R. G. S. NAIDU AND CO. versus COMMISSIONER OF INCOME-TAX AND EXCESS PROFITS TAX, MADRAS

3 S.C.R. SUPREME COURT REPORTS

271

there was no agreement of sale of goods to be obtain ed in future between the assessee and the third party".

In the result, the appeals fail, and are dismissed

with costs. One hearing fee.

Bayyana Bhimayya v. The Government of Andhra Pradesh

Appeals.dismissed.

Hidayatullah ].

Deeember I 4.

R. G. S. NAIDU AND CO. v. COMMISSIONER OF INCOME-TAX AND EXCESS PROFITS TAX, MADRAS (And connected appeals) (J. L. KAPUR, M. HIDAYATULLAH and J. c. SHAH, JJ.) Excess Profits Tax-Excess profits, unassessed or u11derassessed -Assessment, if can be reopened-Apportionment of income-Excess Profits Tax Act, z940 (XV of z940), s. z5, r. 9, Sch. I.

Under an agreement dated July II, 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 immediattily after the accounts of the company were closed and commissions on pur chases and capital expenditure of the company. Prior to Octo ber l, 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. Lt<;!. 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 Offi cer, and Excess Profits Tax liability for the chargeable account ing period ending March 31, 1945. was also worked out on that basis. A return of income was submitted by the ap)lellants for the assessment year 1946-47 which included commission for the period 1-4-45 to 3o-6-45 on purchases of cotton and stores and on capital expenditure. The Tax Officer directed that the commis- 1ion on purchases and capital expenditure be taken into account

272

SUPREME COURT REPORTS

[1961)

1960

R. G. s. Naidu & Co. v.

for the year April I, 1945, to. March 31, 1946, and that the re- ceipts be computed accordingly. The assessment for 1945-46 was then reopened under s. 34 of the Income·tax Act under s. r5 of the Excess Profits Tax Act and as a result of apportionment made by the application of r. g of Sch. I of the Excess Profits Commissioner of Tax Act, the liability of the appellants for Income-tax and Ex lncome-tax and cess Profits Tax was revised and fresh assessments \Vere made. Excess Profits tax, The orders of assessment were confirmed by the appellate autho-

M adras

ties.

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 in come made on the assumption that they did tally, there had resulted underassessment 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. I the commission received by the appellants.

Rule 9 of Sch. I of the Excess Profits Tax Act is enacted in general terms and it is applicable to all contracts which are in .. tended to be operative for fixed periods. If, for the performance of th'3 entire contract, remuneration is payable at certain rates the profits earned out of that remuneration must be apportioned in the manner prescribed by r. 9 if the performance of the con ract 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.

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 s~tri, R. Ganapathy Iyer and

G. Gopalakrishnan, for the appellants.

Hardayal Hardy and D. Gupta, for the respondent. 19110, 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 to chargeable accounting periods April 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.

l, 1944,

Shah ].

3 S.C.R. SUPREME COURT REPORTS

273

x960

Ltd.-hereinafter referred to as the company. Prior to October l, 1944, the appellants were the Managing Agents of the Coimbatore Mills Agency Ltd.-herein- R. G. after· referred to as the Agency Company who were the Managing Agents of the company. The year of Commission" of account of the appellants ended on March 31, of the company on June 30, and of the Agency Company on and .Excess P,oftt• September 30. Under the agreement by which the the appellants were appointed managing agents, following remuneration was provided :

ax, Mad•as Shah J.

5 e;.. Co. v.

Income-ta.

· Naidu

1

1. Office allowance at Rs. 1,500 per mensem ; 2. Commission at 1 % on all purchases of cotton and stores and 2!% on all capital expenditure incurred from time to time; and

3. Commission a.t 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

4. Commission at I% on cotton and

Rs. 9,000.

stores purchased during this period Rs. 21, 704. This return was accepted by the Additional Income ta.x Officer, Coimbatore I & II Circles, and the appel lants. were assessed to income-tax. Excess Profits Tax was a.~o 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 whioh 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 pa.id in December 1945 (1-10-1944 to 30-6-1945)

Rs. 1,90,SSp.

35

-

274

SUPREME COURT REPORTS

[1961]

1960

R. G&~c~aidu v. Commissioner of Jn,ome-l«x

andTEx'M'" dbofits

ax,

a '"'

Shah ],

Rs.

16,777.

L

3. Commission at 1 % on purchases of cotton and stores from 1-4-1945 to 30-6-1945 4. Commission at 2!% on capital

h

d

h

Rs.

d h

expenditure from 1-10-1944 to 30-6-1945

1,690. The Tax Officer in charge of the assessment ' 1 · directe t at t e commiss10n on pure ases an capita 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 appor the period October 1, 1944, to tioned between 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 tax Excess Profits Tax Revised figures

Rs. 1,04,654. Rs. 45,292.

Income-tax (loss) 36,182. Excess Profits Tax Rs. 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:

Rs.

Income-tax Excess Profits Tax The orders of assessment for income

Rs. 1,66,271. Rs. 1,13,163-5-0. tax and Excess Profits Tax were confirmed by the Appellate Assistant Commissioner and the Income-tax Appel· late Tribunal. On the applications of the appellants

'

3 S.C.R. SUPREME COURT REPORTS

275

for reference under s. 66(1) of the Income-tax Act and s. 21 of the Excess Profii;s Tax Act, the Tribunal b drew up a statement of the case and su m1 e t e following four questions to the High Court of Judicature at Madras:

'tt d h

1. Whether on the facts and in the circumstances

,R. G. S. Naidu .,, co. v. Commissioner of Ihcome-ta•

ax

of the case, the Income-tax Officer /Excess Profits and Excess Profits d , t' t k' an cer was rig t m a mg ac 10n un er s. T Offi 15 of the Income-tax and the Excess Profits Tax Act?

Tax Mad>as · - Shah ].

. h

34

d

.

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 case, the Income-tax Officer/Excess Profits Tax Officer was correct in including the proportionate commission income of Rs. 1,127 for income-tax assess ment 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

the case,

4. Whether on the facts and in the circumstances of commission of the proportionate Rs. 37,129 and Rs. 2,299 were rightly assessed for the assessment year 1946-4 7 ?

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 certifiate granted under s. 66A(2) of the Income-Tax Act read withs. 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 appel lants 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 com pany was credited after the accounts of the company were closed. The amounts received by the appel- . lants from the company were included in their return and assessment for the year 1945-46 was completed

t

276

SUPREME COURT REPORTS

[1961 J

196o

Income-ta•

&Co. v.

Shah 1.

R. G. S. Naidu chargeable accounting periods.

for the purposes of the Excess Profits Tax by the Tax Officer without apportionment appropriate to the In so doing, the Tax Officer committed an error. He overlooked the fact Commissioner of that the chargeable accounting period for the as sessment of Excess Profits Tax and the year of and Excess Profits account of the company did not tally. Under s. 15 Tax. Madras of the Excess Profits Tax Act, if the Tax Officer dis- covers, in consequence of definite information which has come into his possession that profits of any charge able 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 require ments 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 underassessment 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, Sch. 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. I. That schedule sets out rules for compu- tation 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 esti mated will result, from the complete performance of the contract as is properly attributable to the

~

3 S.C.R. SUPREME COURT REPORTS

277

1 960

&. Co. v.

accounting period, having regard to the extent to which the contract was performed therein."

The performance of the contract of managing R. ,;. s. Naidu

t•

bl

th

t .

Incom•-tax

1'a• Madras

' Shah J.

agency extended beyond the period of account of the company which was July 1, 1945, to June 30, 1946: Commissioner of it covered parts of two accounting periods. The Tax Officer was therefore obliged to apportion to the and Exws P1ofit fit . d h e en ire pro s c argea e aocoun mg per10 s resulting from the complete performance of the con- tract 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 a.re 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 remu- neration is payable a.t 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 com- pany ; 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 the accounting contract unmistakably cut across period is also manifest. The remuneration for per- formance of the contra.ct is not computed at a daily rate, but is computed on a percentage of the commis- sion 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 mana"- ing agency contracts. The terms in which r. 9 ls 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,

278

SUPREME COURT REPORTS

[1961]

x96o

the remuneration is payable at rates stipulated, profit earned out of that remuneration must be appor- 71· G. s. Naid" tioned in the manner ·provided by r. 9 if the perfor mance of the contract extends beyond the accounting

& Co. v.

Commissioner of period.

Income-ta•

The judgment of this Court in E. D. Sassoon & Go., a•d E•cess Profits Ltd. v. The Commissioner of Income Tax, Bombay Ta., Madras Oity (') on which strong reliance was placed by the In that appellants has no application to this case. Shah 1. case, M/s. E. D. Sassoon & Co., Ltd. who were manag ing 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. whe ther 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 ( J agannadhadas, 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 com mission became due by the companies to the manag ing 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 remunera tion 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 in come and to whom no income had accrued to pay

(t) (1955] t S.C.R. 313.

3 S.C.R. SUPREME COURT REPORTS

279

z96o

income tax on the amounts of remuneration paid to their transferees. The court was not called upon to R. G. s. Naidu 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 commissioner of is r. 9 of Sch. 1 which attracts the principle of appor- tionment. The rule enunciated in M/s. E. D. Sassoon and Excess Profits a , & o. s case as t ere1ore no a pp 1ca 10n to t 1s case, and the High Court was right in holding that the assessment made by the Excess Profits Tax Offcer by apportionment of the commission income between the chargeable accounting periods was correct.

Tax, Madras · Shah J.

.,. co. v.

1. t'

(') h

Income-tax

h'

h

,,

The appeals therefore fail and are dismissed with

costs. One hearing fee.

.t1J1Jieals dismissed.

THE TRAV ANCORE RUBBER AND TEA CO., LTD. v. THE COMMISSIONER OF AGRICULTURAL INCOME-TAX, KERALA

(J. L. KAPUR, M. HIDAYATULLAH and J. c. SHAH, JJ.) 4gricultural Income Tax-Rubber Plantation-Expenditure on immature trees-Whether permissible deduction-Travancore-Cochin Agricultural lticome-tax Act, r950 (Tr. Co. XXII of r950), s. 5.

In computing the agricultural.income of a person s. 5(f) of the Travancore-Cochin Agricultural Income-tax Act, 1950, allow ed deductions of any expenditure "laid out wholly and exclu sively for purpose of deriving the agricultural income". The assessee who had rubber plantations claimed that the amount expended on the maintenance and tending of immature rubber trees should be deducted in computing its agricultural income but this was disallowed on the ground that the use of the article "the" before the words agricultural income implied deduction

(1) (1955) I S.C.R. 313.

>