# R. G. S. NAIDU AND CO v. COMMISSIONER OF INCOME-TAX AND

- **Citation:** [1961] 3 S.C.R. 271
- **Court:** Supreme Court of India
- **Decided:** 1961
- **Case number:** Civil Appeals Nos. 181 to 184 of 1960
- **Bench:** J. L. Kapur, M. Hidayatullah, J. c. SHAH
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/r-g-s-naidu-and-co-v-commissioner-of-income-tax-and-1981
- **Pages:** 9

## Headnote

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 purchases and capital expenditure of the company. Prior to October 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 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 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 commis1ion on purchases and capital expenditure be taken into account
Bayyana
Bhimayya
v.
The Government
of Andhra Pradesh
Hidayatullah ].
Deeember I 4.
272
SUPREME COURT REPORTS
[1961)
1960
for the year April I, 1945, to. March 31, 1946, and that the receipts be computed accordingly. The assessment for 1945-46 was
R. G. s. Naidu then reopened under s. 34 of the Income·tax Act under s. r5 of
& Co.
the Excess Profits Tax Act and as a result of apportionment
v.
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 Exlncome-tax and cess Profits Tax was revised and fresh assessments \Vere made.
Excess Profits tax, The orders of assessment were confirmed by the appellate authoM adras
ties.
Shah ].
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 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 conract 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.

## Text

3 S.C.R. SUPREME COURT REPORTS
271
there was no agreement of sale of goods to be obtained in future between the assessee and the third
party".
In the result, the appeals fail, and are dismissed
with costs. One hearing fee.
Appeals.dismissed.
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 purchases and capital expenditure of the company. Prior to October 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 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 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 commis1ion on purchases and capital expenditure be taken into account
Bayyana
Bhimayya
v.
The Government
of Andhra Pradesh
Hidayatullah ].
Deeember I 4.
272
SUPREME COURT REPORTS
[1961)
1960
for the year April I, 1945, to. March 31, 1946, and that the receipts be computed accordingly. The assessment for 1945-46 was
R. G. s. Naidu then reopened under s. 34 of the Income·tax Act under s. r5 of
& Co.
the Excess Profits Tax Act and as a result of apportionment
v.
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 Exlncome-tax and cess Profits Tax was revised and fresh assessments \Vere made.
Excess Profits tax, The orders of assessment were confirmed by the appellate authoM adras
ties.
Shah ].
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 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 conract 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
chargeable accounting periods April l, 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.
-
3 S.C.R. SUPREME COURT REPORTS
273
Ltd.-hereinafter referred to as the company. Prior
x960
to October l, 1944, the appellants were the Managing
Agents of the Coimbatore Mills Agency Ltd.-hereinR. G. 5· Naidu
e;.. Co.
after· referred to as the Agency Company who were
v.
the Managing Agents of the company. The year of Commission" of
account of the appellants ended on March 31, of the
Income-ta.
company on June 30, and of the Agency Company on and .Excess P,oftt•
September 30. Under the agreement by which the
1 ax, Mad•as
appellants were appointed managing agents, the
Shah J.
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 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
Rs. 9,000.
4. Commission at I% on cotton and
stores purchased during this period Rs. 21, 704.
This return was accepted by the Additional Incometa.x Officer, Coimbatore I & II Circles, and the appellants. 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
3. Commission at 1 % on purchases
of cotton and stores from
R. G&~c~aidu
1-4-1945 to 30-6-1945
v.
4. Commission at 2!% on capital
Rs.
16,777.
Commissioner of
expenditure from 1-10-1944 to
Jn,ome-l«x
30-6-1945
Rs.
1,690.
andTEx'M'" dbofits
The Tax Officer in charge of the assessment
ax,
a '"'
d h
h
·
h
d
' 1
directe t at t e commiss10n on pure ases an capita
Shah ],
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 appellants, 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)
Rs.
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:
Income-tax
Rs. 1,66,271.
Excess Profits Tax
Rs. 1,13,163-5-0.
The orders of assessment for income 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
L
'
t
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 'tt d h
,R. G. S. Naidu
drew up a statement of the case and su m1 e
t e
.,, co.
following four questions to the High Court of
v.
Judicature at Madras:
Commissioner of
1.
Whether on the facts and in the circumstances
Ihcome-ta•
of the case, the Income-tax Officer /Excess Profits and Excess Profits
T
Offi
. h . t k'
, t'
d
34
d
Tax Mad>as
ax
cer was rig t m a mg ac 10n un er s.
an
·-
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 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 1946-4 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 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 appel- .
lants from the company were included in their return
and assessment for the year 1945-46 was completed
Shah ].
276
SUPREME COURT REPORTS
[1961 J
196o
for the purposes of the Excess Profits Tax by the Tax
Officer without apportionment appropriate to the
R. G. S. Naidu chargeable accounting periods. In so doing, the Tax
&Co.
v.
Officer committed an error. He overlooked the fact
Commissioner of that the chargeable accounting period for the asIncome-ta•
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 disShah 1.
covers, 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 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 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 estimated will result, from the complete performance
of the contract as is properly attributable to the
3 S.C.R. SUPREME COURT REPORTS
277
accounting period, having regard to the extent to
1960
which the contract was performed therein."
The performance of the contract of managing R. ,;. s. Naidu
&. Co.
agency extended beyond the period of account of the
v.
company which was July 1, 1945, to June 30, 1946: Commissioner of
it covered parts of two accounting periods.
The
Incom•-tax
Tax Officer was therefore obliged to apportion to the and Exws P1ofit
h
bl
t .
. d
th
t•
fit
1'a• Madras
c argea e aocoun mg per10 s
e en ire
pro s
'
resulting from the complete performance of the conShah J.
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 remuneration 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 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 contra.ct 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 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
remuneration is payable at rates stipulated, the
profit earned out of that remuneration must be appor71· G. s. Naid" tioned in the manner ·provided by r. 9 if the perfor-
& Co.
v.
mance of the contract extends beyond the accounting
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
Shah 1.
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 ( 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 commission became due by the companies to the managing agents only on completion of definite periods of
service and at stated intervals ; that complete performance 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
(t) (1955] t S.C.R. 313.
>
3 S.C.R. SUPREME COURT REPORTS
279
income tax on the amounts of remuneration paid to
z96o
their transferees. The court was not called upon to
R. G. s. Naidu
apply to income received by the assessee the principle
.,. co.
of apportionment under r. 9 of Sch. 1 of the Excess
v.
Profits Tax Act, or any provision similar thereto. It commissioner of
is r. 9 of Sch. 1 which attracts the principle of apporIncome-tax
tionment. The rule enunciated in M/s. E. D. Sassoon and Excess Profits
a ,
(') h
h
,,
1. t'
h'
Tax, Madras
& 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
Shah J.
assessment made by the Excess Profits Tax Offcer
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.
.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, allowed deductions of any expenditure "laid out wholly and exclusively 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.