# SUPREME COURT REPORTS (1959) Supp. r95x THE COMMISSIONER OF INCOME-TAX, nELHI r October .1 v. THE ])ELHI FLOUR MILLS CO., LTD., DELHI

- **Citation:** [1959] Supp. 1 S.C.R. 28
- **Court:** Supreme Court of India
- **Decided:** 1959
- **Case number:** Civil Appeal No. 211of1955
- **Bench:** VENKA'fARAMA AIYAR, Gajendragadrar, A. K. Sarkar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/supreme-court-reports-1959-supp-r95x-the-commissioner-of-income-tax-nelhi-r-1667
- **Pages:** 11

## Headnote

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 managing 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 profits 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 profits, profits divisible between the company and the
managing agents, and that in ascertaining such profits, deduction
had to be made, besides the items expressly mentioned in the
agreement, of excess profits tax payable by the company.
James Finlay & Co .. Ltd. v. Finlay Mills Ltd., (1942) 47
Born. L.R. 77-t and Walchand & Co., Ltd. v. Hinduslhan Con<lmction Co .. Ltd .. (1943) 45 Born. L.R. 951, considered.
Ashton Gas Company v. Attorney-General, [1906] A.C. ro and
Re G. B. Ollivant & Co. Ltd.'s Agreement, [1942] 2 All E. !{. 528,
distinguished.

## Text

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 managing 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 profits 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 profits, profits divisible between the company and the
managing agents, and that in ascertaining such profits, deduction
had to be made, besides the items expressly mentioned in the
agreement, of excess profits tax payable by the company.
James Finlay & Co .. Ltd. v. Finlay Mills Ltd., (1942) 47
Born. L.R. 77-t and Walchand & Co., Ltd. v. Hinduslhan Con<lmction Co .. Ltd .. (1943) 45 Born. L.R. 951, considered.
Ashton Gas Company v. Attorney-General, [1906] A.C. ro and
Re G. B. Ollivant & Co. Ltd.'s Agreement, [1942] 2 All E. !{. 528,
distinguished.
CIVIL APPELLATE JURISDICTION: Civil Appeal No.
211of1955.
Appeal from the judgment and order dated December 30, 1952, of the Punjab High Court in Civil Reference Case No. 18 of 1952.
H.J. Umrigar and Jl. El. Dhebar, for tlw nppelln.nt.
.(
llardayal Hardy, for the respondent.s.
1958. October 3. The Judgment of the Court was
delivered by
J
•
--.. .
(1) S.C.R.
SUPREME COURT REPORTS
29
SARKAR J.-By an agreement made in 1936, the
assessee company appointed a firm as its managing
agents. The agreement provided that the managing agents would be remunerated in the manner
following:
" In consideration for acting as Managing Agents
the Company should pay to the firm remuneration at
Rs. 750 p.m. or such principal sum as may from time
to time be deemed reasonable by the Directors and in
addition a commission equal to 10% of the annual net
profits. Such net profits will be arrived at after allowing the working expenses, interest on loans and d ne
depreciation, but without setting aside anything to
reserves or other special funds."
The question is whether the commission payable tu
the managing agents under this agreement is to he ten
per cent. of the profits of the assessee without deduction of the excess profits tax payable by -it on its
profits or after deduction.
The question has arisen in the course of the assessment of excess profits tax payable by the assessee.
The Excess Profits Tax Officer held that the commission has to be ascertained on the profits remaining
after deduction of excess profits tax. This view was
upheld by the Appellate Assistant Commissioner on an
appeal being taken to him by the assessee. On a
further appeal by the assessee to the Appellate Tribunal it was held that the commission has to be ascertained on the profits without any deduction of the tax.
The revenue authorities then applied for and obtained,
an order from the Tribunal referring the following
question for decision by the High Court:
" Whether on a true construction of the Managing
Agency Agreement between the assessee Company and
its Managing Agents entered into in 1936, the relevant
clause of which is quoted above, the Excess Profits
Tax payable should be deducted from the profits of
the Company for the purpose of arriving at the annual
net profits of which a percentage should be paid to the
Managing Agents as their commission."
The High Court answered the question in the negative.
Commissioner of
Income·la~
v.
Del/ii Flour Mills
Co., Ltd.
Sarkar ].
30
SUPREME COURT REPORTS
[1959] Supp.
The present a.ppea.l is by the revenue authorities
a.gs.inst the judgment of the High Court.
Commissioner of
Tb
·
·
h
I
f
Income-tax
e question IS a. s ort one.
t is one o construcv.
tion of the managing agency agreement. Of course,
Delhi Flour Mills whatever is pa.ya.hie under this agreement to the
Co., Lid.
managing agents as their remuneration is a. proper
Sarkar ].
expense of the business of the assessee and hits to be
deducted in ascertaining its profits and it is upon such
profits that excess profits tax ha.s to be assessed. There
is no dispute about this. The dispute has arisen
because the remuneration of the managing agents iswe leave out now the minimum and fixed remuneration of Rs. 750 per month as to which no question
arises and with which we are therefore not concerned-itself to be calculated on the profits. The dispute
is whether the proper construction of the agreement
is that the profits, a percentage of which is to be paid
to the managing agents as their remuneration, are
the profits before deduction of excess profits tax or
after.
What then is the true construction ? The agreement is that "the net profits will be arrived at after
allowing the working expenses, interest on loans and
due depreciation but without setting aside anything to
reserves or special funds."
We can leave out the
things expressly made not deductible for as to these
no question arises, the question being whether something more, namely, excess profits tax, can be deducted.
Working expenses, interest on loans and due
depreciation have
however been expressly made
deductible in ascertaining the net profits. If these are
all the deductions that can be made, excess profits tax
cannot be deducted for it does not come under any
one of them. But it seems to us that the agreement
was not intended to lay down all the deductions that
can be ma.de. It is not in dispute that expenses like
overhead expenses, litigation expenses and similar
other expenses properly incurred for carrying on the
business can be deducted in arriving a.t the net profits.
These would liot be included within " working
expenses" for that expression is usually understood as
referring to expenses debitable to the trading account
.
~
-
~ ..
(1) S.C.R. SUPREME COURT REPORTS
31
a.shaving been incurred directly in makingthe income
i958
shown there. If this were not the sern~e in which the
d
.
Commission., of
expression " working expenses " was use and it was
Income-tax
meant to cover all revenue expenses incurred, then
v.
there would have bflen no need to mention, interest on Delhi Flo"r Mills
loans and depreciation separately, for, these latter
would have been included as revenue expenses in the
express~on "working expenses". We are therefore
inclined to think that there are other items besides
those expressly mentioned, which have to be deducted
before the net profits ca.n be arrived at.
What then are these other items? That will depend
on what the parties. must be ta.ken to have had in
mind when they used the words "net profits". The
intention of the parties a.s to what they meant by these
words can be best gathered by trying to find out what
they were about in making the agreement. The
parties were a. master and a servant a.nd they were
fixing the remuneration of the servant. They decided
that profits or no profits, the servant would have
a certain fixed sum per month. They also agreed
that the servant would besides the fixed sum, have
a
certain portion of the net profits. The net
profits, whatever they were, would of course be
a variable figure ; in some years they would be
more or less than in other years. The parties therefore agreed that the remuneration of the servant
would increase or decrease as the net profits were
larger or smaller. But why did they do so ? Obviously
because they thought that it was fair that the servant's
remuneration should be commensurate with the benefit
that his work produced for the master; the larger
such benefit was, the larger the servant's remuneration
and vice versa. It is difficult to imagine that the
parties agreed that remuneration would be paid for
profits earned by the servant's efforts of which the
master did not get the benefit. This view of the matter
becomes clearer when one remembers that besides the
variable remuneration dependent on the profits, the
servant had a fixed minimum remuneration. The
agreement, therefore, was essentially one to share the
profits; the agreement was that part of the profits was
Co., Ltd.
Sarkar J.
32
SUPREME COURT REPORTS [1959) Supp.
r95B
to go to the servant and part enure for the master's
-. -.
benefit. If this is the true construction of the agreec ...... .., •• ., •f ment as we think it is then it follows that the net
Iucomt.-l1Jx
, '
t
•
v.
profits contemplated by the parties are such profits as
De/Ai Flo"' Mills can be divided between the master and the servant ;
Co., Lid.
they are such of which both the master and the
servant get the enjoyment in stated proportions. In
Sarkar J.
other words, they are the divisible profits of the
company, divisible, that is to say, between the. master
and the servant. In order that the divisible profits
can be ascertained, excess profits tax has of course to
be deducted. As to tha.t there does not seem to be any
doubt, for, tha.t pa.rt of the profits which is taken away
by the State as excess profits tax, is not available
either to the master or the servant and cannot therefore be divided between them.
It is said that the agreement cannot be construed
itl this way because that would be adding a word to
it; the word 'divisible' not being there, is introduced
into the agreement to support this construction. This
however is not so.
No word is being introduced but
the words used are only being explained. It is only
stating that the parties meant by "net profits ", the
divisible profits. It is really stating the same thing
in different words.
It is also no objection to the view that we take,
that excess profits tax is a part of the profits itself.
It perhaps is so but it is no part of the "net profits "
contemplated by the parties. It is a part which has
to be deducted in arriving at the net profits, that is
to say, the divisible profits which alone the parties
had in mind.
As a matter of construction of the agreement before
us,-and we do not think that the question involved
in this case can be decided in any other way-therefore, we come to the conclusion that the "net profits "
mean the. divisible profits and are to be ascertained
after deduction of excess profits tax which is payable
by the assessee.
That is how the matter strikes us apart from any
authority. We now turn to some of the authorities
which were cited at the bar. They are In re Gondran,
. '
-
f
-
(I) S.C.R. SUPREME COURT REPORTS
33
Gondran v. Stark (1}, Patt.At Oaatinga Syndicate Ltd. v.
19.JB
Etherington(~), Vulcan Motor and Engineering Co. v.
.-.
Hampson (3), Re G. B. OUivam &: Co. Ltd.'s Agree~ commamoner of
ment ('), James Fin1.ay & ,Co. Ltd. v. Finl.ay Mills
Ineo;•-
111~
Ltd. (5) and W alchand & Co. Ltd. v. HindUBthan Gon- Dellti Fl:ur Milb
struction Go. Ltd. (6). These cases however all turn
Co., Ltd.
on the construction of the agreements involved in
them. They are therefore not of much assistance in
Sar/tar J.
construing the agreement that we have before us, for,
each agreement has to be construed according to the
words contained in it and the circumstances in which
it was made. The judgment in Re G. B. OUivant &:
Co. Ltd.'s Agreement (supra) referred to earlier is that
of the House of Lords. In the judgment delivered in
this case by the Court Appeal reported in (1942) 2 All
E. R. 528 which was affirmed by the majority of the
House of Lords, Lord Greene M. R. warned that in
questions of this kind authorities were of no assistance.
Referring to the earlier English cases mentioned
a.hove, he said (p. 532) :
" They decide that on the true construction of the
agreements there in controversy; the phrase "net
profits" in Etherington's case, the phrase "profits
earned by the company" in Vulcan's case and the
phrase "net profits" in Condra.n's case, all meant the
divisible profits of the company in the first two cases
and of the partnership in the third. They went on
to decide a matter which I should have thought was
not open to question, namely, that in ascertaining
divisible profits excess profits duty fell to be deducted
....................................... But beyond that, those
authorities do not· appear to me to afford any assistance. The first part of the decision~. as to the
meaning of" profits " or net profits in those particular agreements, does not help, because the language is
entirely different from that used in the present case ;
and the second part of the decisions, namely, that in
ascertaining divisible profits exce~s .profits duty is to
(r) [r9r7] r Ch 639.
13) [1921] 3 K. B. 597·
(5) (1942) 47 Bom. L.R. 774.
5
(2) [r9r9] 2 Ch. 254.
(4) [1942] 2 All E. R. 528,
(6) (1943) 45 Bom. L.R. 951.
34
SUPREME COURT REPORTS [1959] Supp .•
I958
be deducted, is, as I say, a. matter for which I should
C
-. -.
1 have thought authority was not required ...... ".
omm>SS10H6' 0
"k
h
.
G B Oll'
c L d'
Income-tax
L1 e t e earlier cases, Re . .
ivant &
o.
t . s
v.
Agreement (1) also turne<:I on the language of the
Delhi Flour Mill> agreement involved in it and is not therefore of any
co .• Ltd.
great assistance.
The Indian cases mentioned earlier were also decidSarkar ].
ed on the agreements with which they were concerned. In the James Finlay- & Co. Ltd. case (2) the agreement provided that the " net profits" were to be
ascertained before setting a.side any sum " for payment of income-tax, super-tax or any other tax on
income". It was held that "any other tax on income " included excess profits tax which could not
therefore be deducted. Beaumont C. J. observed in
this case that it ha.ving been held that income-tax
being something which is pa.ya.hie out of the profits
and not a liability to be deducted in ascertaining the
profits, it was difficult to explain why the same principle should not apply to excess profits duty. He also
said that a distinction ha.d been made between the two
taxes in the English cases, to some of which we have
earlier referred, but he did not think it necessary to
consider whether a.II the grounds of distinction were
sound, because in the case· before him he thought that
excess profits ta.x ha.d been expressly dealt with. In
the Walchand & Co. Ltd. case(') the agreement was
very much like the agreement tha.t we have before
us. It provided that the ma.na.ging a.gents would be
pa.id ten per cent. of the annual net profits earned by
the company and also sta.ted that in arriving at the
net profits certain deductions would be ma.de which
included the working expenses a.nd that certain other
deductions would not be made, but no mention wa.s
ma.de of excess profits ta.x a.s being deductible or
otherwise. Beaumont C. J. who wa.s a member also
of the bench which decided this case, held tha.t the
agreement was a profit sharing agreement a.nd the net
profits ha.d to be ascertained after deducting excess
profits ta.x.
Now we do not refer to these judgments
(1) [1942] 2 All E. R. 528.
(2) (1942) 47 Bom. L.R. 774.
(3) (1943) 45 Bom. L.R. 951.
--
-
...
I
..
. ' "
·(l) S.C.R.
SUPREME 'COURT REPORTS
35
as supporting anything that we say but because the
i958
High Court unwittingly fell ilito the error of thinking Commissioner of
that the Walchand & Go. Ltd. case (1) came before the
Income-tax
James Finlay & Go. Ltd. case (2) and that in the
v.
latter case Beaumont C. J. had doubted the correct- Delhi Flour Mills
ness of what he had said in the former. These observations are wholly wrong because, the James Finlay &
Go. Ltd. case (2) was decided long before the Walchand & Go. Ltd. case (1) had been decided. Neither
do we find that there is any conflict between the two
cases .. In the Walchand & Go. Ltd. case (1), Beaumont C. J. gave reasons for making a distinction
between income-tax and excess profits tax and thought
that the distinction between them made in the
English cases to which we have referred, was not of
substance. We do not think it necessary to say
anything as to whether Beaumont C. J. was right in
this view.
011 ·b.ehalf of the assessee we were pressed with the
same contention that as it has long been held that
income-tax could not be deducted in ascertaining the
net profits of a company, excess profits tax could not
also be deducted, for, they were substantially of the
same nature each being a tax on the profits. Indeed
in Ashton Gas Company v. Attorney-General (3), where
the House of Lords had to construe the provision in
the incorporating statute of the Ga11 Company which
provided that the profits to be distributed among the
shareholders in any year should not exceed a. given
rate, the following observation occurs in the opinion
delivered by Lord Halsbury L. C. at p. 12:
"Income-tax is a charge upon the profits; the
thing which is taxed is the profit that is made, and
yon must ascertain what is the profit that is made
before you deduct the tax-You have no right to
deduct the income-tax before you ascertain what the
profit is, I cannot understand how y0u can make the
income-tax part of the expenditure."
No\V it seems to us that there is nothing in the
Ashton. Gas Go. case (3)
which prevents us from
(1) (1943) 45 Born. L.R. 95r.
(2) (1942) 47 Born. L.R. 774·
(3) (Igo6] A. C. IO, 12.
Co., Ltd.
Sarkar ].
36
SUPREME COURT REPORTS [1959] Supp.
holding that in ascertaining the net profits for the
purpose of the agreement that is before us, exceBS
Commissio•er of
1,.,om•-l•x
profits tax has to be excluded. That was not a case
v.
·of profit sharing. It was not concerned with decidDelM Flour Mills ing what sums are deductible in arriving at the
Co .• Lu.
divisible profits in a profit sharing agreement. That is
what we have to decide. Therefore we think that the
Ashton Gas Co. caae (') does not assist in answering
the question that has arisen in this case.
S11rltar ].
Nor do we think it necessary in the present case,
as we have said earlier, to decide whether there are
distinctions between income-tax and excess profits
tax. We are not concerned with the question whether
income-tax should be deducted before the net profits
under the agreement can be ascertained. We will
aBSume that it cannot be. It is common sense and
also firmly established on the authorities to which
reference has already been made, that_ in ascertaining the divisible profits excess profits tax has to be
deducted. As we have construed the agreement in
this case, net profits mean the divisible profits and
therefore they can be arrived at only after deduction
of excess profits tax.
We wish now to refer to the minority opinions in the
House of Lords in Re G. B. OUivant cf: Oo.Ltd.'a Agreement(') on which the High Court seems largely to have
based its decision. The dissenting opinion of Viscount
Simon L. C. arose from the ·fact that he did not think
that the word profits in the agreement then before the
House meant the divisible profitll. With the reasons
for this view we are not concerned for these turned on
the wording of that agreement. Having held that the
word profits did not mean the divisible profits, he proceeded to consider whether exceBB profits tax could be
deducted in ascertaining the net profits and in doing so
said that as income-tax could not be deducted as held
in the Ashton Gas Oo. case (1 ), neither could exceBS
profits tax, for, both were parts of the profits. He also
said that the Court of Appeal was wrong in thinking
that excess profits tax could be debited to the profit
and loBB account and therefore held that the net profit
(l) [tgo6J A.C. to, u.
(•) [1942] 2 All E. R. 528,
'·
•••
'
/
' -..
1.
(1) S.C.R. SUPREME COURT REPORTS
37
b
I958
which is usually shown in that account has to
e
_
ascertained without deducting excess profits tax. We commissio"" of
are not concerned with this part of the opinion of the
Ineom1-1""
Lord Chancellor either. It was given on the basis that
v.
the profits were not the divisible profits and we are Delhi Flour Mills
concerned only with divisible profits. The other
Co .• Lid.
dissentient speech was by Lord Macmillan. He said
Sarllar J.
substantially what Viscount Simon had said, and
therefore it is unnecessary to deal with his view
separately. It does not however appear to us that the
dissentient Judges in the House of Lords held the.it if
the profits were the di visible profits, excess profits tax
could not he deducted before these could be ascertained. In the view that we have taken of the agreement
before us, we cannot, therefore, derive any assistance
from the dissentient opinions.
One other case, namely, N. M. Rayaloo Iyer & Sons
v. The Commissioner of Income-tax, Madras (1), was
brought to our attention. This case also purports to
follow the reasoning adopted in the minority judgments in Re G. B. Ollivant & Co. Ltd.'s Agreement (g)
and actually relied on the authority of the judgment
under appeal. It is therefore unnecessary to refer to it
further.
It had been contended by the learned advocate for
the appellant that even if the net profits mentioned in
the· agreement were not the divisible profits and even
if income-tax could not he deducted to ascertain these
profits, excess profits tax was a proper deduction to be
made. It was said that excess profits tax was for this
purpose different in nature from income-tax, for,
(a) under s. 12 of the Excess Profits Tax Act., 1940, excess profits tax was deductible as an expense for the
purpose of income-tax assessment; (b) that where the
employer is a company, as in the present case, the
income-tax paid is refundable to the shareholders
which excess profits tax is not; (c) that excess profits
tax is a "debt "of the business and therefore an outgoing, and (d) that it was in the nature of a licence fee
upon the payment of which alone the busines~ could
be carried .on. It is unnecessary to consider these
points as in our view the net profits in this case were
(r) [1954] 26 I. T.R. 265..
(2) [1942] 2 All E. R. 528.
38
SUPREME COURT REPORTS [1959] Supp.
r95B
the divisible profits and whether excess profits tax is
Comm;,,;0 ,,,, of distinguishable from income-tax for any of these
Income-tax
reasons or not, it is properly deductible.
"·
We should also refer to an argument advanced by
Delhi Flour Mills the assessee which was founded on s. 87 -C of the
Co., Ltd.
Indian Companies Act, 1913, introduced by an
Sarkar ].
amendment made in 1936, which provides that the
remuneration of the managing agents of a company
shall be a fixed percentage of its net annual profits,
and that in calculating the net profits no deduction in
respect of any tax or duty on income is to be made. It
is said that the statμte incorporates the universal
commercial practice and therefore in construing the
present agreement excess profits tax cannot be deducted.
We are not aware whether the section incorporates any practice but we think that this contention is
entirely unfounded for the section was applied only to
a managing agency agreement made after the amending Act came into force, while the agreement in the
present case was made before that date.
Lastly, we have to point out that nothing turns on
the fact that at the date -the agreement under consideration was made, Excess Profits Tax Act had not
come on the statute book nor perhaps been thought of,
and therefore could not have been in the cont~mpla
tion of the parties. If the net profits are the divisible
profits, everything necessary to be excluded to arrive
at the divisible profits has to be deducted whether it
wa8 in the contemplation of the parties or not. It is
easy to imagine instances. Suppose after the agreement the Government imposed a licence fee on the
payment of which alone the business could have been
carried on and that licence fee was not in the contemplation of the parties when the agreement had been
made. None the less it has clearly to be deducted in
finding out the divisible profits. In the result we
would answer the question framed in the affirmative.
The appeal is therefore allowed with costs in this
Court and in the High Court.
Appeal allowed.
..
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..