1955 (1) TMI 36 - HC - Income Tax

Summary

Issues Involved:
1. Applicability of Proviso (2) to Section 66-A, Indian Income-Tax Act.
2. Allowability of commission as a deduction under Section 10 Indian Income-tax Act.
3. Reasonableness and necessity of commission payments under Rule 12, Schedule I, Excess Profits Tax Act.
4. Interpretation of the terms of the contract regarding the deduction of Excess Profits Tax before calculating commission.

Issue-wise Detailed Analysis:

1. Applicability of Proviso (2) to Section 66-A, Indian Income-Tax Act:
The case was referred to a Full Bench due to a difference of opinion among the judges. The proviso to Section 66-A states that when judges differ on a point of law, the case should be heard by other judges of the High Court. However, both counsels agreed that this proviso applies only when a specific point of law is referred and not when the entire case is referred to a new bench. They requested the Full Bench to hear and decide the case afresh, waiving any irregularities.

2. Allowability of commission as a deduction under Section 10 Indian Income-tax Act:
The assessee firm paid commissions to its Manager and Assistant Manager based on profits without deducting income-tax or excess profits tax. The Income-tax Officer allowed the commission as a deduction under Section 10, but it was unclear whether this was under Section 10(2)(x) or 10(2)(xv). The Excess Profits Tax Officer disallowed a portion of the commission, leading to an appeal that failed. The Tribunal referred two questions to the High Court for decision.

3. Reasonableness and necessity of commission payments under Rule 12, Schedule I, Excess Profits Tax Act:
The Excess Profits Tax Officer has the authority under Rule 12 to disallow expenses deemed unreasonable or unnecessary. The Tribunal and the Excess Profits Tax Officer concluded that the commissions paid were unreasonable and unnecessary because they were calculated without deducting excess profits tax. The Full Bench emphasized that the reasonableness of the commission must be judged based on the requirements of the business and actual services rendered, not merely on whether it was an ex gratia payment.

4. Interpretation of the terms of the contract regarding the deduction of Excess Profits Tax before calculating commission:
The Tribunal did not clearly address whether the commissions should be calculated after deducting excess profits tax. The Full Bench noted that the terms of the contract, whether written or inferred from practice, are crucial in determining this. The practice of paying commissions without deducting excess profits tax in previous years was acknowledged, but the Tribunal seemed to treat the deduction as a matter of law rather than contract terms. The Full Bench clarified that the Excess Profits Tax Officer's role is to assess the reasonableness of the payment, not to reinterpret the contract terms.

Conclusion:
The Full Bench concluded that the Excess Profits Tax Officer must evaluate the reasonableness and necessity of commission payments based on business requirements and services rendered, not solely on whether the payment was ex gratia. The terms of the contract, whether explicit or inferred from practice, should guide the calculation of commissions. The assessee was awarded costs of Rs. 500 for the reference.