1962 (4) TMI 4 - SC - Income Tax

Whether in 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 agent s business for the purposes of the war profits tax ? Held that - 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 latter s 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 rule 4(1). Appeal dismissed.

Issues Involved:

1. Interpretation of Rule 4(1)(b) of Schedule I of the Gwalior War Profits Tax Ordinance.
2. Deductibility of remuneration paid to managing agents in computing business profits.
3. Inclusion of remuneration in the profits of managing agents' business for war profits tax purposes.
4. Application of the proviso to Rule 4(1)(b) in cases of companies with controlling directors.

Issue-wise Detailed Analysis:

1. Interpretation of Rule 4(1)(b) of Schedule I of the Gwalior War Profits Tax Ordinance:

The central issue revolves around the interpretation of Rule 4(1)(b) of Schedule I of the Gwalior War Profits Tax Ordinance, which states: "In computing the profits of a business carried on by a company, no deduction shall be made in respect of remuneration paid to directors if during any part of the accounting period concerned, they had controlling interest in the company." The proviso to this rule allows an exception: "to the remuneration of any managing agent where such remuneration is included in the profits of the managing agents' business for the purposes of the War Profits Tax."

2. Deductibility of Remuneration Paid to Managing Agents in Computing Business Profits:

The respondent company, Binod Mills Co. Ltd., managed by Messrs. Benodiram Balchand, claimed deductions for remuneration paid to its managing agents for three chargeable accounting periods. The assessing officer disallowed the deductions, stating that the remuneration was not factually assessed in the hands of the managing agent, thus falling under the main rule and not saved by the proviso. The High Court ruled in favor of the respondent, allowing the deduction, which led to the appeal.

3. Inclusion of Remuneration in the Profits of Managing Agents' Business for War Profits Tax Purposes:

The crux of the dispute is the meaning of "is included in the profits of the managing agents' business." The High Court interpreted this to mean that the remuneration should be "liable to be included" in the managing agent's profits, regardless of whether it was actually assessed. The appellant argued that the remuneration must be actually assessed in the managing agent's hands to qualify for the deduction.

4. Application of the Proviso to Rule 4(1)(b) in Cases of Companies with Controlling Directors:

The appellant contended that the proviso should be read as giving an option to the managing agent to include the remuneration in their own returns or in the company's returns. The High Court rejected this, stating that the proviso could not grant the assessing authority the discretion to choose between taxing the company or the managing agent. The Supreme Court agreed, noting that such an interpretation would lead to unreasonable results and potential injustice to other shareholders.

Conclusion:

The Supreme Court upheld the High Court's decision, affirming that the remuneration paid to the managing agent should be deductible in computing the company's profits if it is liable to be included in the managing agent's profits under the Ordinance. The appeals were dismissed with costs, reinforcing the principle that the failure of the managing agent or the assessing authority to include the remuneration in the managing agent's assessment should not prejudice the company's right to the deduction.

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