Supreme Court Upholds Tax Department in Excess Profits Tax Reopening and Apportionment of Managing Agency Commission. Apportionment of Commission Earned Under Managing Agency Agreement Was Proper Under Rule 9, Schedule I, Excess Profits Tax Act, 1940, and Assessment Reopening Under Section 15 Was Valid.

Case Note & Summary

These appeals were directed against the judgment and order dated March 16, 1955, of the Madras High Court in Case Referred No. 43 of 1950, which answered reference questions against the assessee. The appellant, R.G.S. Naidu and Co., was a managing agent of a limited company. Under an agreement dated July 11, 1945, the appellant was appointed managing agent for 20 years of the Coimbatore Spinning and Weaving Co. Ltd. Prior to October 1, 1944, the appellant had been managing agent of the Coimbatore Mills Agency Ltd., which in turn managed the company. The appellant's accounting year ended on March 31, the company's on June 30, and the agency company's on September 30. The managing agency agreement provided for remuneration consisting of a monthly office allowance, commission at one percent on purchases of cotton and stores, commission at two and a half percent on capital expenditure, and commission at ten percent on net profits payable yearly after the accounts of the company were closed. For assessment year 1945-46, the appellant submitted a return including remuneration from the agency company, commission from the agency company up to September 30, 1944, remuneration from the company from October 1, 1944 to March 31, 1945, and commission on purchases during that period. The Income-tax Officer accepted the return and computed excess profits tax for the chargeable accounting period ending March 31, 1945 on that basis. For assessment year 1946-47, the appellant's return included remuneration for one year from April 1, 1945, commission on net profits paid in December 1945 covering the period October 1, 1944 to June 30, 1945, commission on purchases from April 1 to June 30, 1945, and commission on capital expenditure from October 1, 1944 to June 30, 1945. The Tax Officer directed that commission on purchases and capital expenditure be taken into account for the year April 1, 1945 to March 31, 1946. He reopened the assessment for 1945-46 under Section 34 of the Income-tax Act, 1922 and Section 15 of the Excess Profits Tax Act, 1940, and apportioned the commission on profits under Rule 9 of Schedule I of the Excess Profits Tax Act. Revised assessments resulted in substantially higher excess profits tax liability. The appellate authorities and the Income-tax Appellate Tribunal confirmed the assessments. On reference, the Madras High Court answered four questions against the appellant. The Supreme Court granted certificate under Section 66A(2) and heard two questions: whether reopening was permissible and whether apportionment under Rule 9 was proper. The appellants contended that there was no underassessment because their books were on cash basis and commission was received after the company's accounts were closed; that Rule 9 applied only to engineering or works contracts involving day-to-day profit-making, not to managing agency contracts where remuneration is fixed periodically. The Revenue argued that the mismatch between chargeable accounting period and company's accounting year caused underassessment, and Rule 9 is general. The Court held that reopening under Section 15 was valid because the assessment proceeded on the mistaken assumption that the chargeable accounting period and the company's accounting period tallied, resulting in underassessment. The Court further held that Rule 9 is expressed in general terms and applies to all contracts intended to be operative for fixed periods, including managing agency contracts. The performance of the managing agency contract extended beyond the accounting period and cut across it, so profits had to be apportioned. The remuneration not being computed at a daily rate did not preclude apportionment. The Court distinguished E.D. Sassoon & Co. Ltd. v. Commissioner of Income-tax, Bombay City. The appeals were dismissed and the High Court's order was affirmed.

Headnote

Issue of Consideration

Final Decision

Appeals dismissed; High Court order affirmed. Reopening under Section 15 of the Excess Profits Tax Act was valid; apportionment under Rule 9, Schedule I was proper. Revised tax assessments were upheld.

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