Law:

Section:

Excess Profits-tax Act, 1940 - Net profits - Meaning of - By an agreement, assessee-company appointed a firm as its managing agents - Agreement provided that managing agents would be remunerated a sum in addition to commission equal to 10 per cent of annual net profits - Such net profits were to be arrived at after allowing working expenses, interest on loans and due depreciation but without setting aside anything to reserves or other special funds - Whether excess profits tax payable should be deducted from profits of company for purpose of arriving at annual net profits of which a percentage should be paid to managing agents as their commission - Held, yes FACTS By an agreement, the assessee-company appointed a firm as its managing agents, the agreement provided that the managing agents would be remunerated 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 per cent of the annual net profits to be arrived at after allowing the working expenses, interest on loans and due depreciation, but without setting aside anything to reserves or other special funds. In the course of assessment of excess profit tax, the question arose as to whether the commission payable to the managing agents was to be 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 EPTO held that the commission had to be ascertained on the profits remaining after deduction of excess profits tax. This view was upheld by the AAC. On a further appeal by the assessee, the Tribunal held that the commission had to be ascertained on the profits without any deduction of the tax. On reference, the High Court affirmed the decision of the Tribunal. On appeal to the Supreme Court : HELD Working expenses, interest on loans and due depreciation had been expressly made deductible in ascertaining the net profits. It seemed that the agreement was not intended to lay down all the deductions that could be made. There were other items besides those expressly mentioned, which have to be deducted before the net profits could be arrived at. Such…

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