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R.A. Coodzer and Company Vs. the Commissioner of Excess Profits Tax - Court Judgment

SooperKanoon Citation
SubjectDirect Taxation
CourtChennai
Decided On
Reported in(1948)2MLJ442
AppellantR.A. Coodzer and Company
RespondentThe Commissioner of Excess Profits Tax
Cases ReferredThe Cape Brandy Syndicates v. The Commissioner of Inland Revenue
Excerpt:
- - even before the constitution of the partnership in question, they were doing commission agency business as well as canvassing business in the said names and their business included also canvassing and selling other goods. presumably with the object of obviating such uncertainty in the determination of the nature of such payments, section 10(4)(b) was introduced by the amendment act of 1939. 7. the language of that provision is clear, and according to well established canons of construction it is not open to read into the enactment words which are not there or to disregard words which are actually to be found in it. it means that in taxation you have to look simply at what is clearly said. you imply nothing, but you look fairly at what is said and at what is said clearly and that is..........from them, remuneration or commission, were allowable deductions in computing the profits of the firm. in commissioner of income-tax v. b.s. mines company (1922) 1 i.t.c. 176 a. full bench of this court ruled that the salaries paid to the partners of a firm are not admissible as deductions in the commutation of the profits of the firm for income-tax purposes, and they were treated as part of the profits. but in ramakrishna ramnath v. commissioner of income-tax, c.p. (1929) 4 i.t.c. 171 a distinction was pointed out between remuneration paid to a partner doing business in his individual capacity for services rendered to the firm which was a legitimate deduction from the assessable income of the firm and amounts paid to a partner for carrying on the business of the firm, whether styled.....
Judgment:

P.V. Rajamannar, C.J.

1. The question for decision is 'whether under the circumstances of the case the commissions paid to Luckman & Company, and Bhatta & Company are '' interest, salary, commission or remuneration' paid by a firm to a partner within the meaning of Section 10(4)(b) of the Income-tax Act.'

2. The assessee is a firm composed of three partners, Lakshmana Iyer, Bhatt and Ganapati Iyer. The firm was constituted by a deed of partnership dated 10th March, 1942. It was the Manufacturers' Representative of Kiwi Polish, etc. Of the three partners, Lakshmana Iyer and Bhatt are also the respective proprietors of commission agency businesses known as Luckman & Company and Bhatt & Company respectively. Even before the constitution of the partnership in question, they were doing commission agency business as well as canvassing business in the said names and their business included also canvassing and selling other goods.

3. The question for decision relates to two sums of Rs. 2,642 and 3,037 paid by way of commission to Luckman & Co., and Bhatt & Co., respectively. The applicant firm claimed deduction of these two sums as expenses incurred for earning the profit. But their claim was rejected by the Excess Profits Tax Officer and the Appellate Authorities on the ground that these payments were not permissible deductions because of the provision in Section 10(4)(b) of the Act, the material part of which runs thus:

Nothing in...Clause (xii) of subjection (2) shall be deemed to authorise....

(4) any allowance in respect of any payment by way of interest, salary, commission or remuneration made by a firm to any partner of the firm.

Clause (xii) relates to any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) paid out or expended wholly and exclusively for the purpose of such business, profession or vocation.

4. It is contended by Mr. Subbaraya Aiyar, learned Counsel for the assessee, that the said two amounts paid by way of commission to Luckman & Co., and Bhatt & Co., of which the sole proprietors were the two partners, Lakshmana Aiyar and Bhatt respectively, will not be payments by way of commission made by the firm, to a partner of the firm, because payments were made to them not as partners of the firm but as the proprietors of two independent concerns. If these payments had been made to individuals or firms not in any way connected with the appellant firm, then certainly the payments would have been admissible deductions. So, he argued, the fact that the proprietors of the two firms in question happened to be partners of the firm would not make a difference. In short, his argument amounted to adding the words 'as a partner of the firm ' after the words ' any partner of the firm.' In support of his contention, he relied upon cases decided under the English Income-Tax Statutes. This case appears to be eminently one to which the following observations of their Lordships of the Judicial Committee in Commissioner of Income-tax, Bengal v. Shaw Wallace & Company apply, in the matter of relying on cases decided under the English Statutes for construing provisions in an Indian enactment:

Again their Lordships would discard altogether the case law which has been so painfully evolved in the construction of the English Income-tax, statutes--both the cases upon which the High Court relied and the flood of other decisions which has been let loose in this Board. The Indian Act is not in pari maleria; it is less elaborate in many ways, subject to fewer refinements, and in arrangement and language, it differs greatly from the provisions with which the Courts in this country have had to deal. Under such conditions their Lordships think that little can be gained by attempting to reason from one to the other....

Undoubtedly, there is great difference in the language of the provisions of the English Statute and the Indian Statute as regards the point which falls for decision in this case. Not only are the decisions on English Statutes of little help, but as we shall presently point out, even decisions of Courts in India before the insertion of the provision in question, namely, Section 10(4)(b), will not be very helpful in enabling us to arrive at a proper construction of the present provision. The decision in Heastie v. Veilch and Company (1934) 1 K.B. 535 dealt with a claim to deduct the rent paid for the use and occupation of business premises to one of the partners. In that case, one of the terms of the partnership deed provided for the payment to the partner of the rent which actually was in excess of the net Schedule A assessment in respect of the premises. It was decided by the Court of Appeal that in computing the profits or gains of the partnership for the purpose of assessment to income-tax under Schedule D of the Income-tax Act, 1918, the rent was properly allowed as a deduction, having regard to Rule 3(c) of the Rules applicable to cases I and II. No doubt, there are observations of the learned Master of the Rolls at page 544 which are general in nature. Lord Hanworth, M.R. says:

There is no doubt--and the Attorney-General does not contend otherwise--that if these premises had belonged to some entirely independent owner, the partnership would have been entitled to pay that owner 1,250 and that sum would have been deductible as a proper outgoing in ascertaining the profits and gains, in accordance with the indication that is given in Rule 3(c) of the Rules applicable to cases I and II of Schedule D.

But these general observations were made in the absence of any provision in the statute prohibiting such a deduction being made. In fact, even under the Indian Act, rent for the business premises paid to a partner would be an allowable deduction. Jones v. Wright (1927) 13 T.C. 221 dealt with the charges of a solicitor and does not carry the matter any further. Nor the case in Henry Richardson v. Inland Revenue Commissioners (1947) 1 All. E.R. 275 in which it was held that the salary of a secretary was not part of her remuneration as a director, because 'directors' remuneration' was remuneration received for service as a director and would not include the remuneration of any director who was required to devote substantially the whole of his time to the service of the company in a managerial or technical capacity. No assistance can be derived from any of these decisions which either turn on the language of the English Finance Act or the English Income-tax Act. As already pointed out, there is no provision corresponding to Section 10(4)(b) of the Indian Act in any of the English taxing Statutes.

5. Section 10(4)(b) became part of the Income-tax Act only by the Amendment Act of 1939. Before the introduction of this provision, Courts in India were called upon to decide whether particular payments alleged to have been made by the firm to its partners either by way of salary or interest on borrowings from them, remuneration or commission, were allowable deductions in computing the profits of the firm. In Commissioner of Income-tax v. B.S. Mines Company (1922) 1 I.T.C. 176 a. Full Bench of this Court ruled that the salaries paid to the partners of a firm are not admissible as deductions in the commutation of the profits of the firm for income-tax purposes, and they were treated as part of the profits. But in Ramakrishna Ramnath v. Commissioner of Income-tax, C.P. (1929) 4 I.T.C. 171 a distinction was pointed out between remuneration paid to a partner doing business in his individual capacity for services rendered to the firm which was a legitimate deduction from the assessable income of the firm and amounts paid to a partner for carrying on the business of the firm, whether styled as remuneration or commission or by any other name. In dealing with this point, the following observations were made:

The question is really a question of fact. No doubt the partner in question is a legal personality apart from that of the firm. He might conceivably do business in his individual capacity and in that capacity might render services to the firm in consideration of which the firm might pay him remuneration which would be a legitimate deduction from the assessable income of the firm. But obviously considering the opportunities for fraud that any alleged arrangement would offer, very strict proof would reasonably be required of the existence of such an arrangement.

In The Electric and Dental Stores v. Commissioner of Income-tax, Punjab and N.W.F. Provinces (1931) 5 I.T.C. 254 payments made to working partners in a firm as salary for services rendered by them were held to be admissible deduction in the computation of the profits of the firm. The learned Judges of the Lahore High Court adopted the statement in Sundaram's Law of Income Tax in India that the dual capacity of a partner cum employee, though suspect, was possible and to the extent that the person is in truth an employee, salary is deductible from the profits of the partnership. They point out that the Commissioner should see whether as a fact the particular partners were true employees or whether the payment of salaries to them was a device to escape income-tax. In Commissioner of Income-tax, Madras v. Subramanian Chettiar : AIR1928Mad923 a Full Bench of five Judges of this Court had to decide the question whether interest paid to a partner in respect of a loan advanced by him to the partnership was a legitimate item of business expenditure within the meaning of Section 10(2)(iii) of the Indian Income-tax Act. It was held that where a partner as partner genuinely lends money, beyond the initial capital, to the partnership at an agreed reasonable rate of interest and the money is used for capital expenditure, the interest paid by the partnership to him in the year of assessment must be deducted in computing the profits or accounts of the partnership. Here again, the question would ultimately turn on whether the lending is genuine or not.

6. It is clear from these decisions that the state of law on the subject was far from satisfactory because the decision in each particular case in respect of payment made by way of interest, salary, commission or remuneration by a firm to a partner turned upon determining as a fact whether the payment was made to a partner as a partner or in a different character and whether the payment was real and bona fide or only intended to serve as a device to escape taxation. Presumably with the object of obviating such uncertainty in the determination of the nature of such payments, Section 10(4)(b) was introduced by the Amendment Act of 1939.

7. The language of that provision is clear, and according to well established canons of construction it is not open to read into the enactment words which are not there or to disregard words which are actually to be found in it. Rowlatt, J., observed in The Cape Brandy Syndicates v. The Commissioner of Inland Revenue (1921) 12 T.C. 358 thus:

Now of course it is said...that in a taxing Act clear words are necessary to tax the subject. But it is often endeavoured to give to that maxim a wide and fanciful construction. It does not mean that words are to be unduly restricted against the Crown or that there is to be any discrimination against the Grown in such Acts. It means this, I think; It means that in taxation you have to look simply at what is clearly said. There is no room for any intendment; there is no equity about a taxation; there is no presumption as to a tax; you read nothing in; you imply nothing, but you look fairly at what is said and at what is said clearly and that is the tax.

Looking, then, fairly at what has been said, it is clear that there is no distinction made between payments by way of interest, commission, salary or remuneration made to a partner as a partner and made to him in a different character. There is nothing to indicate that some categories of interest, salary, commission, or remuneration, though paid by the firm to a partner, were to fall outside the scope of that provision. It is not for us to speculate on the object of the enactment, though it might very well be to have a general and certain rule for computation of profits and to exclude payments which may be doubtful in character.

8. The construction which we have placed on Section 10(4)(b) of the Act appears to have been also placed by a Division Bench of the Patna High Court consisting of Fazl Ali, C.J., and Maonhar Lall, J. in Commissioner of Income-tax v. Jainarain Jagannath I.L.R. (1945) Pat. 634. In that case, the amounts paid to individual members of a Hindu undivided family by way of remuneration for services rendered to the business of the family were held to be legitimate deductions in computing the profits of the business, provided they were bona fide payments to bona fide employees for services actually rendered and were not a device to escape the income-tax. For the Department, it was contended that Section 10(4)(b) would apply even to the case of payment by the joint family to individual members and would therefore not be permissible deductions. The learned Judges did not accept the contention but in doing so, Fazl Ali, C.J., observed, after dealing with the earlier cases before the amendment and the introduction of this provision, as follows:

These decisions, in my opinion, lay down the general principle in correct terms though they are now more or less of an academic interest only in so far as partnerships governed by the Partnership Act are concerned inasmuch as a provision has been inserted in the present Act disallowing ' any allowance in respect of any payment by way of interest, salary, commission, or remuneration made by a firm to any partner of the firm '--No distinct provision has yet been made about Hindu Joint family trading firms to which the Partnership Act does not apply and in my judgment, the principles under lying the decisions to which I have referred are still applicable to them.

9. In this case, there can be no doubt that the payments of these two sums were made to the partners by way of commission and the answer to the question must be in the affirmative. The applicant will pay the costs of the reference, Rs. 250, to the respondent.


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