Full Judgment Text
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PETITIONER:
R. G. S. NAIDU AND CO.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX ANDEXCESS PROFITS TAX, MADRAS(And
DATE OF JUDGMENT:
14/12/1960
BENCH:
SHAH, J.C.
BENCH:
SHAH, J.C.
KAPUR, J.L.
HIDAYATULLAH, M.
CITATION:
1961 AIR 1007 1961 SCR (3) 271
ACT:
Excess Profits Tax-Excess Profits, unassessed or under
assessed--Assessment, if can be reopened-Apportionment of
income-Excess Profits Tax Act, 1940 (XV of 1940), s. 15, r.
9, Sch. 1.
HEADNOTE:
Under an agreement dated July 11, 1945, the appellants were
appointed managing agents of the Coimbatore Spinning and
Weaving Co. Ltd., for 20 years, and certain remuneration was
provided for them including 10% commission on the net
profits of the company due and payable yearly immediately
after the accounts of the company were closed and
commissions on purchases and capital expenditure of the
company. Prior to October 1, 1944, the appellants were the
managing agents of the Coimbatore Mills Agency Ltd., who
were the managing agents of the Coimbatore Spinning and
Weaving Co. Ltd. The year of account of the appellants
ended on March 31, of the company on June 30, and of the
Agency Company on September 30. For the assessment year
1945-46 the appellants submitted a return of their income
which included the stipulated remuneration and commissions.
This return was accepted by the Income-tax Officer, and
Excess Profits Tax liability for the chargeable accounting
period ending March 31, 1945, was also worked out on that
basis. A return of income was submitted by the appellants
for the assessment year 1946-47 which included commission
for the period 1-4-45 to 30-6-45 on purchases of cotton and
stores and on capital expenditure. The Tax Officer directed
that the commission on purchases and capital expenditure be
taken into account
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for the year April 1, 1945, to March 31, 1946, and that the
receipts be computed accordingly. The assessment for 1945-
46 was then reopened under S. 34 of the Income-tax Act under
s. 15 of the Excess Profits Tax Act and as a result of
apportionment made by the application of r. 9 of Sch. 1 of
the Excess Profits Tax Act, the liability of the appellants
for Income-tax and Excess Profits ’fax was revised and fresh
assessments were made. The orders of assessment were
confirmed by the appellate authorities.
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Held, that as in the instant case the chargeable accounting
period for the assessment of Excess Profits Tax and the year
of account of the company did not tally, by the assessment
of income made on the assumption that they did tally, there
had resulted under assessment and it was open to the Tax
Officer to take action under s. 15 of the Excess Profits Tax
Act. The Excess Profits Tax Officer acted properly in
apportioning under r. 9 of Sch. 1 the commission received by
the appellants.
Rule 9 of Sch. 1 of the Excess Profits Tax Act is enacted
in general terms and it is applicable to all contracts which
are intended to be operative for fixed periods. If, for the
performance of the entire contract, remuneration is payable
at certain rates the profits earned out of that remuneration
must be apportioned in the manner prescribed by 19 if the
performance of the contact extends beyond the accounting
period.
E. D. Sassoon & Co., Ltd. v. The Commissioner of Income-
tax, Bombay City, [1955] 1 S.C.R. 313, distinguished.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 181 to 184
of 1960.
Appeals. from the judgment and order dated March 16, 1955,
of the Madras High Court in Case Referred No. 43 of 1950.
A. V. Viswanatha Sastri, R. Ganapathy Iyer and G.
Gopalakrishnan, for the appellants.
Hardayal Hardy and D. Gupta, for the respondent.
1960, December 14. The Judgment of the Court was delivered
by
SHAH, J.-These appeals relate to Excess Profits Tax
liability of the appellants in respect of two chargeable
accounting periods April 1. 1944, to March 31., 1945, and
April 1, 1945, to March 31, 1946.
The appellants were under an agreement dated July 11, 1945,
appointed managing agents for 20 years of the Coimbatore
Spinning and Weaving Co,
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Ltd.-hereinafter referred to as the company. Prior to
October 1, 1944, the appellants were the Managing Agents of
the Coimbatore Mills Agency Ltd--hereinafter referred to as
the Agency Company who were the Managing Agents of the
company. The year of account of the appellants ended on
March 31, of the company on June 30, and of the Agency
Company on September 30. Under the agreement by which the
appellants were appointed ’managing agents, the following
remuneration was provided:
1. Office allowance at Rs. 1,500 per mensem;
2. Commission at 1% on all purchases of cotton and stores
and 21/2 on all capital expenditure incurred from time to
time; and
3. Commission at 10% on the net profits of the company due
and payable yearly immediately after the accounts of the
company were closed.
For the assessment year 1945-46, the appellants submitted a
return of their income inclusive of the following items:
1. Remuneration from the Agency
Company Rs. 36,000.
2. Commission at 10% on profits from the Agency Company
upto 30-9-1944 Rs. 37,953.
3. Remuneration from company from
1-10-1944 to 31-3-1945 Rs. 9,000.
4. Commission at 1% on cotton and stores purchased during
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this period Rs. 21,704.
This return was accepted by the Additional Income-tax
Officer, Coimbatore I & II Circles, and the appellants were
assessed to income-tax. Excess Profits Tax was also worked
out on the same basis for the chargeable accounting period
ending March 31, 1945. For the assessment year 1946-47, the
appellants submitted a return of their income which included
the following items:
1. Remuneration from the company
for one year from 1-4-1945 Rs. 18,000.
2. Commission at 10% on the profits
of the company paid in December
1945 (1-10-1944 to 30-6-1945) Rs. 1,90,889.
35
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3. Commission at 1% on purchases
of cotton and stores from
1-4-1945 to 30-6-1945 Rs. 16,777.
4. Commission at 2 12/ %on capital
expenditure from 1-10-1944 to
30-6-1945 Rs. 1,690.
The Tax Officer in charge of the assessment directed that
the commission on purchases and capital expenditure be taken
into account for the year April 1, 1945, to March 31, 1946,
and that the receipts-be computed accordingly. The amount
of Rs. 1,127 attributable out of item 4 was accordingly
taken into the account of the previous year after reopening
the assessment under s. 34 of the Income-tax Act, and the
commission on the profits of the company was apportioned
between the period October 1, 1944, to March 31, 1945, and
April 1, 1945, to June 30, 1945, by the application of r. 9
of Sch. 1 of the Excess Profits Tax Act. The Tax Officer
also determined the proportionate commission payable under
items 3 and 4, for the period ending March 31, 1946, and as
a result of the apportionment, the liability of the appel-
lants, original and revised, for income tax and Excess
Profits Tax for the assessment year 1945-46 and chargeable
accounting period April 1, 1944, to March 31, 1945, stood
as follows:
Original assessment of income taxRs. 1,04,654.
Excess Profits TaxRs. 45,292.
Revised figures
Income-tax (loss) Rs. 36,182.
Excess Profits TaxRs. 1,41,962-11-0.
For the assessment year 1946-47 and chargeable accounting
period April 1, 1945, to March 31, 1946, tax liability was
computed at:
Income-tax Rs. 1,66,271.
Excess Profits Tax Rs. 1,13,163-5-0.
The orders of assessmentfor income tax and Excess Profits
Tax were confirmed by the Appellate Assistant Commissioner
and the Income-tax Appellate Tribunal. On the applications
of the appellants
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for reference under s. 66(1) of the Income-tax Act and s. 21
of the Excess Profits Tax Act, the Tribunal drew up a
statement of the case and submitted the following four
questions to the High Court of Judicature at Madras:
1.Whether on the facts and in the circumstances of the
case, the Income-tax Officer/Excess Profits Tax Officer was
right in taking action under s. 34 and 15 of the Income-tax
and the Excess Profits Tax Act ?
2.Whether on the facts and in the circumstances of this
case, the provisions of r. 9, s. 1, were properly applied ?
3.Whether on the facts and in the circumstances of the
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case, the Income-tax Officer/Excess Profits Tax Officer was
correct in including the proportionate commission income of
Rs. 1,127 for income-tax assessment 1945-46 and Rs. 1,43,163
plus Rs. 1,127 for Excess Profits Tax assessment Tax for the
chargeable accounting period ending 31st March 1945, and
4.Whether on the facts and in the circumstances of the
case, the proportionate commission of Rs. 37,129 and Rs.
2,299 were rightly assessed for the assessment year 1946-47
?
The High Court answered all the questions against the
appellants and in favour of the Department. Against the
order passed by the High Court, these appeals have been
preferred with certificate granted under s. 66A(2) of the
Income-Tax Act read with s. 21 of the Excess Profits Tax
Act.
Two questions were canvassed in these appeals:
1.Whether it was open to the Taxing Officer to re-open
the assessment for 1945-46; and
2.Whether the commission received by the appellants was
liable to be apportioned under r. 9 of Sch. 1 of the Excess
Profits Tax Act.
The appellants maintained their books of account on cash
basis and commission received from the company was credited
after the accounts of the company were closed. The amounts
received by the appellants from the company were included in
their return and assessment for the year 1945-46 was
completed
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for the purposes of the Excess Profits Tax by the Tax
Officer without apportionment appropriate to the chargeable
accounting periods. In so doing, the Tax Officer committed
an error. He overlooked the fact that the chargeable
accounting period for the as assessment of Excess Profits
Tax and the year of account of the company did not tally.
Under s. 15 of the Excess Profits Tax Act, if the Tax
Officer discovers, in consequence of definite information
which has come into his possession that profits of any
chargeable accounting period chargeable to excess profits
tax have escaped assessment, or have been under assessed, he
may serve on the person liable to pay such tax a notice
containing all or any of the requirements which may be
included in a notice under s. 13 and may proceed to assess
or reassess the profits. The provision is substantially
similar to s. 34(1) of the Income-tax Act before it was
amended in the year 1948. It is manifest that by the
assessment of income made on the assumption that the
chargeable accounting period and the accounting period of
the company tallied, there resulted under assessment in the
computation of tax liability for Excess Profits Tax, and it
was open to the Tax Officer to take action under s. 15 of
the Excess Profits Tax Act.
Determination of the second question depends upon r. 9, Sob.
1, of the Excess Profits Tax Act. By s. 2(19) of the Excess
Profits Tax Act, the expression " profits " means profits as
determined in accordance with Sch. 1. That schedule sets out
rules for computation of profits for the purpose of the
Excess Profits Tax Act; and by r. 9, it is provided in so
far as it is material that:
" Where the performance of a contract extends
beyond the accounting period, there shall
(unless the Excess Profits Tax Officer, owing
to any special circumstances, otherwise
directs) be attributed to the accounting
period such proportion of the entire profits
or loss which has resulted, or which it is
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estimated will result, from the complete
performance of the contract as is properly
attributable to the
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accounting period, having regard to the extent
to which the contract was performed therein."
The performance of the contract of managing agency extended
beyond the period of account of the company which was July
1, 1945, to June 30, 1946: it covered parts of two
accounting periods. The Tax Officer was therefore obliged
to apportion to the, chargeable accounting periods the
entire profits resulting from the complete performance of
the contract in proportions properly attributable to the
accounting periods and this, he proceeded to do. Counsel
for the appellants contends that the contracts contemplated
by r. 9 are those of the nature of engineering or works
contracts and the like where execution of the contract
involves a profit making operation de die in diem and not
contracts where remuneration is payable at a certain time
for services performed throughout the stipulated period. It
is true that remuneration was paid to the appellants after
the expiry of the year of account of the company ; but the
contract was one the performance of which extended
throughout the year of account of the company. The
appellants were the managing agents of the company and they
had to perform their duties as managing agents for the whole
year. It is not disputed that the contract of agency for 20
years is to be regarded for assessment of excess profits tax
as an annual contract. The performance of the contract
unmistakably cut across the accounting period is also
manifest. The remuneration for performance of the contract
is not computed at a daily rate, but is computed on a
percentage of the commission on the profits of the company
for the whole year, but on that account, the contract is not
one in which performance does not extend throughout the year
of account. Normally in a managing agency contract,
the managing agent may not suffer loss, but that does not
rule out the application of r. 9 to managing agency
contracts. The terms in which r. 9 is enacted are general:
the rule is applicable to all contracts which are intended
to be operative for a fixed period. If, for the performance
of the entire contract,
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remuneration is payable at rates stipulated, the profit
earned out of that remuneration must be apportioned in the
manner provided by r. 9 if the performance of the contract
extends beyond the accounting period
The judgment of this Court in E. D. Sassoon & Co., Ltd. v.
The Commissioner of Income Tax, Bombay City(1) on which
strong reliance was placed by the appellants has no
application to this case. In that case, M/s. E. D. Sassoon
& Co., Ltd. who were managing agents of three different
companies transferred the managing agencies to three other
companies on several dates during the accounting year. A
question arose in the computation of income-tax payable by
M/s. E. D. Sassoon & Co., Ltd. whether the managing agency
commission was liable to be apportioned between M/s. E. D.
Sassoon & Co., Ltd. and their respective transferees in the
proportion of the services rendered as managing agents for
the respective periods of the accounting year. It was held
by this court (Jagannadhadas, J., dissenting) that on a true
interpretation of the managing agency agreements in each
case, the contract of service between the companies and the
managing agents was entire and indivisible and the
remuneration or commission became due by the companies to
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the managing agents only on completion of definite periods
of service and at stated intervals ; that complete perfor-
mance was a condition precedent to the recovery of wages or
salary in respect thereof and the remuneration payable
constituted a debt only at the end of each period of service
completely performed, no remuneration or commission being
payable to the managing agents for broken periods; that no
income was earned by or accrued to M/s. E. D. Sassoon &
Co., Ltd. and as the transfer of the agencies did not
include any income which E. D. Sassoon & Co., Ltd. had
earned, they were not liable to be taxed under the Income-
Tax Act. But that was a case dealing with liability of the
assessees who did not receive any income and to whom no
income had accrued to pay
(1)[1955] 1 S.C. R. 313.
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income tax on the amounts of remuneration paid to their
transferees. The court was not called upon to apply to
income received by the assessee the principle of
apportionment under r. 9 of Sch. 1 of the Excess Profits
Tax Act, or any provision similar thereto. It is r. 9 of
Sch. I which attracts the principle of apportionment. The
rule enunciated in M/s, E. D. Sassoon & Co.’s case (1) has
therefore no application to this case, and the High Court
was right in holding that the assessment made by the Excess
Profits Tax Officer by apportionment of the commission
income between the chargeable accounting periods was
correct.
The appeals therefore fail and are dismissed with costs.
One hearing fee.
Appeals dismissed.
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