1972 (10) TMI 3 - SC - Income Tax

Whether the amount of Rs. 5, 39, 057 was rightly disallowed under rule 12(1) of the Schedule to the Excess Profits Tax Act - Whether the amount of Rs. 1, 28, 743 was rightly disallowed under rule 12(1) of Schedule I to the Excess Profits Tax Act - Excess Profits Tax Officer was perfectly justified in disallowing certain proportion which according to him was unreasonable and unnecessary having regard to the requirements of the business

Summary

Issues Involved:
1. Disallowance of Rs. 5,39,057 under Rule 12(1) of the Schedule to the Excess Profits Tax Act.
2. Disallowance of Rs. 1,28,743 under Rule 12(1) of Schedule I to the Excess Profits Tax Act.

Issue-Wise Detailed Analysis:

1. Disallowance of Rs. 5,39,057 under Rule 12(1) of the Schedule to the Excess Profits Tax Act:

The Supreme Court reviewed the judgment of the Allahabad High Court regarding the disallowance of Rs. 5,39,057 for the chargeable accounting period from January 1, 1945, to December 31, 1945. The assessee, a public limited company, had been remunerating its directors and branch managers through commissions based on net audited profits. This commission was in addition to directors' fees and monthly salaries. A resolution dated February 24, 1940, stated that the commission was payable on net audited profits after depreciation but before any allocation or provision for taxation. This was further clarified on July 27, 1940, to include all forms of taxation, including excess profits tax.

The Excess Profits Tax Officer, in his order dated December 15, 1947, held that the commission allowed was unreasonable and unnecessary, particularly since it included amounts attributable to excess profits tax. He disallowed Rs. 5,39,057 on the basis that the commission paid out of profits that could not be retained by the corporation was not justified. The Tribunal upheld this disallowance, and the High Court affirmed the decision, finding that the payments were both unreasonable and unnecessary, having regard to the requirements of the business and the actual services rendered.

2. Disallowance of Rs. 1,28,743 under Rule 12(1) of Schedule I to the Excess Profits Tax Act:

For the chargeable accounting period from January 1, 1946, to March 31, 1946, the Excess Profits Tax Officer similarly disallowed Rs. 1,28,743. The officer applied the same reasoning as in the previous period, determining that the commission paid was not reasonable and necessary. The Tribunal dismissed the appeals, following its earlier decision for the periods ending December 31, 1943, and December 31, 1944.

The High Court, in its judgment, observed that the Tribunal and the Excess Profits Tax Officer should have considered whether the payments were necessary and justified based on ordinary commercial practice and commercial expediency, taking into account the services rendered. However, the Supreme Court noted that the rule does not reference commercial expediency or practice but requires consideration of all relevant factors to determine if the expenditure is reasonable and necessary.

The Supreme Court upheld the High Court's decision, stating that the Excess Profits Tax Officer was justified in disallowing the commission paid on excess profits, as these profits were due to the war situation and not the efforts of the managers. The payments were deemed unreasonable and unnecessary, and the disallowance was affirmed.

Conclusion:
The Supreme Court dismissed the appeals, affirming the High Court's decision that the disallowances of Rs. 5,39,057 and Rs. 1,28,743 were justified under Rule 12(1) of the Schedule to the Excess Profits Tax Act. The payments were found to be unreasonable and unnecessary, considering the requirements of the business and the actual services rendered.