1961 (7) TMI 6 - SC - Income Tax

Whether in computing the profits and gains of the appellant the remuneration paid to the agents was deductible under rule 3(2)(ix)? Held that - The existence of a rule seems to obliterate the frontiers between legislative judicial and executive exercise of the power of a State such as we understand it. There being no invariable use of a clear-cut legislative language each general order emanating from the sovereign Ruler and promulgated in the same manner as any other rule and having its roots in a resolution of the Cabinet must be regarded as one binding upon the subject. This is the purport of the decisions of this court and the present case falls in line with those which have been previously decided. There is nothing in the content the character or the nature of these notifications which would put them on a level lower than the Rules which had been earlier promulgated. Appeal dismissed.

Issues Involved:
1. Deductibility of agents' commission on profits under rule 3(2)(ix) of the Indore Industrial Tax Rules, 1927.
2. Legislative force and validity of the notifications issued in 1931, 1932, and 1933.
3. Interpretation of the rules and notifications in the context of sovereign powers.

Detailed Analysis:

1. Deductibility of Agents' Commission on Profits:
The core issue was whether the remuneration paid to the agents, including commission on profits, was deductible under rule 3(2)(ix) of the Indore Industrial Tax Rules, 1927. Rule 3(2)(ix) allows for the deduction of "any expenditure (not being in the nature of capital) incurred solely for the purposes of earning such profits or gains." The appellant, a textile mill, claimed deductions for various remunerations paid to its agents, including fixed monthly allowances and commissions on net profits and sales proceeds.

The assessing officer partially accepted the deductions but disallowed the commission on profits. The appellate authority upheld this disallowance, leading to second appeals in the Madhya Bharat High Court, which were dismissed, prompting the present appeals to the Supreme Court.

2. Legislative Force and Validity of the Notifications:
The notifications in question were issued in 1931, 1932, and 1933, addressing the non-deductibility of agents' commission on profits. The 1932 notification explicitly stated that "the agents' commission on 'profits' should not be allowed to be deducted from the assessable profits." The appellant contended that these notifications were not legislative acts but mere administrative directions, and thus not enforceable as law.

The Supreme Court examined the legislative machinery and the sovereign powers of the Holkar State. It was noted that the Regency Council, acting during the minority of Maharaja Yeshwant Rao Holkar, had the authority to promulgate rules and notifications. The court referred to the historical context, including the abdication of Maharaja Tukoji Rao III and the installation of Maharaja Yeshwant Rao Holkar, to establish the legislative competence of the Regency Council.

3. Interpretation of the Rules and Notifications:
The court discussed the principles laid down in the Pondicherry Railway Co. Ltd. case, which held that a payment out of profits is not an expenditure incurred to earn profits. However, subsequent decisions, like those in Union Cold Storage Co. Ltd. v. Adamson and Indian Radio and Cable Communications Co. Ltd. v. Commissioner of Income-tax, clarified that payments to directors or managers as part of their remuneration could be deductible.

The Supreme Court emphasized that the notifications in question must be interpreted as legislative expositions of rule 3(2)(ix) and not merely administrative directions. The court cited its previous decisions, including Ameer-un-nissa Begum v. Mahboob Begum, to assert that orders from a sovereign ruler, when promulgated in the usual manner, have the force of law.

The Full Bench of the Madhya Bharat High Court, in Rajkumar Mills Ltd. v. Madhya Bharat State, had previously held that the Maharaja's order regarding the non-deductibility of agents' commission on profits was a sovereign mandate with the force of law. This view was affirmed by the High Court of Madhya Pradesh in the judgment under appeal.

The Supreme Court concluded that the notifications issued in 1931, 1932, and 1933 were indeed legislative acts, binding and enforceable. The court dismissed the appeals, upholding the High Court's judgment that the agents' commission on profits was not deductible under rule 3(2)(ix).

Conclusion:
The Supreme Court dismissed the appeals, affirming that the agents' commission on profits was not deductible under rule 3(2)(ix) of the Indore Industrial Tax Rules, 1927. The court recognized the legislative force of the notifications issued in 1931, 1932, and 1933, and held that these notifications were binding as they emanated from the sovereign authority of the Holkar State. The appeals were dismissed with costs, one set.

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