1959 (5) TMI 2 - SC - Income Tax

Whether in law, if there is an obligation on the employer to pay a certain bonus, the Excess Profits Tax Officer is bound to allow it as a deduction and is precluded from exercising his discretion under rule 12(1) of the First Schedule of the Excess Profits Tax Act? Whether on a true construction of the agreement between the assessee and its employees and the Provident Fund Rules, the assessee company is under obligation to pay the bonus without deducting the excess profits tax? Held that - 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. The decision of the High Court impugned here was correct. Appeal dismissed.

Issues Involved:
1. Obligation of the Excess Profits Tax Officer to allow bonus as a deduction.
2. Obligation to pay bonus without deducting excess profits tax.

Issue-wise Detailed Analysis:

1. Obligation of the Excess Profits Tax Officer to Allow Bonus as a Deduction:

The primary question was whether the Excess Profits Tax Officer is bound to allow a bonus as a deduction if there is an obligation on the employer to pay it, and whether he is precluded from exercising his discretion under rule 12(1) of the First Schedule of the Excess Profits Tax Act. The Excess Profits Tax Officer had found that large payments were made to five employees and excessive contributions to their provident funds without deducting excess profits tax. The Tribunal upheld this decision, and the High Court answered in the negative, affirming that the Excess Profits Tax Officer could exercise discretion under rule 12(1). Rule 12(1) states that in computing 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.

The Excess Profits Tax Officer, supported by the Tribunal, concluded that the payments were unreasonably high and unnecessary for the business's requirements. The Tribunal's decision was based on evidence, including comparative practices in similar businesses and a detailed schedule of payments showing extraordinarily high bonuses and provident fund contributions. The High Court's decision was upheld, confirming that the Excess Profits Tax Officer's discretion under rule 12(1) was valid and applicable.

2. Obligation to Pay Bonus Without Deducting Excess Profits Tax:

The second issue was whether the assessee company was under an obligation to pay the bonus without deducting excess profits tax based on the agreements with employees and the Provident Fund Rules. The agreements specified that bonuses would be calculated based on profits before providing for depreciation and income-tax and super-tax. The dispute was whether this included excess profits tax, which came into effect in 1940.

The Excess Profits Tax Officer argued that including excess profits tax in the calculation of bonuses was unreasonable and unnecessary. The Tribunal and the High Court supported this view, concluding that the payments were excessively high and not justified by the business's requirements. The Tribunal found that the payments to employees and contributions to the provident fund were excessive compared to other similar businesses. The Excess Profits Tax Officer's decision to deduct excess profits tax before applying the percentage was deemed reasonable and necessary.

The assessee company's argument that the agreements and regulations excluded excess profits tax from deductions was not accepted. The Tribunal and the High Court found that there was sufficient evidence to support the conclusion that the payments were unreasonably high. The High Court's decision to modify the questions and answer them in the negative was upheld, confirming that the Excess Profits Tax Officer's actions were justified under rule 12(1).

Conclusion:

The Supreme Court upheld the High Court's decision, confirming that the Excess Profits Tax Officer was not bound to allow the bonus as a deduction and could exercise discretion under rule 12(1). The assessee company's obligation to pay the bonus without deducting excess profits tax was also not supported, as the payments were found to be unreasonably high and unnecessary for the business's requirements. The appeal was dismissed with costs.

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