Case: Ahmedabad Manufacturing &amp; Calico Printing Company Limited Vs. Commissioner of Excess Profits Tax, Bombay North Kutch &amp; Saurashtra

2. The facts out of which the reference arose were as follows: The assessee Company is a limited liability Company, and is one of themanufacturers of textile goods. We are concerned with three chargeable accounting periods corresponding to the Calendar years 1943, 1944 and 1945. While making the assessment of the assessee Company, the Excess Profits Tax Officer found that large payments had been made to five of the employees of the Company during the chargeable accounting periods. He also found that in the case of 53 employees of the assessee Company, excessive contributions had been made by the Company to their Provident Funds. These payments and contributions were on the basis of a percentage of the profits of the assessee Company made in the years of account. In determining the profits on which the said percentage was to be calculated, the assessee Company did not first deduct either theor the excess profits tax. TheOfficer upheld the action of the assessee Company in not deducting thebut he objected to its not deducting the excess profits tax before calculating the amounts payable to the five employees and to the Provident Fund. The Excess Profits Tax Officer also held, applying R,. 12 of the First Schedule of the Excess Profits Tax Act, that it was not necessary for the assessee Company for the purpose of its business to make the calculations on the basis of net profits without the deduction of excess profits tax.3. The appellate Tribunal also upheld the Excess Profits Tax Officers decision. It, however, declined to state a case to the High Court of Bombay, and the assessee Company moved and obtained from the Bombay High Court a rule nisi, by which the High Court asked the Department to show cause why it should not state a case on the following two"Whether on a true and proper construction of the Provident Fund Rules and of the five agreements with the five officer employees, the amount of Excess Profits Tax determined to be payable should be deducted in the first instance for the purposes of determining the amount of bonus or commission payable to the said employees and the five officer employees.2. Whether in the circumstances of the case the finding of the Tribunal that the full amount of commission or bonus paid to the employees of the Petitioners under the Provident Fund Rules and to the five officer employees under their respective agreements is not an allowable deduction in computing the taxable profits of the Petitioners for the purpose of Excess Profits Tax is justifiable in law.It appears that when the rule nisi came to be heard, the High Court of Bombay accepted the contentions of counsel for the Department, and modified the questions to those which have been stated at the commencement of this judgment. We mention this fact, because in the hearing before us, it was contended that the proper questions which arose from the order of the appellate Tribunal were the questions which were formulated by the High Court in the rule nisi and not the ones, which were subsequently set down when the rule was made absolute.5. A few further facts are necessary to indicate what exactly was the arrangement between the assessee Company and the five employees with regard to payment of bonus to them and also what the existing rules were under which the Companys contribution to the Provident Fund came to be made. The Tribunal in stating the case has forwarded five agreements entered into with the said employees. Of these, four agreements are between the years 1933 and 1935  the fifth agreement is of 1944. In all these agreements, it is provided that the employee in question would receive in addition to the salary, if any, bonus or remuneration calculated at a certain percentage of the profit in accordance with the following formula:X per cent. of the profit of Block value Rs......the Company for the year x _____________________Block for the year for which bonus or remuneration payable.The percentage of the block value is shown differently under different agreements, but that is not much to the purpose. There was, however, a condition which was common to all the agreements, by which it was provided that profits meant the Companys profit for each complete official year of the Company as shown in the balance sheet for that year before providing for depreciation and6. In respect of the Provident Fund, it may be stated that the Provident Fund Regulations were framed with effect from June 30, 1935, and were recognised by the Commissioner ofas required by the rules regarding Recognised Provident Funds framed by thein Council on March 15, 1930. The amount payable by the Company was determined in accordance with Regulation 12(b), which reads asthe profits of the Company come to 4% and over on the cost value of the Block as shown in the Balance Sheet in a particular year, then the amount payable by the Company as Bonus in respect of an employee will be equal toProfit for a yearR xx 100Block value for that yearWhere R is a certainconstant corresponding to each appointment." It was also provided (Regulation 13) that profits for a year meant profits as shown in theof the Company for that year before providing for depreciation andcharges but after providing for bonus.The dispute naturally arose whether the termt; could be said to include excess profits. tax, which came into being in 1940. It was also a question whether the Excess Profits Tax Officer could, under the powers conferred on him by R. 12(1) of First Schedule of the Excess Profits Tax Act, 1940, order that the deduction of excess profits tax should be made before applying the percentage. Rule 12(1) reads ascomputing the profits of any chargeable accounting period no deduction shall be allowed in respect of expenses in excess of the amount which the Excess Profits Tax Officer considers reasonable and necessary 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 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.In the assessment yearwhich corresponded to the chargeable accounting period ending December 31, 1943, theOfficer had not allowed the claim of the assessee Company with regard to excess profits tax in theassessment. In that year the Excess Profits Tax Officer also acting under R. 12 above quoted, disallowed the claim for excess profits tax assessment. In the two subsequent assessment years corresponding to the chargeable accounting periods ending December 31, 1944 and December 31, 1945 respectively, theOfficer computed the assessable profits by allowing bonus to the employees and contribution to the Provident Fund on the basis of net profits after deduction of excess profits tax. The Excess Profits Tax Officer also took the same action, but he did it not only on the acceptance of the assessment of theOfficer but also under special power conferred on him under R. 12 above quoted. The Excess Profits Tax Officer, however, did not give a finding of fact that the payments of bonus and contributions to the Provident Fund of the employees were in excess of the amount which he considered reasonable and necessary, having regard to the requirements of the business and in the case of bonus, to the actual services rendered by the persons concerned. When the matter came before theAppellate Tribunal, Bombay, on appeal, it remanded the case to the Excess Profits Tax Officer for a finding on these points. The Excess Profits Tax Officer thereupon drew up a remand report, in the light of which the Tribunal came to the conclusion that the order of the Excess Profits Tax Officer was justified. The assessee Company when it made the application for reference to the Tribunal as well as to the High Court set out no less than 13 questions which, it considered, arose from the order of the Tribunal. These questions were compressed into two by the High Court when it issued a rule nisi to the Department to show cause why the Tribunal should not be asked to state a case. Those two questions bore upon the two matters which we have referred, namely, the construction of the agreements as well as the Provident Fund Regulations to determine whether the amount of excess profits tax was deductible or not before the payments and/or contributions were made by the Company, and whether in the circumstances of the case, the amount paid and the contribution made by the assessee Company was justifiable in law. It appears that, at the stage of showing cause, the learned counsel for the Department was able to convince the High Court that no question of evidence on which the orders of the Excess Profits Tax Officer and the Tribunal were based, could be raised.

Court's reasoning:
From the above facts, it is clear that the payments made to the five employees and the 53 employees admitted to the benefits of the Provident Fund are clearly excessive having regard to the requirements of the business and the actual services rendered by the powers concerned within the meaning of Rule 12(1) of Sch. I.In our opinion, none of these arguments can avail the assessee Company. To begin with, it was never the case of the assessee Company that there was no evidence to support the findings of the Tribunal. In the thirteen questions proposed by the assessee Company, none relates to the existence or even the quantum of the evidence. The assessee Company was more interested in relying on the agreements and the Regulations as embodying a provisions thatx and excess profits tax should not be deducted before applying the percentages, or, in the alternative, in showing that profits indicate the ordinary trading profits and not what is left over after payment of these taxes. Question No. 8 of these proposed questions does not involve any consideration whether the decision proceeded on evidence or material.15. Further, the assessee Company seems to have acquiesced in the modified questions because it did not seek special leave of this Court at that stage. Even in the statement of the case filed here, there is no mention of the Tribunal having acted on no evidence. We are also of the opinion that there was evidence on which the Tribunal could reach the conclusion that the payments were unreasonably high, having regard to the requirements of the business. The Excess Profits Tax Officer had prepared schedules showing the proportion of bonus or additional payments to the salary of these employees and also the proportion of the Provident Fund contributions to salary and had stated that in no other concern such extraordinarily high payments were being made. The Tribunal also examined one of the employees of the assessee Company who was present, and collected data in relation to some typical cases. All this material was before the Tribunal when it gave its finding.16. The schedules which are appended to the order of the Excess Profits Tax Officers remand report speak volumes. The payments even in the lowest cases seem extraordinarily high, and cannot be justified as dictated by the requirements of the business. There was again the practice of other concerns similarly situated to make a comparative study.The Excess Profits Tax Officer on a view of the matter held that it was not reasonable to apply the percentage before deducting the taxes. The process of his reasoning was that looking to the facts above stated the payments to the five employees and the contributions to the Provident Fund were unnecessarily large and also unreasonable, having regard to the requirements of the business, and he proceeded to prune them, not by taking up each individual case but by insisting that the percentage be applied only after all the taxes were paid by the assessee Company. It was open to the Excess Profits Tax Officer to say that payment to an employee or contributions to the Provident Fund, before deducting the excess profits tax were unreasonable and led to an unnecessarily large payment to the employees, having regard to the needs of the business. In other words, the Excess Profits Tax Officer having come to conclusion (b), viz., that payment to an individual employee or to his Provident Fund by the Company was unreasonable or unnecessarily large, having regard to the requirements of the business, applied conclusion (a), viz., that the payment of percentage without deduction of Excess Profits Tax was per se unreasonable and unnecessary, to reduce these large payments and contributions.In our opinion, there was material on which he could proceed, and the Tribunal in affirming that finding had further material to act upon