BRITISH INDIA CORPORATION versus COMMISSIONER OF INCOME-TAX, U.P. LUCKNOW

Citation: [1973] 2 S.C.R. 524 · Decided: 03-10-1972 · Supreme Court of India · Bench: K.S. HEGDE · Disposal: Dismissed

Judgment (excerpt)

524 
BRITISH INDIA CORPORATION 
v. 
COMMISSIONER OF INCOME-TAX, U.P .. LUCKNOW 
October 3, 1972 
[K. S. HEGDE, P. JAGANMOHAN REDDY AND I. D. DUA, JJ.J 
Excess Profits Tax Ac: .. 1940, Schedule I, r.12 
(!)-Determination 
by office,. H'llether expenditure is ireasonab/e and 11ec£•ssary-Tests for. 
Rule 12 ( 1) of Schedule I to the Excess Profits Tax Act. D40. is 
designed to prevent the dissipation of excess pofits by intlating °'penditure 
which bas_ no relation to the requirements of the business. The test is 
whether the expenditure is unreasonable and unnecessary haring regard 
to the requirements of the business, and, in the case of directors' fees or 
other payments for services, to the actual services rendered. A!l ::-elevant 
facts, especiaUy commercial expediency or commercial practice, must be 
taken into consideration b)· the ExCess Profits Tax Officer in con3idering 
whether the expenditure is reasonable and necessary; that is, he c"1lld not 
ap.PlY the nile to increases that can be justified on ordinary commercial 
principles, because, an increase iit profits n1ay in certain cases b~ Clue to 
increase in the activity of the management or increase in the estab!ishmcnt 
justifying a corresponding increase in the expenditure. 
But when huge 
profits are earned,. not due to any activity of managers but due to national 
emergencies such as war situati<>.n•, the govem,ment is entitled to a certain 
share of the excess profits computed under the Act. Any commission paid 
on the excess profits for which the manage!\' pr employees made no sort 
of contribution would ex facie be unreasonable and unnecessary and the 
Excess Profits Tax Officer would be justified in disallowing the proportion, 
which, according to him, was unreasonable and unnecessary having regard 
to the requirements of the business. [530A-D; 53 !G-H; 532A] 
In the present case, the assessee is a public limited com.Panv having 
several branches and subsidiary compaimes. It hds a Board of Directors 
which looks after its business. The managers who look after the branche' 
of the c'ompany are also members of the Board. The assossee was rem· 
underating its directors 'by way of commission based on a certain fixed 
percentage of its net audited profits. 
The phrase 'net audited profits' 
was clarified to mean the amount after depreciation ha.d been allowed 
for, but prior to any allocation or appropriation 
of profits 
including 
provision· for taxation. 
The Excess Profits Tax Act came into force on 
April 5, 1940, and on 27th Inly. 1940, the phrase 'including provision 
for tax' in the clarification, was further clarified that it was intended to 
cover all forms of taxation including excess profits tax and other like 
impositions. 
Therefore, no deduction of ex_t;ess 
profits tax was to be 
mad~ prior to the calculation of managerial commissions. For the char· 
gea.ble accounting years 1945 and 1946 the Excess Profits Tax Officer 
found that the assessee had made large profits and held that if the comm-
is~ion was to be paid on the \net audited profits the whole exce3S p"e>lits 
would be taken into account for the payment of commission; that a por-
tion of the commission attributable to extess profits, in the peculiar cir-
cumstances of war conditio:ris. was _not reasonable an'1 necessaJ1Y wjthin· 
the meaning of r. 12 (I), and that any pdyment, in excess of the agreed 
proportion of the net profits after deduction of excess profits tax, was nM 
justified. He. therefore, dis>allowed a percentage of the said excess profits 
·which would be payable to the State on actje>unt of exress proftts 
ta.x 
liability. [526A-H; 527A-C] 
A 
B 
c 
D 
E 
F 
G 
H 
A 
B 
llRfflSH INDIA CORP. V. C.I.T. (Jaganmohan Reddy, J.) 
525 
On the question \Vhcthcr the 
disaJIOYia~ncc for each of the years was 
rightly made, the Tribunal and the High Court held against the assessec. 
Dismissing thL' <ippcal to this Court, 
HELD : The Excess Profits Tax Officer and the Tribunal have given 
valid reasons for not a\lov•ing the entire commision claimed on the basis 
of the audited accounts without deducting the excess profits tax .. [5310]'• 
A !1111edahad 
Ma11ufact11ring &. Calico Printing Co. 
v. 
Commt'. oJ, 
E.P.T., 38 l.T.R. 675 followed. 
British India Corporalio11 Ltd. v. Commr. of E.P. T •• 33 l.T.R. 826 
and Shya111/a/ Pra1111arain v, · C.l.T .. 27 l.T.R. 404 referred to 
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 1987 to 
c 
1988 of )969. 
D 
E 
F 
G 
II 
Appeals b

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