THE COMMISSIONER OF INCOME-TAX, NELHI vs. THE DELHI FLOUR MILLS CO., LTD., DELHI

CIVIL APPEAL No. 211/1955Supreme Court1958 INSC 7503 October 1958Bench: 3 JudgesAuthor: T.L. VENKATARAMA AIYYAR, P.B. GAJENDRAGADKAR, A.K. SARKAR SUPREME COURT REPORTS11 pages
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What did the Supreme Court hold?

The Supreme Court held that the words 'net profits' in the managing agency agreement meant divisible profits, i.e., profits available for distribution between the company and its managing agents. The Court reasoned that the purpose of the commission was to ensure the managing agents' remuneration was commensurate with the benefit their work produced for the company. Therefore, any outgoing that reduced the profits available for distribution had to be deducted. The Court found that EPT was such an outgoing. The Court distinguished the cases relied upon by the High Court, particularly the minority opinions in Re G. B. Ollivant & Co. Ltd.'s Agreement, stating that those opinions were based on a different interpretation of 'profits' as not meaning divisible profits. The Court also dismissed the argument based on Section 87-C of the Indian Companies Act, 1913, as the agreement predated the amendment. The Court concluded that if net profits are divisible profits, then all necessary deductions to arrive at them must be made, irrespective of whether they were contemplated by the parties at the time of the agreement. Consequently, EPT must be deducted to ascertain the net profits for commission calculation. The appeal was allowed.

What were the facts?

The assessee, Delhi Flour Mills Co., Ltd., entered into a managing agency agreement in 1936 with a firm. The agreement stipulated remuneration for the managing agents, including a commission of 10% of the annual net profits. These net profits were to be calculated after deducting working expenses, interest on loans, and due depreciation, but without setting aside anything for reserves or special funds. The dispute arose during the assessment of excess profits tax (EPT) payable by the company. The Excess Profits Tax Officer initially held that EPT should be deducted before calculating the commission. This was upheld by the Appellate Assistant Commissioner. However, the Appellate Tribunal ruled that EPT should not be deducted. The revenue authorities appealed this decision to the High Court, which answered the reference in the negative, meaning EPT should not be deducted. The present appeal is by the revenue authorities against the High Court's judgment.

What were the issues?

1. Whether, on a true construction of the managing agency agreement, the Excess Profits Tax (EPT) payable by the company should be deducted from its profits for the purpose of arriving at the annual net profits, of which a percentage is paid to the managing agents as commission? Assessee's contentions: The assessee argued that 'net profits' in the agreement meant divisible profits. They relied on the principle that all expenses necessary to earn profits should be deducted. The assessee also referred to Section 87-C of the Indian Companies Act, 1913 (as amended in 1936), which provided that no deduction in respect of any tax on income should be made when calculating net profits for managing agents' remuneration, suggesting a universal commercial practice. They contended that EPT, being a tax on profits, should be deducted. Revenue's contentions: The revenue contended that the agreement explicitly listed deductible items (working expenses, interest on loans, depreciation) and did not include EPT. They argued that EPT was not a working expense. They also distinguished EPT from income-tax, citing that under Section 12 of the Excess Profits Tax Act, 1940, EPT was deductible as an expense for income-tax assessment, that EPT paid by a company was not refundable to shareholders like income-tax, that EPT was a 'debt' of the business, and that it was in the nature of a license fee. The revenue also argued that since EPT was not in contemplation when the agreement was made in 1936, it should not be deducted.

Which sections of the Income-tax Act were involved?

Section 12 of the Excess Profits Tax Act, 1940, Section 87-C of the Indian Companies Act, 1913

AI-generated summary — verify with the full judgment below

28 SUPREME COURT REPORTS (1959) Supp. r95x THE COMMISSIONER OF INCOME-TAX, nELHI r...

October .1. v. THE ])ELHI FLOUR MILLS CO., LTD., DELHI (VENKA'fARAMA AIYAR, GAJENDRAGADRAR and A. K. SARKAR JJ.) J~xcess 1-'rofits-Assesstn4!nt-Asse.ssee company's agreement ;.·ith 1na1taging age11ts-Cornmissio11 on net projits-Coniputation -Tax. if can be deducted·- "Net profits", meaning of.

An agreement betwten the assessee company and its manag- ing agents provided : "In consideration for acting as managing agents the company should pay to the firm remuneration at Rs. 750/- p.m ............. and in addition a comn1ission equal to 10~~ of the annual net profits. Such net profits will he arrived at after allowing the working expenses, interest on Joans and due depreciation, but without setting aside anything to reserves or other special funds". The question was whether the excess pro- fits tax payable by the company should be deducted from its profits for the purpose of arriving at the annual net profits of which a percentage should be paid to the managing agents as thr-ir commission under the agreeinent.

Held, that the words "net profits" in the agreement meant divisible

The order continues below.

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