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TMI Blog1952 (12) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... other special funds. In calculating the commission of the managing agents for the period between the 1st of November, 1944, and the 31st of October, 1945, the assessee-company did not take into account the income-tax and the excess profits tax. The Income-tax Officer, however, held that in arriving at the annual net profits of which a percentage was, the commission of the managing agents the excess profits tax was to be deducted. On appeal the decision given by the Income-tax Officer was upheld by the Appellate Assistant Commissioner. In proceedings under Section 33 of the Indian Income-tax Act, 1922, hereinafter referred to as the Act, the Income-tax Appellate Tribunal found that the excess profits tax, not being an expense for the purpose of earning profits of the business, was not to be deducted in computing annual net profits of the company on which commission was to be paid to the managing agents. On the application of the Income-tax Commissioner under Section 66 (1) of the Act, the Appellate Tribunal referred for decision to this Court the question of law stated above. For the reason that the only reported case on the point, Walchand Co. Ltd. v. Hindustan Const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct . In the chargeable accounting period excess profits tax was an amount equal to sixty-six and two thirds per cent. of the amount by which the profits of the business during that period exceeded the standard profits. From a perusal of Section 4 of Act XV of 1940 it is plain that the excess profits tax is not an expenditure incurred in the earning of profits but is an impost which has to be paid as a portion of the profits which the company has made. On this point L.C. Ltd. v. G.B. Ollivant Ltd. and Others [1944] 1 All ER 510; 13 ITR Suppl. 23 and James Finlay Co. Ltd., v. Finlay Mills Ltd. [1942] 47 Bom, LR 774 may be seen. In L.C. Ltd. case (supra) Viscount Simon, L.C., said at page 513 :- Both by name and by nature it is part of the profits, and it is none the less so because the Crown takes this part and leaves only the balance, if any, available for distribution among shareholders. If the excess profits tax were to be retrospectively repealed this would not increase the profits of the company in the least: it would only change their destination. The profits would be the same as before, but, as the Crown in that event would take less, the shareholders would re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned. Then it is said that in the relevant clause of the agreement computation of net profits means the computation of profits which would be divisible amongst the shareholders as dividend. The word divisible does not occur in the agreement and I have no doubt that in reading the word divisible for the word net occurring in clause II of the agreement the Court; would not be construing the agreement but making a new agreement for the parties. That this is not permissible is conceded. Indeed, profits of a trading company available for distribution amongst shareholders of that company are a part of the net profits of the company. In considering this matter Viscount Simon, L.C, said in L.C. Ltd. v. G.B. Ollivant Ltd. and Others [1944] 1 All ER 510 ; 13 ITR Suppl. 23 at page 513:- Moreover, it is a misapprehension to suppose that excess profits tax is, as a matter of course, introduced into a profit and loss account. If the accounts of the enterprise are set out in full, there will normally be first a trading account in which the receipts of the business are set off against the expenses directly incurred in earning those receipts. The gross profit arrived at in the tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bably did not intend to base commission on excess profits which the employer is not entitled to retain. In an earlier part of this judgment I have examined the implications of the agreement and shown that there are indications in the agreement that the parties intended to base commission op excess profits tax. In any case, the commission paid to the managing agents is for the efforts they put in the affairs of the company, and it is not their concern that the company is not allowed to retain part of such profits. For the foregoing reasons, I think that in calculating the annual net profits of the company for the purposes of the managing agents' commission excess profits tax is not to be deducted. Before parting with this case it is necessary that I should say a few words about some of the previous cases which have been cited to us. Patent Castings Syndicate Limited v. Etherington [1919] 2 Ch. 254 was the first case in the English Court of Appeal decided in May, 1919. In that case Clause 5 of the agreement dated the 30th of October, 1916, which came up for construction provided for the payment of the following commission to the works manager of the company:- And sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or fraction of five per cent. pro rata after ten per cent. had been earned by the company. Of the three Judges who decided that case Warrington, L.J., followed his previous decision in Patent Castings Syndicate, Ltd.'s case (supra ), Bankes, L.J., followed that decision without expressing approval or disapproval, but Scrutton, L.J., indicated that but for the decision in Etherington's case (supra), he would have felt a difficulty in distinguishing for the purposes of that case excess profits tax from income-tax. In In re the Agreement of G.B. Ollivant Company, Limited [1942] 2 All ER 528, that came up before the English Court of Appeal in October, 1942, the relevant clauses of the agreement were :- (1) The profits of the purchasers shall be computed by the auditors for the time being of the purchasers. Subject to any special provision in this agreement contained, the general principles to be adopted by them in making such computations shall be those of ordinary commercial practice but they shall be entitled to make such adjustments as they think appropriate in order to give effect to the principles of this agreement. (3) The account shall include all usual an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntend to base commission on excess profits which the employer is not entitled to retain. In James Finlay Co. Limited v. Finlay Mills Limited [1942] 47 Bom. LR 77 Beaumont, C.J., himself was critical of this line of reasoning. In that case, Patent Castings Syndicate, Ltd.'s case (supra) and Vulcan Motor Engineering Company, Ltd.'s case ( supra) were cited. In dealing with those cases Beaumont, C.J., said:- Those cases were, I think, founded on the general consideration, that where one is dealing with a profit sharing agreement, as agreement under which an employer is paying an employee a commission based on the profits of the business, it is reasonable to suppose that what the parties intended to share were the profits which otherwise would have belonged to the employer, and that a portion of the profits taken bodily by the revenue authorities, which the employer himself never gets the benefit of, was probably not intended to be shared with the employee. But in arriving at that conclusion, the Judges were in the difficulty of having to distinguish excess profit tax from income-tax, because it was very well settled at the dates when those cases were decided that one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cate Limited v. Etherington [1919] 2 Ch. 254 Vulcan Motor Engineering Company, Limited v. Hampson [1921] 3 KB 597 and L.C. Limited v.G.B. Ollivant Limited and Others [1944] 1 All ER 510 ; 13 ITR. Suppl. 23, for the language of the agreements in those cases was different from the language of the agreement in the present case. In L.C. Ltd.'s case (supra) , the agreement was not a managing agency agreement and that agreement required the auditors for the purpose of computing the profits of the purchasers to apply the general principles of ordinary commercial practice and to make such adjustments as they thought appropriate in order to give effect to the principles of the agreement . Giving the matter my anxious consideration, I find that we must answer the question put to us in the negative and hold on the construction of the managing agency agreement that excess profits tax does not fall to be deducted from the profits of the company for the purpose of arriving at the annual net profits of which a percentage should be paid to the managing agents as their commission. Soni, J.-I agree to the answer according to the facts of the case and the circumstances prevailing in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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