# THE STATE OF MA.DHYA PRADESH v. BINOD MILLS COMPANY LTD

- **Citation:** [1963] 1 S.C.R. 205
- **Court:** Supreme Court of India
- **Decided:** 1963
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-state-of-ma-dhya-pradesh-v-binod-mills-company-ltd-2541
- **Pages:** 15

## Headnote

1 S. C.R.
SUPREME COURT REPORTS
205
THE STATE OF MA.DHYA PRADESH ,
v.
BINOD MILLS COMPANY LTD.
(P. B.
GAJENDRAGADKAR,
A. K. SARKAR, K. N.
WANCHOO.
K. C. DAS GUPTA
and
N. RAJAGOPALA AYYANGAR, JJ.)
War Profits Tax-Assessment o.f company's profitsDeduction of managing agent's remuneration-" Included in
the profits of the managing agency bu,qiness"-Gwalior War
Profits
Tax Ordinance, Samvat 2001, ss.2(.5), 2(10), 4(1),
5(1), Sch.I, r.4( 1) proviso (b).
Sub-rule (1) of r.4 of Sch. I to the Gwalior War Profits Tax Ordinance, Samvat 2001, provided: "In computing
the profits of a bu~iness carried on by a company, no deduction shall be made in respect of the remuneration paid to
directors
if during
any part
of the accounting period
concerned,
they had cuntrolling interest in the company;
provided that this sub-rule shall not apply (a) ........ (h)
to the remuneration of any managing agent where such
remuneration is included in the profits of the managing
agents' business for the purposes of the War Profits Tax"
The respondent company was managed by a managing
agency firm which had, by reason of its shareholding exceeding 50% of the issued share-capital, a controlling interest in
the company. The company was assessed to War Profits Tax
under the provi~ions of the Gwalior War P1 ofits Tax Ordinance, Samvat 2001, for three chargeable accounting periods
between 1944 and 1946. During each of these accounting
periods the company had paid remuneration to its manag-ing
agent and claimed to deduct the remuneration so paid in
the computation of its business profits during these three
periods. The assessing officer disallowed the claim on the
ground that as the remuneration received by the managing
agency firm had not been factually assessed in the hands of
the managing agent, proviso (h) to r.4( I) of Sch.
I was not
applicable. It was found that the managing agents had
in their statement of their own Profit and Loss account fo~
the relevant years disclosed the managing agency commission received by them but they claimed before the assessing
authority that the sum was not liable to be taxed and this
claimed was accepted.
Held, that the remuneration paid to the managing
agents, even
though they had a controlling interest in the
1962
April 3.
196r,;
Thi Sta/1 oj
Madhya P"dtsh
v.
Binod Mills
Compan1 Ltd.
206
SUPREME COURT REPORTS [1963)
company, was a permissible deduction for the purp= of
compudng the profits of the company under the War Profits Tax Ordinance, Samvat
2001, because by virtue of
proviso (b) to r.4(1) of Sch. I to the Ordinance, the managing agent was liable to include this remuneration in his
assessable profits.
The words "is included" in proviso (h) to r.4(1) refer
to the inclusion
under the provisions of the Ordinance.
Neither the default of the managing agent as an assessee
nor of the assessing authority to include the sum in the profits of the managing agent could prejudice the rights of the
company in the matter of the computation of its income.
C1v1L APPELT.ATE JURISDICTION: Civil Appeals
Nos. 228 to 230 of 1960.
Appeals from the judgment and decree dated
February 4, 1957, of the Madhya Pradesh High
Court (Indore Bench) at Indore in Civil Reference
No.15 of 1952.
B. Sen, B. K. B. Naidu and T. N. Shroff, for
the appellants.
A. V. Viswanatha Sastri, K. A. Ohitale, J. B.
Dadachanji. S. N. Andky. Rameshwar Nath and P. L.
Volwa for the respondents.
1962. April 3. The Judgment of the Court was
delivered by .
AYYANGAR, J.-Rule 4 (l )(h) of Sch. I heade•l
"Rules for the computation of profits for the
purposes of War Profits Tax'' of the Gwalior War
Profit~ Tax Ordinance, Samvat 2001 (hereinafter
referred to as the Ordinance), provided:
' 14. In computing the profits of a business
carried on by a company, no deduction eball
be made in respect of-
( l) remuneration. paid to directors if
during any part of the accounting period
concerned, they bad controlling interest in
the company;
1 S. C.R.
SUPREME COURT REPORTS
20?
Provided that this s

## Text

1 S. C.R.
SUPREME COURT REPORTS
205
THE STATE OF MA.DHYA PRADESH ,
v.
BINOD MILLS COMPANY LTD.
(P. B.
GAJENDRAGADKAR,
A. K. SARKAR, K. N.
WANCHOO.
K. C. DAS GUPTA
and
N. RAJAGOPALA AYYANGAR, JJ.)
War Profits Tax-Assessment o.f company's profitsDeduction of managing agent's remuneration-" Included in
the profits of the managing agency bu,qiness"-Gwalior War
Profits
Tax Ordinance, Samvat 2001, ss.2(.5), 2(10), 4(1),
5(1), Sch.I, r.4( 1) proviso (b).
Sub-rule (1) of r.4 of Sch. I to the Gwalior War Profits Tax Ordinance, Samvat 2001, provided: "In computing
the profits of a bu~iness carried on by a company, no deduction shall be made in respect of the remuneration paid to
directors
if during
any part
of the accounting period
concerned,
they had cuntrolling interest in the company;
provided that this sub-rule shall not apply (a) ........ (h)
to the remuneration of any managing agent where such
remuneration is included in the profits of the managing
agents' business for the purposes of the War Profits Tax"
The respondent company was managed by a managing
agency firm which had, by reason of its shareholding exceeding 50% of the issued share-capital, a controlling interest in
the company. The company was assessed to War Profits Tax
under the provi~ions of the Gwalior War P1 ofits Tax Ordinance, Samvat 2001, for three chargeable accounting periods
between 1944 and 1946. During each of these accounting
periods the company had paid remuneration to its manag-ing
agent and claimed to deduct the remuneration so paid in
the computation of its business profits during these three
periods. The assessing officer disallowed the claim on the
ground that as the remuneration received by the managing
agency firm had not been factually assessed in the hands of
the managing agent, proviso (h) to r.4( I) of Sch.
I was not
applicable. It was found that the managing agents had
in their statement of their own Profit and Loss account fo~
the relevant years disclosed the managing agency commission received by them but they claimed before the assessing
authority that the sum was not liable to be taxed and this
claimed was accepted.
Held, that the remuneration paid to the managing
agents, even
though they had a controlling interest in the
1962
April 3.
196r,;
Thi Sta/1 oj
Madhya P"dtsh
v.
Binod Mills
Compan1 Ltd.
206
SUPREME COURT REPORTS [1963)
company, was a permissible deduction for the purp= of
compudng the profits of the company under the War Profits Tax Ordinance, Samvat
2001, because by virtue of
proviso (b) to r.4(1) of Sch. I to the Ordinance, the managing agent was liable to include this remuneration in his
assessable profits.
The words "is included" in proviso (h) to r.4(1) refer
to the inclusion
under the provisions of the Ordinance.
Neither the default of the managing agent as an assessee
nor of the assessing authority to include the sum in the profits of the managing agent could prejudice the rights of the
company in the matter of the computation of its income.
C1v1L APPELT.ATE JURISDICTION: Civil Appeals
Nos. 228 to 230 of 1960.
Appeals from the judgment and decree dated
February 4, 1957, of the Madhya Pradesh High
Court (Indore Bench) at Indore in Civil Reference
No.15 of 1952.
B. Sen, B. K. B. Naidu and T. N. Shroff, for
the appellants.
A. V. Viswanatha Sastri, K. A. Ohitale, J. B.
Dadachanji. S. N. Andky. Rameshwar Nath and P. L.
Volwa for the respondents.
1962. April 3. The Judgment of the Court was
delivered by .
AYYANGAR, J.-Rule 4 (l )(h) of Sch. I heade•l
"Rules for the computation of profits for the
purposes of War Profits Tax'' of the Gwalior War
Profit~ Tax Ordinance, Samvat 2001 (hereinafter
referred to as the Ordinance), provided:
' 14. In computing the profits of a business
carried on by a company, no deduction eball
be made in respect of-
( l) remuneration. paid to directors if
during any part of the accounting period
concerned, they bad controlling interest in
the company;
1 S. C.R.
SUPREME COURT REPORTS
20?
Provided that this sub-rq.le Fhall not
apply-
(a) ...•........•••• • •.. •. •. • •• . . . . . . .....••.•. •
(b) to the remuneration of any
managing agent where such remu~eration
is included in the profits of the managinp: agents' business for the purposes of
the War Profits Tax".
The respondent-Binod Mills Co. Ltd. which
had its business at Ujjain i.n the State of Gwalior
was a company whose profits were liable to War
Profits Tax under the Ordinance. The company
was managed by a managing agency firm-M/s.
Binodira.m Balchand which had, by re:uon of its
shareholding exceeding 50% of the issued sha.recapital, a controlling interest in the company. The
respondent-company was assessed to War Profits
Tax for thret:} cha.rgeable accounting periods-July
l, l9H, to Dacember 31, 19H, .f anuary l, 1945, to
December 3l, 1945, an:l January 1, 194f), to .June
30, 19-16.
During each of these accounting-periods
the respondent-company had paid rem11neration to
its managing-agents and elaimed to rleduct the
rem11neration so paid ia the computation of its business profits during these three periods. The assessingofficer disallowed the claim on ·the ground that the
remuneration received by the managing-agency firm
had not been factually assessed in the hands of the
mana·ging-agent and that consequently the matter
was covered by tho opening words of r. 4 and not
saved by proviso (b) to the rule. An appeal against
this order of assessment was dismissed by the appellate authority and thereafter by the Commissioner
of War Profits Tax in revision. But at the request
of the respondent the Commissioner submitted a
reference under s. 46 (I) of the Ordinance to ·the
1061
The flate of .
.lf1.d•.yo PradeJh
v.
Binod Mills
Cam(111ny Ltd
AyyLngar J.
lll'OZ
The Stats of
Madhya Pt•tltsh
••
Binod MlllJ
Oqmpiny Ltd.
..d:1yano•r .1.
208
SUPREME COURT REPORTS [1963)
High Court of Madhya Pradesh of the following
question for ite decision:
"Whether in computing the profits of a
business carried on by a company deduction
shall be made in respect of any remuneration
to any managing-agent where such remuneration is included in the profits of the managing
agent's business for the purposes of the War
Profits Tax ?"
There was a consolidated reference in respeet of
the three chargeable accounting periods. The . learned Judges of the High Court answered . the question in favour of the respondent and held that the
remuneration, even though paid to a managing·
aj!'.ent who had a controlling interest in the company, was a permiRBible deduction for the purpose
of computing the profits of the company for the
purposes of the War Profits Tax. The High Court was
thereafter moved by the appellant for the grant of
certificates of fitness for appeals to this Court under
s. 47 of the Ordinance and the certificates having
been !?ranted these three appeals which relate to
the t.hree chargeable accounting periods have been
prPferred to this Court.
Before proceeding further it might be con·
venient to set out certain facts to appreciate the
form of the question which might provoke some
enquiry. There was not much dispute, and even if
thAre was, it was abandoned fairly early, that M/s.
Binodiram Balchand were "directors" of the company within the meaning of the Ordinance and had
a controlling interest in the company. In this
connection we might advert to the definition of
'director' ins. 2(10) of the Ordinance:
"2. (IO) 'director' includes any perAon
occupying the position of a director by whatever name called and also includes any
person who-
(i) is a manager of the company or
.
,
..
1 S. C. R.
SUPREME COURT REPORTS
209
concerned in the management of the
buainess; and
(ii) is remunerated out of the funds
of the business; and
(iii) is the beneficial owner of not
less than 20 per cent of the ordinary
share capital of the company"
The controlling interest being established, it wM
common ground that the remuneration paid to the
manti ging-agent could not be deducted in compnting
the profits of the company unless it fell within
proviso {b) of r. 4(1 ).
Before the departmental authorities it was
suggested on behalf of the company that the
expression 'included' in proviso (b) meant 11disclosed in the return of the director" and on this basis
it was contended that as M/s Binodiram Balchand
had, in the statement of their own Profit & Loss
account for Sa.mvat 2000, 2001 and 2002, disclosed
the managing agency commission received by them
the remuneration had been "included" in their
profits for the purposes of the War Profits Tax,
though for reasons which are unnecessary to discuss
they claimed that the sum was not liable to be
brought to tax: and this claim was accepted. This
argument which was rejected by the departmental
authorities is however responsible for the form of
the question referred to the High Court. This contention however was not apparently repeated before
the High Court and does not figure in the judgment
as part of the reasoning of the learned Judges in
the judgment now under appeal a.nd has not been
relied upon before us. We shall therefore say no
more about it, but proceed to deal with the substantial question raised.
The facts being as above stated the entire
question in the n.ppealli1 turns on the meaning of the
1962
State of
Madhya Prarl1sh
v.
Bi'lod Mills
Company Ltd.
dyyangarJ,
1962
Thi Sta,. of
JI atlliJa Pro.thsh
v.
.Binotl MiUs
Company Ltd.
. .l.Jyanzar J.
210
SUPREME COURT REPORTS [1963]
expression "is included in the profits of the managing
Agency business" in r.4(1)proviso(b)ofSch. I of the
Ordinance. Before however entering on a discussion of the words underlined and of proviso (b) in
particular, it would be necessary to set out broadly
the scheme underlying the levy of the tax under the
Ordinance. Section 4(1) of the Ordinance is the
charging section and it enacts :
"4. ( 1) Subject to the provisions of this
Ordinance, there shall, in respect of any
business to which this Ordinance applies, be
charged, levied and paid on the amount by
which the profits during any chargeable perfod
exceed the standard profits, an excess profit
tax (in this Ordinance referred to as the 'War
Profits Tax') which shall be equal to 60 per
cent. of the' aforesaid amount."
The "business" to which the Ordinance applies has
to be gathered from the terms of s. 2 (5) which
defines the term 'business'. That clause reads :
" 'business' includes any trade, commercl.
or ma,nufacture or any adventure in the nature
of trade, commerce or manufacture or any
profession or vocation, but does not include a
profession carried on by an individual or by
individuals in partnership, if the profits of the
profession depend wholly or mainly on bis or
their personal qualifications, unless such profession consists wholly or mainly in the
making of contracts on behalf of other
persons or the giving to other perscns of advice
of a commercial nat,uro in connection with the
making of contracts :
Provid'\d that " J.ere the functions ot a
company or of a society incorporated by or
under any enactment consist wholly or mainly
in the holding of investments or other property or both, the holding thereof shall be
•
I S.C.R.
SUPREME COURT REPORTS
211
deemed for the purpose of this definition to be
& business carried on by such company or
society;
Provided further that all businesses to
which this Ordinance applies carried on by the
same person shall be treatESd as one business
for the purposes of this Ordinance".
The second proviso uses the term 'person' which is
defined by s. 2 (13) to include "any company or
body of .mdividuals or any other aaBociation of
persons whether incorporated or not and also includes
a Hin<lu undivided family". The 'profits' which is
ref erred to in the charging ·section is, by reason of
the definition of the term in s. 2 ( 16), to mean
"profits as determined in accordance with the provisions of this Ordinance and its First Schedule".
The provisions of the Ordinance relating to the
·computation of pro.fits do not hear upon the point
now in controversy, but ·what is of relevance are
certain of the Rules for the computation of the
profits in Sch. I.
From the terms of the charging section read
with the other provisions of the Ordinance to which
we have adverted it would be seen that it is the
profits accruing from
busines~ th.at is brought to
charge and that each person whether he be an individual or comprehended within the· inclusive
definition of the term ''person" is an independent
unit of assessment whose profits are computed by
aggregation of all of its sources of income from
every business which that unit may carry on: How
the profits of each unit is to be. computed for the
purposes of tax has ~o be gathered, apart from the
prorisions of the Ordinance which, as stated earlier,
are not relevant to the present case, from Sch. I
headed '1 Rules for the computation of profits for
the purposes of Ws.r Profits· Tax". Rule 1 of these
Rules which generally follows the pattern of the
Indian Income-Tax Aot in setting out the list of
196B
Tlte Stolt •f
M 11dh,10 Pr.Us/I
...
Binod Mil/1
Comp119 Ltd.
.brangorJ.
l9~t
T/it Slate of
JI •dhya Pr.,,,s•
v.
Binod Mills
Company Ltd.
212
SUPREME COURT REPORTS (1963]
permissible deductions, provides as one of such
deductions in r. 1 ( 1) (xi) "any expenditure (not
being in the nature of capital expenditure or personal expense of the person to whose business this
Ordinance applies) laid out or expended wholly and
exclusively for the purposes of such business~'. If
this provision were applied for computing the
profits of a company as an unit of assessment, there
could be no dispute that genera.Uy speaking the
remuneration paid to a managing-agent would be
an admissible deduction.
It hardly needs to be
mentioned that the remuneration received by a
managing-agent would be profits from business on
which he would be liable to tax under the Ordinance, being a profit from business as defined in s. 2(5)
subject only to the condition that the amount of
the profit brought it within the taxable limit. To
this prima facie rule as regards the manner in whic~
the profits derived by a company are to be computed r. 4 enacts an exception, in the case of those
companies in which the Directors have a controlling
interest. But the application of this special rule as
regards companies under the management of Directors with controlling interest is, however, subject,
among others, to proviso (b) not applying to the
case. In other words, if proviso (b) saved the case,
the special. rule as' to controlled companies would
cease to be applicable and the remuneration paid
would be deductible in the computation of the
companies' profits.
This turns on whether the
remuneration paid to the managing·agent "is included in the profit& of the managing agent's business".
The words used being "is included" there is no
doubt that an actual incluiion is posited. But this,
however, does not sol rn the problem, for the
"inclusion in the profi'.;s'' might refer to three
distinct "inclusions" :
(1) the inclusion by the
managing agents as an assessee for the· purposes of
his individual assessment, i.e., in his return, (2) the
inclusion by the a1111e.11ing authority in the order of
1 s.c.R.
SUPHEME COURT R.EPOR1
1S
213
assessment ·ma.de against the managing agent, (3)
the inclusion under the terms of the Ordinance of
tho remuneration as an amount chargeable to the
tax as pa.rt of the profits of the managing a.gent.
In passing we might observe that r. 7 (2) lb) of,Sch.
I to the Excess Profits Tn.x Act, 1940, on which the
Ordinance is modelled is in the same terms as the
proviso (b) to r .4( 1 ) of the Ordinance but the propei:
interpretation of the rule in the Excess Profits Tax
Act has never come up before the Courts for
decision.
-
The contention urged on behalf of the appellant before the learned Judges of the High Court
was that the inclusion referred to an inclusion by
the assessment officer of the remuneration in the
asEessmt:nt of the managing-agent and that unless
the remunera.tion sought to be excluded in the
computation of the pro.fits of the company was
actually assessed in the hands of the managingagent, the company cquld not claim the benefit of
proviso (b). The learned Judges repelled this submission by holding that the proviso could not be
construed as to vest in the assessing authority an
absolute discretion to assess either the company
or the managing-agent.
They read the words '.'is
included" as equivalent to "is liable to be included" and that ·as it was not contested before them
that if the assessment-officer had been so minded he
could have included this sum in the profits of the
managing-agent's business, the terms of proviso (b)
were sati1died.
Mr. Sen-learned Counsel for the appellant
did not pursue the same line of argument as· in the
Court below. We should add that we consider that
Mr. Sen was right in not attempting to support the
argument which was rejected by the learned Judges
of the High Court. Though tax laws occasionally
ma.ke provision for the assessing-authority to proceed against a particular unit of assessment on one or
1162
Thi Stall of
Madhya Praiesh
v.
Binod Mills
C1m;any Ut.
~YJ•nt" J.
TJi, State of
Madhya P~arle1h
v.
Bi1,od Mills
Company Lid
Ayyangar J.
214
SUPREME COURT REPORTS (1968]
more alternative bases, it would require very
explicit and unambiguous language to permit an
asRessing-authority to choose one of two units for
assessment, particularly ir the context of there
being no provision for the inter Be adjustment of the
rights and liabilities h the event of one unit benefiting at the expense o; the other by reason of the
exercise of the option and when admittedly the unit
does not receive the income as agent for the other
unit.
Besides, if the company h!ld been first assessed to tax-because let us say its retw·n had been
filed earlier, or the enquiry as regards the correctness of the return was completed earlier, there is no
provision in the Ordinance or in the Rules for
excluding the sum in the personal assessment of the
managing agent, so that it could not be urged that
the assessing-authority had any option in the matter
-to tax either the company or the managing-agent.
If the managing-agent is ex con.ce.ssis liable to have
his remuneration included in his assesament for the
tax, unless the income or the business is not within
the Ordinance, it would be most anomalous to ·
suggest that in order that the benefit of proviso (b)
should be available to a company, the assessment
of the managing.agent should have been completed
first-a matter not always within the control of a
company. We do not think it necessary to dilate
further on this oonstruction since Mr. Sen did not
commend it for our acceptance.
His submission, on the other hand, was
that this was
a special
provision
designed
to
meet
the cases of companies
in which
the directors had a controlling interest. In such
cases it was t.hese directors who had to to submit and submitted the return on behalf of the company and who, of course, had to submit their own
returns in their individual capacity as persons in
receipt of taxable profits. In these circumstances
I S.C.R.
SUPREME COU!t.T REPO:ltTS
215
he urged that the proviso should be re~d as conferring an option upon the directors either to include
their
remun~ra.tion in their own returns, get
them taxed and pay the tax. themselves or
to include it in the company's return and
have the amount taxed in the company's assessment. His further submission was that having
regard to the manner in which the proviso wa.a
worded, where the managing-agent failed to include
his remuneration in his own return and have it
assessed as part of his profits, the effect was the same
as if he had opted to have the sum taxed in the
company's assessment. The option, it was urged,
was that of the managing-agent who controlled the
affairs of a company and therefore in effect represented it and who in one capacity acted for himself
and in 8nother acted for the company. ·. In effect
the submission of lea.rned Counsel was that the prd:-
vision was designed to obviate double taxation of
the same income and for this purpose vested the
controlling-Director with a. discretion to render the
company immune from tax where the sum was included in his own return and was assessed in his
hands.
The theory propounded regarding the proTision being one for avoidance of double taxation in
the manner a hove indicated by vesting a discretion
in the controlling-Director breaks even on a cursory
examination. Let us assume that the managingagent opts to have the company taxed and submits
a return on behalf of the company in which no deduction is claimed in respect of this item and an
asseBSment is made accepting that return. On the
terms of the Ordinance this would not afford any
relief to the managing agent i.n bis persona.I assessment, f'or admittedly there is, as pointed out earlier,
no provision in the Ordinance or in the Schedule
exempting the managing agent from the inclusion
of this remuneration in bis taxable profits, ·and this
19C2
1h' State of
Madhy;i Pr•iesh
v.
Binod l1 ills
Company Ltd.
--
A.yyan:ar J.
Th~ Stat• of
.. V odh,a Prad1sh
v.
Bincc! 11ills
Company Ltd.
2l6
SUPREME COUR'r REPORTS [1963]
must obviously be so, because for the purposes of
the charging section he would be an independent
unit of assessment. He would have to include in
the computation of his personal income for the purpose of the War Profits Tax the remuneration received by him. '!his might be expressed in a slightly
different form by stating that proviso (b) to r. 4(1)
does not operate in the reverse direction, that is by
exempting the managing-agent from tax on the remuneration derived by him, merely because the
deduction of that item has been denied to the company. Obviously therefore r. 4(l)(b) is not a rule
designed for the avoidance of double taxation in
the sense in which learned Counsel for the appellant
suggests that it is.
There are also other reasons why we find it
unable to accept the submission of Mr. Sen that by
the words is "included" is meant the inclusicin in the
return by the managing-agent with the result that
in cases where he does not so include, the company
would not be entitled to the deduction. The option
suggested by Mr. Sen to the managing-agent was
that he might either elect to pay the tax himself or
get the company to pay it. Obviously it would always be in the interest of the managing-a.gent to
have the tax paid by the company if by that means,
as is suggested by Mr. Sen, he could obtain absolution from' the obligation of paying the tax himself,
for if the tax is paid by the company the loss involved in the payment.of the tax would fall on him
only to the extent of his shareholding, being for the
rest shared by the other share-holders of the company. It is really difficult to understand the principle by which one could construe a rule of this
nature as enabling a managing-agent who holds, eay
51 % of the share-capital of the company to visit
49% of the burden of tax which normally one
would expect to be paid by him, to be paid by the
other shareholdel'll of the company merely because
•
1 S.C~R. SUPREME COURT REPORTS
217
he happens to be the managing-agent holding a
controlling interest by the extent of his share-holding. We consider that the construction suggested
by Mr. Sen which leads to such an unreasonable
result and inflicts an unjust injury on the 01 her
shareholders is not any proper interpretation of the
provision. Besides, there are other grounds why the
meaning attributed to the words "is included'' as
referring to "included by the managing-agent"
cannot be accepted. Suppose the managing-agent
includes it in his return but the assessing authority
does not include it in the computa.tion of his return
but prefers to disallow the deduction in the case of
a company. Would that be "inclusion in his profits?" Again, suppose the managing-agent does not
include it in his return but the assessing authority
does, and tax is paid by the managing-agent, would
there be no exclusion? These ilJustrations serve to
bring out the anomalies that would arise if it were
held that the words "is included'' meant "is included in his return by the managing-agent''.
This leaves for consideration the meaning that
''is included" refers to the inclusion under the provisions of the Ordinance. If this meaning were
accepted it would not matter whether the managing agent has or has not included the sum in his
return or whether the assessing authorities have or
have not done their duty by having the remuneration included in the taxable profits of the managingagent. If the managing-agent has not done so
being under an obligation imposed by the law to
include it, the return would be liable to be revised
by the assessing officer and if the failure to include
the sum was due to any suppresbion, the managing·
ageDt would, besides having the sum included in his
assessable profits, be liable to appropriate penalties
for filing a wilfully incorrect return. Similarly, the
assessing officer being under a statutory duty to
include the sum in the assessment of the managinga.gent would, if he failed to do so, render the order
196£
The State of
M 11dhya Pradesh
v.
f1 inod 11 ills
Company Ud.
A Y.wingar ./.
1962
Th~ Stot1 of
M adhytJ Prad1sh
v.
BIJJod Mills
Comp ... ny ltd.
.A.~ ngarJ,
218
SUPHEME COURT REPORTS (1963)
liable to be revised. The remedy for the failure
either of the managing-agent or of the assessing
authorities to conform to the requirements of the
law certainly cannot be the disallowance of the sum
in the computation of the profits of the company.
The entirety of this reasoning, it would be noted,
proceedH on the basis th!!.t the managing-agent was
liable to include his remuneration in his assessable
profits. In such a contingency it stands to reason
th!!.t neither the default of the managing-agent as an
assessee or of the assessing authority to include the
sum in the profits of the managing-agent could prejudice the rights of the company in the matter of
the computation of its income.
Where . the remuneration of the managingagent was not uμder the Ordinance liable to be
brought to tax the position would be different and
that is just what is indicated as that which would
render the proviso inapplicable. For instance,
s. 5( l ) of the Ordinance enacts:
'' ......................................................
Provided further that this Ordinance shall not
apply to-
( a) ..........•.•...........•...••....................
(b) profit from a business carried on
wholly on behalf of a religious or charitable
institution.and the profits of which are applied
solely to the purpose of the institution and
enure for the benefit of the public, and-
(i) the business is carried on in the course
of the carrying out of a primary purpose of
the institution, and
(ii) the work in connection with the business is carried on by the beneficiaries of the
institution".
If for instance, the business of the managing-agency
was being carried on for or on behalf of a trust of
1 s.c.R.
SUPREME COURT REPOR'rs
219
the character indicated by the provision just now
read, the remuneration of the managing-agent
would not be liable to ta.x for the reason that it is
outside the ~mbit of the Ordinance and to snch a
case the terms of proviso (b) tor. 4(1) would not
be attracted, with the result that the managingagent not being liable to tax under the Ordinance
on the remuneration derived by him, the company,
if it were a controlled company, would not be entitled to the deduction of that remuneration in the
computation of its profits. Except in case where
the remuneration received by a managing agent ' is
not liable to tax under the Ordinance, it is the
managing-agent that would be liable to pay tax on
his remuneration and notwithstanding that the company is a controlled company the nimuneration
paid by it to the managing agent would be a permissible deduction by reason of the exception to the
opening .words of r. 4(1) contained in proviso (b ).
It is unnecessary for our present purpose to consider whether besides s. 5(l)(b), already referred to,
there are other contingencies in which remuneration
received by a. Dfrector could be held not to be
'included' in the latter's profits under the Ordinance, since in the case before us it is admitted that
the remuneration received by the managing-agent
was liable to. be included in the computation of his
profits for the purposes of the War Profits 'fax and
therefore neither the fact that the managing-agent
did not "include" the sum in his return, nor the
default of the assessing authority to correct this
error by "including" the sum in his assessment, is
any reason for depriving the respondent company
of the benefit of proviso (b) tor. 4(1).
·
We therefore consider that the learned ,Judges
of the High Court answered the question referred
to them correctly. The appeals fa.ii and are dismis·
sed with costs.
AppeaLs dismissed.
The State ~f
.1 ad QI'• Prade:JI•
v.
B ir1od A-! rlls
Cumpany Ltd.