.2. Before proceeding further it might be convenient to set out certain facts to appreciate the form of the question which might provoke some enquiry. There was not much dispute, and even if there was, it was abandoned fairly early, that M/s. Binodiram Balchand were "directors of the company within the meaning of the Ordinance and had a controlling interest in the company. In this connection we might advert to the definition of director in S. 2(10) of thedirector includes any person occupying the position of a director by whatever name called and also includes any person who-(i) is a manager of the company or concerned in the management of the business; and(ii) is remunerated out of the funds of the business; and(iii) is the beneficial owner of not less than 20 per cent of the ordinary share capital of thecontrolling interest being established, it was common ground that the remuneration paid to the managing-agent could not be deducted in computing the profits of the company unless it fell within proviso (b) of R. 4(1).3. Before the departmental authorities it was suggested on behalf of the company that the expression included in proviso (b) meant "disclosed in the return of the director and on this basis it was contended that as M/s. Binodiram Balchand had, in the statement of their own Profit and Loss Account for Samvat 2000, 2001 and 2002 disclosed the managing agency commission received by them the remuneration had been "included in their profits for the purposes of the War Profits Tax, though for reasons which are unnecessary to discuss they claimed that the sum was not liable to be brought to tax and this claim was accepted. This argument which was rejected by the departmental authorities is however responsible for the form of the question referred to the High Court. This contention however was not apparently repeated before the High Court and does not figure in the judgment as part of the reasoning of the learned Judges in the judgment now under appeal and has not been relied upon before us. We shall therefore say no more about it, but proceed to deal with the substantial question raised.

Reasoning: 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).