The Judgment of the Court was delivered by
M. Hidayatullah, J.— This appeal by special leave of this Court, has been filed against the judgment and order of the Bombay High Court dated August 27, 1954, by the Ahmedabad Manufacturing and Calico Printing Co. Ltd., Ahmedabad, hereinafter called “the assessee Company”. By that judgment, the High Court of Bombay answered the first of the two following questions referred to it by the Income Tax Appellate Tribunal, Bombay, in the negative, and declined to answer the second question, inasmuch as, in its opinion, that question did not arise in view of the answer to the first question:
“1. Whether in law, if there is an obligation on the employer to pay a certain bonus, the EPT Officer is bound to allow it as a deduction and is precluded from exercising his discretion under Rule 12(1) of the First Schedule of the Excess Profits Tax Act.
2. If the answer to the first question is in the affirmative whether on a true construction of the agreement between the assessee and his employees and the Provident Fund Rules, the assessee Company is under obligation to pay the bonus without deducting the excess profits tax.”
2. The facts out of which the reference arose were as follows: The assessee Company is a limited liability company, and is one of the well-known manufacturers of textile goods. We are concerned with three chargeable accounting periods corresponding to the calendar years 1943, 1944 and 1945. While making the assessment of the assessee Company, the Excess Profits Tax Officer found that large payments had been made to five of the employees of the Company during the chargeable accounting periods. He also found that in the case of 53 employees of the assessee Company, excessive contributions had been made by the Company to their provident funds. These payments and contributions were on the basis of a percentage of the profits of the assessee Company made in the years of account. In determining the profits on which the said percentage was to be calculated, the assessee Company did not first deduct either the income tax or the excess profits tax. The Income Tax Officer upheld the action of the assessee Company in not deducting the income tax, but he objected to its not deducting the excess profits tax before calculating the amounts payable to the five employees and to the provident fund. The Excess Profits Tax Officer also held, applying Rule 12 of the First Schedule of the Excess Profits Tax Act, that it was not necessary for the assessee Company for the purpose of its business to make the calculations on the basis of net profits without the deduction of excess profits tax.
3. The Appellate Tribunal also upheld the Excess Profits Tax Officer's decision. It however, declined to state a case to the High Court of Bombay, and the assessee Company moved and obtained from the Bombay High Court a rule nisi, by which the High Court asked the Department to show cause why it should not state a case on the following two questions:
“1. Whether on a true and proper construction of the Provident Fund Rules and of the five agreements with the five officer employees, the amount of excess profits tax determined to be payable should be deducted in the first instance for the purposes of determining the amount of bonus or commission payable to the said employees and the five officer employees.
2. Whether in the circumstances of the case the finding of the Tribunal that the full amount of commission or bonus paid to the employees of the petitioners under the Provident Fund Rules and to the five officer employees under their respective agreements is not an allowable deduction in computing the taxable profits of the petitioners for the purpose of excess profits tax is justifiable in law.”
4. It appears that when the rule nisi came to be heard, the High Court of Bombay accepted the contentions of counsel for the Department, and modified the questions to those which have been stated at the commencement of this judgment. We mention this fact, because in the hearing before us, it was contended that the proper questions which arose from the order of the Appellate Tribunal were the questions which were formulated by the High Court in the rule nisi and not the ones, which were subsequently set down when the rule was made absolute.
5. A few further facts are necessary to indicate what exactly was the arrangement between the assessee Company and the five employees with regard to payment of bonus to them and also what the existing rules were under which the Company's contribution to the provident fund came to be made. The Tribunal in stating the case has forwarded five agreements entered into with the said employees. Of these, four agreements are between the years 1933 and 1935 and the fifth agreement is of 1944. In all these agreements, it is provided that the employee in question would receive in addition to the salary, if any, bonus or remuneration calculated at a certain percentage of the profit in accordance with the following formula:
X per cent of the profit of the Company for the year
X
Block value Rs …
Block for the year for which bonus or remuneration payable.
6. The percentage of the block value is shown differently under different agreements, but that is not much to the purpose. There was, however, a condition which was common to all the agreements, by which it was provided that profits meant the Company's profit for each complete official year of the Company as shown in the balance sheet for that year before providing for depreciation and income tax and super tax.
7. In respect of the provident fund, it may be stated that the Provident Fund Regulations were framed with effect from June 30, 1935, and were recognised by the Commissioner of Income Tax, as required by the Rules regarding Recognised Provident Funds framed by the Governor-General-in-Council on March 15, 1930. The amount payable by the Company was determined in accordance with Regulation 12(b), which reads as follows:
“If the profits of the Company come to 4 per cent and over on the cost value of the Block as shown in the balance sheet in a particular year, then the amount payable by the Company as Bonus in respect of an employee will be equal to
‘R'
X
Profit for a year
X
100
Block value for that year
Where ‘R' is a certain preassigned constant corresponding to each appointment.”
8. It was also provided (Regulation 13) that profits for a year meant profits as shown in the balance sheet of the Company for that year before providing for depreciation and income tax charges but after providing for bonus.
9. The dispute naturally arose whether the term “income tax and super tax” could be said to include excess profits tax, which came into being in 1940. It was also a question whether the Excess Profits Tax Officer could, under the powers conferred on him by Rule 12(1) of First Schedule of the Excess Profits Tax Act, 1940, order that the deduction of excess profits tax should be made before applying the percentage. Rule 12(1) reads as follows:
“12. (1) In computing the profits of any chargeable accounting period no deduction shall be allowed in respect of expenses in excess of the amount which the Excess Profits Tax Officer considers reasonable and necessary having regard to the requirements of the business and, in the case of directors' fees or other payments for services, to the actual services rendered by the person concerned:
Provided that no disallowance under this rule shall be made by the Excess Profits Tax Officer unless he has obtained the prior authority of the Commissioner of Excess Profits Tax.”
10. In Assessment Year 1944-1945, which corresponded to the chargeable accounting period ending December 31, 1943, the Income Tax Officer had not allowed the claim of the assessee Company with regard to excess profits tax in the income tax assessment. In that year the Excess Profits Tax Officer also acting under Rule 12 above quoted, disallowed the claim for excess profits tax assessment. In the two subsequent assessment years corresponding to the chargeable accounting periods ending December 31, 1944 and December 31, 1945 respectively, the Income Tax Officer computed the assessable profits by allowing bonus to the employees and contribution to the Provident Fund on the basis of net profits after deduction of excess profits tax. The Excess Profits Tax Officer also took the same action, but he did it not only on the acceptance of the assessment of the Income Tax Officer but also under special power conferred on him under Rule 12 above quoted. The Excess Profits Tax Officer, however, did not give a finding of fact that the payments of bonus and contributions to the provident fund of the employees were in excess of the amount which he considered reasonable and necessary, having regard to the requirements of the business and in the case of bonus, to the actual services rendered by the persons concerned. When the matter came before the Income Tax Appellate Tribunal, Bombay, on appeal, it remanded the case to the Excess Profits Tax Officer for a finding on these points. The Excess Profits Tax Officer thereupon drew up a remand report, in the light of which the Tribunal came to the conclusion that the order of the Excess Profits Tax Officer was justified. The assessee Company when it made the application for reference to the Tribunal as well as to the High Court set out no less than 13 questions which, it considered, arose from the order of the Tribunal. These questions were compressed into two by the High Court when it issued a rule nisi to the Department to show cause why the Tribunal should not be asked to state a case. Those two questions bore upon the two matters which we have referred, namely, the construction of the agreements as well as the Provident Fund Regulations to determine whether the amount of excess profits tax was deductible or not before the payments and/or contributions were made by the Company, and whether in the circumstances of the case, the amount paid and the contribution made by the assessee Company was justifiable in law. It appears that, at the stage of showing cause, the learned counsel for the Department was able to convince the High Court that no question of evidence on which the orders of the Excess Profits Tax Officer and the Tribunal were based, could be raised. The questions were accordingly modified to the two questions which are set out in the beginning of this judgment, and which may, for convenience, be again reproduced:
“1. Whether in law, if there is an obligation on the employer to pay a certain bonus, the EPT Officer is bound to allow it as a deduction and is precluded from exercising his discretion under Rule 12(1) of the First Schedule of the Excess Profits Tax Act.
2. If the answer to the First question is in the affirmative, whether on a true construction of the agreement between the assessee and his employees and the Provident Fund Rules, the assessee Company is under obligation to pay the bonus without deducting the excess profits tax.”
11. Mr Palkhiwala who appeared for the assessee Company contended that several maters were not in dispute in the present case. He argued that the genuineness of the agreements and the rules were not at any stage questioned, and that these agreements had come into existence long before the passing of the Excess Profits Tax Act. He drew attention to the recognition granted by the Commissioner of Income Tax to the Provident Fund Regulations when they were enacted, and added that there was no dispute as to the meaning of the relevant conditions in the documents between the employer and the employees. He wound up this part of his argument by saying that the reasonableness of the percentage was also not questioned by the Department. He stated that the construction placed by the assessee Company upon the agreements and Regulations to the effect that the excess profits tax should not be deducted before the percentage was calculated was reasonable, regard being had to several decisions, including the opinion of Viscount Simon, L.C and Lord Macmillan in L.C Ltd v. G.B Ollivant, Ltd. (1945) 13 ITR Supplement 23. He also referred to three decisions of the Indian High Courts in which a similar view was taken viz. N.M Rayaloo Iyer and Sons v. CIT (1954) 26 ITR 265, CIT v. Delhi Flour Mills Co. Ltd. (1953) 23 ITR 167 and Western Hosiery & General Mills v. CIT (1953) 24 ITR 191. Reference was also made to the decision of the Allahabad High Court reported in Shyamlal Pragnarain v. CIT (1955) 27 ITR 404 as to what was meant by “reasonable” and what one must see before deciding whether a particular deduction was reasonable or not.
12. These cases were cited not merely as aids to the construction of the documents in question, but to show that the action of the assessee Company in not deducting the excess profits tax before applying the percentage could not, per se be unreasonable. The argument was really advanced to afford a step to the next argument, which was the main contention in the case. The assessee Company's complaint was that the Excess Profits Tax Officer's order did not disclose why he had considered the deduction of excess profits tax as necessary before the percentage could be applied. If the documents could be interpreted in a manner which would exclude excess profits tax from the list of deductions to be made before applying the percentage, counsel contended that there was nothing further in the case to show that the Excess Profits Tax Officer had any material or evidence on which the unreasonableness of the payments made could be rested. He therefore argued that the proper questions were the ones which were raised by the High Court in the rule nisi, and that the real contention between the parties was not reflected in the amended questions, which the High Court proceeded to answer.
13. The order of the Excess Profits Tax Officer was rested on a decision of the Bombay High Court reported in Walchand & Co. Ltd. v. Hindustan Construction Co. Ltd. (1944) 12 ITR 104 in which the object underlying the calculation of excess profits tax was analysed by Chagla, C.J Having quoted from the judgment of Chagla, C.J the Excess Profits Tax Officer set down Rule 12 of First Schedule of the Excess Profits Tax Act, and observed as follows:
“In the light of the observations of the Chief Justice in the case of Walchand & Co. Ltd. (1944) 12 ITR 104 quoted above the payments of bonuses on the basis of net profits as per balance sheet without deducting excess profits tax is clearly both unreasonable and unnecessary within the meaning of Rule 12 of Schedule I of the Act. The employer and the employee cannot divide the profits including the item of Excess Profits Tax payable which the employer himself is not allowed to retain. As required by proviso to Rule 12 of Schedule I after obtaining the prior authority of the Commissioner of Excess Profits Tax, the excess of bonuses payable arrived at on the basis of EPT payable on balance sheet profits without deduction of EPT has been disallowed under Rule 12 of Schedule I as under:
Bonus paid to 6 employees:
S. No.
Name of the Employee
Bonus pay-ment claimed for the year 1943
Bonus that would be payable on the basis of profits after deducting E.P.T payable on basis of balance-sheet profits
Excess of bonus allowed under Rule 12 of Schedule I
Date of agreement
1.
S.H Gidwani
2,46,260
1,06,583
1,39,427
3-1-33
2.
Bhogilal B. Shah
74,251
32,410
41,841
8-3-34
3.
J.A Gandhi
64,621
25,449
30,172
24-3-44
4.
A.C Shah
29,700
12,964
16,742
as sanctioned by directors.
5.
A.N Tankaria
14,850
6482
8386
2,45,550
53 employees admitted to the benefits of Provident Funds Scheme as per figures worked out in attached list
2,40,733
1,04,043
1,36,690
Total amount disallowed under Rule 12 of Schedule 1
3,82,240
14. When the matter reached the Appellate Tribunal, it called for a further report from the Excess Profits Tax Officer, and he submitted it giving his finding and his reasons why the payment and the contribution by the assessee Company were unreasonable and unnecessary. He observed as follows:
“Unlike Section 10 and 10-A of the EPT Act it is not necessary for the EPT Officer to prove the motive of payment. If the payments are excessive having regard to the requirements of the business and the services rendered, then Rule 12 requires that such amounts in excess are to be disallowed. In case of other textile mills at Ahmedabad, no payments of the nature similar to this are made. Even in cases where the bonus is paid, such payments are not exceeding 3 to 6 months' salaries paid to the employees. Looking at this practice there is no doubt that the bonus payments claimed in this case are clearly excessive.”
15. He appended a detailed schedule of payments to the five officer employees as well as to the 53 employees, to whose provident fund, contributions were made by the assessee Company, and showed that in the case of four of the employees to whom salary was paid, percentage of bonus to salary ranged between 412 to 884 per cent, if payment was calculated before deducting the excess profits tax. In the case of the fifth employee to whom no salary was paid in the year, a sum of no less than Rs 2,46,260 was paid as bonus in the relevant year. He also showed that the percentage of the provident fund contribution to salary ranged from 56% to 553% and this, according to him, was also excessive. He therefore concluded as follows:
“From the figures supplied in the attached lists, it may kindly be seen that the contribution by the Company as bonus not only exceeds the contributions of the employees but is several times more than the annual salaries paid to the employees. If such excessive payments as claimed were foreseen at the time when the recognition was given, the CIT while recognising the fund would not have recognised the fund without this rule (Rule 10 of the Provident Fund Rules) and basis being changed.
From the above facts, it is clear that the payments made to the five employees and the 53 employees admitted to the benefits of the provident fund are clearly excessive having regard to the requirements of the business and the actual services rendered by the persons concerned within the meaning of Rule 12(1) of Schedule I.”
16. Learned counsel for the assessee Company contended that there was no evidence whatever, on which the conclusion that the payments were unreasonable could be justified, and that the matter was wrongly apprehended by the authorities. According to him, the Excess Profits Tax Officer could have acted on one of the two and only two grounds viz.
(a) That the payment of percentage without deduction of excess profits tax was per se unreasonable and unnecessary; or
(b) That a payment to an individual employee or to his provident fund by the Company was unreasonable or unnecessarily large, having regard to the requirements of the business.
17. He contended that the Excess Profits Tax Officer had acted solely on the first ground and had thus acted, not under Rule 12 of Schedule I but on a rule of thumb which led to rather inconsistent and startling results in that a few hundreds of rupees paid to one employee came to be considered unreasonable but not tens of thousands of rupees paid to another employee. He stated that there was no enquiry made as to whether the emoluments paid to any of these employees were unreasonable.
18. In our opinion, none of these arguments can avail the assessee Company. To begin with, it was never the case of the assessee Company that there was no evidence to support the findings of the Tribunal. In the thirteen questions proposed by the assessee Company, none relates to the existence or even the quantum of the evidence. The assessee Company was more interested in relying on the agreements and the Regulations as embodying a provision that income tax, super tax and excess profits tax should not be deducted before applying the percentages, or, in the alternative, in showing that “profits” indicate the ordinary trading profits and not what is left over after payment of these taxes. Question 8 of these proposed questions does not involve any consideration whether the decision proceeded on evidence or material.
19. Further, the assessee Company seems to have acquiesced in the modified questions because it did not seek special leave of this Court at that stage. Even in the statement of the case filed here, there is no mention of the Tribunal having acted on no evidence. We are also of the opinion that there was evidence on which the Tribunal could reach the conclusion that the payments were unreasonably high, having regard to the requirements of the business. The Excess Profits Tax Officer had prepared schedules showing the proportion of bonus or additional payments to the salary of these employees and also the proportion of the provident fund contributions to salary and had stated that in no other concern such extraordinarily high payments were being made. The Tribunal also examined one of the employees of the assessee Company who was present, and collected data in relation to some typical cases. All this material was before the Tribunal when it gave its finding.
20. The schedules which are appended to the order of the Excess Profits Tax Officer's remand report speak volumes. The payments even in the lowest cases seem extraordinarily high, and cannot be justified as dictated by the requirements of the business. There was again the practice of other concerns similarly situated to make a comparative study. The Excess Profits Tax Officer on a view of the matter held that it was not reasonable to apply the percentage before deducting the taxes. The process of his reasoning was that looking to the facts above stated, the payments to the five employees and the contributions to the provident fund were unnecessarily large and also unreasonable, having regard to the requirements of the business, and he proceeded to prune them, not by taking up each individual case but by insisting that the percentage be applied only after all the taxes were paid by the assessee Company. It was open to the Excess Profits Tax Officer to say that payment to an employee or contributions to the provident fund, before deducting the excess profits tax were unreasonable and led to an unnecessarily large payment to the employees, having regard to the needs of the business. In other words, the Excess Profits Tax Officer having come to conclusion (b) viz. that payment to an individual employee or to his provident fund by the Company was unreasonable or unnecessarily large, having regard to the requirements of the business, applied conclusion (a) viz. that the payment of percentage without deduction of excess profits tax was per se unreasonable and unnecessary, to reduce these large payments and contributions. In our opinion, there was material on which he could proceed, and the Tribunal in affirming that finding had further material to act upon.
21. In our view, the decision of the High Court impugned here was correct. We were not invited to interpret the agreements and the Regulations, if our conclusion on this part was against the assessee Company, and we do not therefore proceed to do so. Even otherwise, we think it unnecessary, in view of the fact that we consider that the action of the Excess Profits Tax Officer was referable to the Rule under which he acted.
22. The result is that the appeal fails and is dismissed with costs.