Full Judgment Text
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PETITIONER:
THE NANDLAL BHANDARI MILLS LTD.,INDORE
Vs.
RESPONDENT:
THE STATE OF MADHYA BHARAT
DATE OF JUDGMENT:
17/07/1961
BENCH:
HIDAYATULLAH, M.
BENCH:
HIDAYATULLAH, M.
DAS, S.K.
SHAH, J.C.
CITATION:
1963 AIR 332 1962 SCR (2) 854
ACT:
Agent-Commission paid out net profits-If deductible from
assessable income--The Indore Industrial Tax Rules-
Notifications.
HEADNOTE:
By a Cabinet Resolution of the Holkar State certain Rules
known as The Indore Industrial Tax Rules were framed for the
purpose of levying industrial tax. After the decision of
the Privy Council in cherry Railway Go., Ltd. v.
Commissioner Income,-tax, (1931) L. R. 58 1. A. 239,
disallowing deduction , of Commission paid out of profits to
agents from the assessable profits; the Government of Holkar
State of which the Maharaja was the Supreme Ruler; issued
certain Notifications ordering that the Agents’ Commission
on profits should not be allowed to be deducted from the
assessable profits. The appellants who under an agreement
paid commission to their agents out of the company’s net
profits contended, inter alia, that the Notifications in
question did not have the force of law and was not
enforceable against the appellants.
Held, that every general order emanating from the sovereign
ruler having its roots in a resolution of the cabinet must
be regarded as a law binding on the subject and the
Notifications disallowing commission paid to, agents to be
deducted from the assessable profits were therefore binding
on the appellants, because that was the normal mode by which
laws were made in the Holkar State.
Rajkumar Mills Ltd. v. Madhya Bharat State, A. I. R. 1953 Madhya
Bharat 135, approved.
Ameer-un-nissa Begum v. Mahboob Begum, A. I. R. 1955 S.C. 352,
followed.
The Union Cold Storage Co., Ltd. v. Anderson, (1931) 16 T.
C. 293 and The Indian Radio and Cable Communications Co.,
Ltd. v. Commissioner of Income-tax, (1937) I. T. R. 270,
discussed.
Madharao v. State of Madhya Bharat, A.I.R. 1961 S. C. 298,
referred to.
860
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JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil, Appeals Nos. 344-346 of
1960.
Appeals by special leave from the judgment and order dated
September 8. 1958, of the Madhya Pradesh High-Court (Indore
Bench), Indore, in Civil Second Appeals Nos. 11.0-1,12 of,
1952.
S. T.Desai and J. B. Dadachanjifor the appellant.
B. Sen,J. Bhave and 1. N. Shroff,for the respondent.
1961. July 17. The Judgment of the Court was delivered by
HIDAYATULLAH, J.-These three consolidated appeals by special
leave are against a common judgment and order of the High
Court of Madhya Pradesh, dated September 8, 1958, in three
second appeals filed under R. 13 of the Indore Industrial
Tax Rules, 1927 of the former Holkar State, which were in
force before the State became part of Madhya Bharat State.
They concern three assessments relating to the assessment
years, 1941,1942 and 1943 respectively. These second
appeals were originally filed in the Madhya Bharat High
Court as early as 1952 ; but the records of the appeals
’were destroyed by fire and had to be reconstructed. By the
time the appeals were ready, Madhya Bharat had merged in the
new state of Madhya Pradesh, and the appeals were
accordingly heard by a Divisional Bench of that High Court.
The appellant is a Textile Mill and a public Joint Stock
Company called the Nandlal Bhandari Mills, Ltd. The
appellant had appointed a" firm, Messrs Nandlal Bhandari and
Sons as agents, secretaries and treasurers of the Mills, and
under cl. (6) of the agreement of agency, it agreed to pay
to the agents an office allowance, commission on the
Company’s net profits and commission on the sale proceeds.
of sales of yam, cloth, etc. The
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remuneration of the agents for the three accounting years
was as follows :
___________________________________________________________
Remuneration As per Accounting Years,
agree -------------------------------
ment. 1941 1912 1943
Rs. Rs. Rs.
__________________________________________________________
Clause 6 1500 18,000 18,00018,000
(a) Fixed P.M. for the for the
monthly allow- year. year.
ance as office
allowance.
(b) Commission @ 16% 2,68,335 6,15,946 10,52,939
on the Com- net on
painy’s Net profits
Profits.
(c) Commission @ 1-9-0 1,10,156 1,10156 1,64,751 2,71,672
on the sale Per Cent,
proceeds of on sales
sales of yarn,
cloth etc.
___________________________________________________________
In computing the tax, the Mills claimed to deduct under R.
3(2)(ix) of the Rules the above amounts paid as
remuneration. The Rule reads :
"(ix) any expenditure (not being in the nature
of capital) incurred solely for the purposes
of earning such profits or gains."
The Assessing Officer accepted the appellant’s claim for
deduction but only as. to a part. We are not required in
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these appeals to consider the correctness of the quantum of
the deduction in view of what transpired later. The
Assessing Officer also disallowed certain other claims made
by the appellant, which again need ’not be mentioned. The
appellant then. appealed to the Appellate Authority, and on
December 31, 1951 the Appellate Authority, while accepting
some of
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the appellant’s other contentions upheld the order refusing
to deduct the agent,s commission on profits under R.
3(2)(ix). Three second appeals were preferred in the Madhya
Bharat High Court under R. 13 of the amended Rules. They
were dismissed by the High Court of Madhya Pradesh, and
hence the present appeals.
The Indore Industrial Tax Rules were first promulgated in
1926 by a Cabinet Resolution (No. 373 dated March 22, 1926).
In 1927, by, Cabinet Resolution No. 1991 dated November 23
1927, the Rules were modified, and the new Rules, were made
applicable retrospectively from May 1, 1926. These Rules
were framed for the levy of the tax and for ascertainment
and determination of the income of cotton mills. The
taxcalled the "Industrial Tax" was leviable under R. 3,
which imposed the charge. It says that the Industrial Tax
shall be payable by an assessee in respect of the profits or
gains of any Cotton Mill industry carried on by him in the
Holkar State. Sub-r. (2) of R. 3 provides that such profits
or gains are to be computed after making allowances, inter
alia, for any expenditure incurred solely for the purpose of
earning such profits or gains, R. 6, which is a part of the
Rule imposing a charge, lays down the rates which are : (a)
on all incomes up to Rs. 50,000, at 1-1/2 annas per rupee,
and (b) above, at 2-1/2 annas per rupee. The short question
thus was whether in computing the profits and gains of the
appellant, the remuneration paid to the agents was
deductible under R. 3 (2) (ix).
It is necessary At this stage to see the legislative
machinery existing in the Holkar State in 1927 and onwards.
On February 27, 1926, His Highness Maharaja Tukoji Rao III
abdicated, and, his son, H.H. Maharaja Yeshwant Rao Holkar,
became the Ruler, whose installation ceremony’ was performed
on March 11, 1926. A Regency Council was appointed under
the orders of the
863
Government of India for the administration’ of the State
during the minority of the Maharaja. This Regency Council,
which was called the Cabinet, was entrusted with the
administration of the State according to existing rules and
practice, under the supervision and with the advice of the
Agent to the Governor-General in Central India. Prime
Minister of the State was the Chairman. H. H. Maharaja
Yeshwant Rao Holkar attained majority on September 6, 1929
and resumed sovereign powers on May 9, 1930. It was during
the minority of the Ruler that the Cabinet had promulgated
the amended Rules of 1927. In 1931, the decision of the
Privy Council in the well-known case of Pondicherry Railway
Co., Ltd. v. Commissioner oF Income-tax (1) was rendered.
In that case, a Railway Company had agreed to make over to
the French Colonial Government half of the Company’s net
profits in consideration of a 99-year concession. This was
sought to be deducted by the Company from its assessable
profits as an expenditure incurred solely for the purpose of
earning such profits. The Privy Council disallowed the
deduction. Lord Macmillan observed as follows :
"A payment out of profits and conditional on-
profits being earned cannot accurately be
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described as a payment made to earn profits.
It assumes that profits have first come into
existence. But profits on their coming into
existence attract tax at that point and the
revenue is not concerned with the subsequent
application of the profits."
It seems that, as a result of this decision, a notification
was issued in August, 1931, and another on February 2/3,
1932 by the Commerce. and Industry Department of the Holkar
State. The latter notification reads as follows
(1) (1931) L.R. 38 I.A. 239.
864
"Commerce and Industry Department
Notification.
Notification No. 1 dated the 2nd/3rd Feb. 19
32. In continuation of this office
Notification No. 4733 dated the 6th December,
1927 (Vide Issue No. 11 dated the 12th
December, 1927, of the Holkar Sirkar Gazette)
embodying modified rules for the levy of the
Industrial Tax the Cabinet,in their Resolution
No. 1072 dated the 25th August, 1931, have
ordered that the Agents’ Commission on
’Profits’ should not be allowed to be deducted
from the assessable profits."
It is, to be noticed that this notification refers to the
earlier notification No. 4733 of December 6, 1927, under
which were published the amended Industrial Tax Rules, 1927,
and to the notification of August 1931. The latter has not
been produced before us.
This notification led to representations by the persons
affected by it. The Maharaja of Holkar thereupon referred
the matter for the opinion of the, Full Bench of the High
Court of the State. It appears that the opinion of the High
Court was in favour of disallowing such deductions. On July
14, 1933, another notification (No. 13) was issued which
reads as follows :
"In continuation of this office Notification
No. 1 dated 3rd February,, 1932, it is hereby
published for the information of the mills and
factories concerned that on submission of the
Prime Minister’s (Legal Department) report No.
25 dated 11th May, 1933, His Highness the
Maharaja is please to order (vide Huzur Shri
Shankar, Order No. 173 dated 29th June,1933)
that the opinion of the Full Bench of the High
Court being that the Managing Agent’s
Commission an profit’s is
865
not an item of expenditure incurred solely for
the purpose of earning the said profit within
the meaning of Rule 3(2)(ix) of the said
Industrial Tax Rules and this being. also the
view of the Cabinet as expressed in their
resolution No. 1072 dated 28th August, 1931,
the aforesaid Cabinet Resolution be given
effect to and the industrial tax due on the
amount of the managing agent’s commission on
profits be recovered with effect from the date
of the said Cabinet Resolution."
This notification, it is contended before this Court had not
the force of law and was not enforceable against the
appellants, who claim that they are entitled to show that
the remuneration paid to the agents was deductible from the
profits of the Mills before. computing the Industrial Tax.
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In this connection, the appellants wish to use the later
decisions of the House of Lords in The Union Cold &wage Co.,
Ltd. v. Adamson(1) and of the Privy Council in The Indian
Radio and Cable Communication Co., Ltd. v. Commissioner of I
Income-tax (2), in which the decision in the Pondicherry
Railway Company case (3) was explained. In the case before
the Privy Council, Lord Maugham observed:
"It is not universally true to say that a,
payment the making of which is conditional on
profits being earned cannot properly be
described as an expenditure incurred for the
purpose of earning such profits. The typical
exception is that of a payment to a, director
or a manager of a commission on the profits of
a company’....If a company having made; an
apparent net profit, of pound 10,000 has then
to pay pound 1,000 to directors, or managers
as the contractual recompense for their
service during the year, it: is plain that the
real net profit is only pound 9,000."
(1) (1931) 16 T. C. 293. (2) (1937) I.T.R. 270
(3) (1931) L.R. 58 (1) A. 239.
866
Lord Macmillan in the former case observed that the
Pondicherry Railway Company case (1) must be read in the
context of the facts of that case, and the obligation was
first to find out the net profits of the company and then to
divide them. These two sets of cases proceed upon different
principles. If the agreement is to share the profits the
expenditure cannot properly be treated as one incurred
solely for the purpose of earning such profits; but if a
slice of the profits is;to be paid to persons as
remuneration to help in the earning of the profits, the
deduction can be claimed.
All this would of course be pertinent to consider, if there
was no legislative enactment on the subject. If the matter
was not one concluded by law, then there would be room for
judicial interpretation of the Rule. The rival claims in
these appeals are thus confined to the legislative force of
the notifications issued in 1931, 1932 and 1933
respectively,. The appellant’s contention is that the
notifications were not an act of legislation but an
interpretation by the Sovereign. Mr. Desai concedes that if
they be regarded as legislation, then the later decisions of
the Privy Council and some of this Court cannot be called in
aid, because where the law itself speaks with clarity,
judicial interpretation is out of place. He contends, how-
ever that the two notifications were not framed as rules and
were not expressly stated to be amendments of the rules then
existing. He points out that after the first notification
which was nothing more than an administrative direction to
the assessing officers to include in the profits the
remuneration of the agents, the opinion of the High Court
was obtained, and the second notification merely pointed out
that the earlier notification was to be given effect to, and
did no more than add a second administrative direction. On
the other side, it is contended that the Cabinet could make
laws as often as it pleased and that
(1) (1931) L. R. 58 I. A. 239.
867
the notifications must be read either as independent rules
or as a legislative explanation of R. 3 (2) (ix). In so far
as the legislative supremacy of the Cabinet was concerned,
no question was raised before us. When the Indore Industrial
Tax Rules, 1926 were framed, they came into existence by
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virtue of a Cabinet Resolution of that year. When they were
modified, they were superseded by yet another Cabinet
Resolution of the year 1927, which promulgated the new Rules
with retrospective effect from May 1926. The source of the
Rules ’was thus a Resolution of the Cabinet on both the
occasions, and it is not denied that the Rules thus framed
had legislative sanction and were unquestionable. When the
Cabinet promulgated its notifications in 1931, 1932 and
1933, it followed the same procedure, and it stated that the
notification of 1932 was "’in continuation of this office
Notification No. 4733 dated December 6, 1927." This has
reference to that notification under which the Indore
Industrial Tax Rules, 1927 were orginally published. From
this, it follows that new Rules were framed by a resolution
of the Cabinet and were promulgated by a notification in the
Gazette as part of the Rules. The mode followed in 1926 and
1927 was repeated in 1932 and 1933 and also presumably in
1931, though the notification of that year has not been
printed in the record of this case.
This view was taken by the Full Bench of the’ Madhya Bharat
High Court in Raj Kumar Mills Ltd. v. Madhya Bharat State
(1). The question which is involved in these appeals also
arose in that case. It was observed by the Full Bench :
"This Notification makes it abundantly clear
that His Highness the Maharaja ordered that
the industrial tax due on the amount of the
managing agent’s commission on profits be
recovered. This being. an order of the
(1) A.I.R. 1953 Madbya Bharat 135.
868
ruler, who enjoyed sovereign Powers, that
order is not open to challenge. This is a
mandate emanating from a sovereign and as such
has the force of law. This Court has,
therefore, no power to go behind the order and
enquire as to whether the managing agent’s
commission on profits is an item of
expenditure solely incurred for the ’purpose
of earning profits or not: In this view of the
matter the point at issue is concluded by
Huzur Shri Shanker order No. 173 dated 29th
June, 1933."
Thus view was affirmed by the High Court of Madhya Pradesh
in the judgment under appeal.
In our judgment, the two notifications cannot be described
as "judicial ,interpretation". If any this, they must be
interpreted as legislative exposition of R. 3(2)(ix) and in
the nature of an explanation. This Court in Ameer-un-nissa
Begum v. Mahboob Begum in dealing with the ’Firmans" of His
Exalted Highness the Nizam of Hyderabad, observed as follows
:
"It cannot be disputed that prior to the
integration of Hyderabad State with the Indian
Union and the coming into force of the Indian
Constitution, the Nizam of Hyderabad enjoyed
uncontrolled sovereign powers. He was the
supreme legislature, the supreme judiciary and
the, supreme head of the executive, and there
were no ;constitutional limitations upon his
authority to act in any of these capacities.
The ’Firmans’ were expressions of the
sovereign will of the Nizam and they were
binding in the same way as any other law;- nay
they would override all other laws which were
in conflict with them. so long as a particular
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’Firman’ held the field, that alone
would govern or regulate
(1)A.I.R. 1955 S.C. 352.
869
the rights of the parties concerned, though it
could be annulled or modified by a latter
’Firman’ at any time that the Nizam willed."
The same can be said of the Ruler of the Holkar State. When
to the order of the Ruler was added the usual mode of making
and promulgating rules, the-position which emerges is really
unassailable.
Mr. Desai in attempting to show that the ruling does not
apply to the case, raised two contentions. The first was
based upon a more recent decision of this Court in Madhaorao
v. State of Madhya Bharat (1), where certain Kalambandis of
the Maharaja of Gwalior were considered. This Court in
deciding whether the Kalambandis were existing law under
Art. 372 of the Constitution, observed :
"In dealing with the question as to whether
the orders issued by such an absolute monarch
amount to a law or regulation having the force
of law, or whether they constitute merely
administrative orders, it is important to bear
in mind that the distinction between executive
orders and legislative commands is likely to
be merely academic where the Ruler is the
source of all power. There was no
constitutional limitation upon the authority
of the Ruler to act in any capacity he liked ;
he would be the supreme legislature, the
supreme judiciary and the supreme head of the
executive, and all his orders, however issued,
would have the force of law and would govern
and regulate the affairs of the State
including the rights of its citizens.",
It was, however, pointed out in the case that even where an
order is issued by the sovereign ruler, one must look to the
character of the order and its content to find out whether
it enacted a binding rules
(1) A.I.R. 1961 S.C. 298.
870
Mr. Desai has constructed his entire argument on the basis
of these observations, and has contended that the orders
only expressed an opinion and did not bind. He pointed out
as the second limb of his argument that these notifications
were not expressed as a rule but as an order, and that they
did not seek to amend the rules, nor to add to them. He
referred to other notifications in which a legislative act
was clearly discernible, as for example, Notification No.
22/Com. dated May 17, 1946, by which for the existing Rule
4, a new Rule was substituted. An examination of the Rules,
however, shows that there was no set pattern of language.
Some of the Rules do not read like rules at all. Notes have
been appended to the rules, which are not rules proper, and
R. 29 says :
"All matters not dealt with in these rules may
be submitted to the member-incharge., Commerce
and Industry Department for decision."
The existence of such a rule seems to obliterate the
frontiers between legislative, judicial and executive
exercise of the power of a State, such as we understand it.
There being no invariable use of a clear-cut legislative
language, each general order emanating from the sovereign
ruler and promulgated in the same manner as any other rule
and having its roots in a resolution of the Cabinet must be
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regarded as one binding upon the subject. This is the
purport of the decisions of this Court, and the present case
falls in line with those which have been previously decided.
There is nothing in the content, the character or the nature
of these notifications, which would put them on a level
lower than the Rules, which had been earlier promulgated.
In our opinion., the judgment of the High Court under appeal
is correct, and the appeals are accordingly dismissed with
costs, one set.
Appeals dismissed.
871