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TMI Blog1972 (10) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... rch 31, 1946, and are given below : " (1) Whether, on the facts and circumstances of this case, the amount of Rs. 5,39,057 was rightly disallowed under rule 12(1) of the Schedule to the Excess Profits Tax Act ? (2) Whether, on the facts and circumstances of this case, the amount of Rs. 1,28,743 was rightly disallowed under rule 12(1) of Schedule I to the Excess Profits Tax Act ? " Both these questions were answered in the affirmative. The facts and circumstances of the case on which these answers were given are : The assessee is a public limited company (hereinafter called " the Corporation ") having several branches and subsidiary companies. It has a board of directors which looks after its business. The branches of the company are looked after by managers who are members of the board of directors. It appears that for a long time and even before the Act came into force the corporation has been remunerating its directors including the managing director and branch managers by way of commission based on a certain fixed percentage of its net audited profits. This commission was in addition to the directors' fees and/or stipulated monthly salary. In the case of a branch manager ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dule I, for the chargeable accounting period up to December 31, 1943, I hold that, having regard to the requirements of the business and the actual services rendered by the persons concerned, the commission allowed to the management and directors is both unreasonable and unnecessary Any payment in excess of the agreed proportion of the net profits after deduction of excess profits tax is not justified. " The Excess Profits Tax Officer accordingly held that Rs. 11,47,143 for the first chargeable accounting period and Rs. 11,06,693 for the second chargeable. accounting period could not be allowed and was further of the view that a portion of it was not reasonable and necessary having regard to the requirements of the business and the actual services rendered by the persons concerned. It was pointed out that the commission of the nature under consideration was being paid by the corporation even before the Act came into force and that such commission was being allowed in its entirety for purposes of computing profits under section 10 of the Income-tax Act, 1922, in the two corresponding assessments made under section 10 of the Income-tax Act. Though this was so under the Income-tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court on a reference under the Act considered a similar question, whether the amounts, claimed by the corporation in respect of each of the assessment year was rightly disallowed under rule 12(1) of the First Schedule to the Act. In the earlier reference for the assessment in respect of the assessment years 1943 and 1944, a Bench of the Allahabad High Court in British India Corporation Ltd. v. Commissioner of Excess Profits Tax, consisting of Bhargava J. (as he was then) and Mehrotra J., were of the view that the findings of the Excess Profits Tax Officer that the payments were both not necessary and not reasonable amounted to holding that the previous practice and agreements gave no indication that the commission had to be paid without deducting the excess profits tax from the net profits and that the payments made were beyond the terms of the agreement. According to that court this was not the basis on which the question of reasonableness and necessity of the payments had to be decided. But, what the officer and the Tribunal ought to have decided is the question whether or not these payments were necessary and justified, having regard to the ordinary commercial practice and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o in the statement of the case. We also find that the High Court in its earlier judgment was not justified in thinking that the Excess Profits Tax Officer had not applied the requirements of rule 12 of the Schedule to the Act. Rule 12(1) of Schedule I, which is relevant, is as follows : " (1) 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 having regard to the requirements of the business and, in the case of directors' fees or other payments for services, to the actual services rendered by the person concerned : Provided that no disallowance under this rule shall be made by the Excess Profits Tax Officer unless he has obtained the prior authority of the Commissioner of Excess Profits Tax." This rule is designed to prevent the dissipation of the excess profits by inflating expenditure which has no relation to the requirements of the business. The test is, whether the expenditure is unreasonable and unnecessary having regard to the requirements of the business and in the case of directors' fees or other payments for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t orders pertaining to the disallowance of the claim in the chargeable accounting years in question. In the earlier order the reasons given were as follows : " The rates of commission were fixed long prior to the commencement of the present war and no deduction was admittedly made for the excess profits tax liability in computing the net profit of the corporation for the purpose of calculating commission payable to directors and management. As a result of war conditions the profits of the corporation have gone up tremendously from about Rs. 10 lakhs in the pre-war period to about Rs. 2 crores during the relevant chargeable accounting period and the commission to management on the basis of net profits has risen in the same proportion. Since the excess profits tax, which is intended to prevent the owner of a business from making a large fortune out of what is a national danger, is not deducted out of net profits in calculating commission, 'an employee stands to benefit from the national emergency to a greater extent than an employer' : (Walchand & Co. Ltd. v. Hindustan Construction Co. Ltd.). It, therefore, appears both unnecessary and unreasonable to pay more than the agreed propo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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