Judgement

A. K. SARKAR, J. : By an agreement made in 1936, the assessee company appointed a firm as its managing agents. The agreement provided that the managing agents would be remunerated in the manner following:

"In consideration for acting as Managing Agents the Company should pay to the firm remuneration 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. Such net profits will 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."

The question is whether the commission payable to the managing agents under this agreement is 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.

2. The question has arisen in the course of the assessment of excess profits tax payable by the assessee. The Excess Profits Tax Officer held that the commission has to be ascertained on the profits remaining after deduction of excess profits tax. This view was upheld by the Appellate Assistant Commissioner on an appeal being taken to him by the assessee. On a further appeal by the assessee to the Appellate Tribunal it was held that the commission has to be ascertained on the profits without any deduction of the tax. The revenue authorities then applied for and obtained an order from the Tribunal referring the following question for decision by the High Court:

"Whether on a true construction of the Managing Agency Agreement between the assessee Company and its Managing Agents entered into in 1936, the relevant clause of which is quoted above, the Excess Profits Tax payable should be deducted from the profits of the Company for the purpose of arriving at the annual net profits of which a percentage should be paid to the Managing Agents as their commission."

The High Court answered the question in the negative. The present appeal is by the revenue authorities against the judgment of the High Court.

3. The question is a short one. It is one of construction of the managing agency agreement. Of course, whatever is payable under this agreement to the managing agents as their remuneration is a proper expense of 187 the business of the assessee and has to be deducted in ascertaining its profits and it is upon such profits that excess profits tax has to be assessed. There is no dispute about this. The dispute has arisen because the remuneration of the managing agents is-we leave out now the minimum and fixed remuneration of Rs. 750 per month as to which no question arises and with which we are therefore not concerned-itself to be calculated on the profits. The dispute is whether the proper construction of the agreement is that the profits, a percentage of which is to be paid to the managing agents as their remuneration, are the profits before deduction of excess profits tax or after.

4. What then is the true construction? The agreement is that "the net profits will be arrived at after allowing the working expenses, interest on loans and due depreciation but without setting aside anything to reserves or special funds." We can leave out the things expressly made not deductible for as to these no question arises, the question being whether something more, namely, excess profits tax, can be deducted. Working expenses, interest on loans and due depreciation have however been expressly made deductible in ascertaining the net profits. If these are all the deductions that can be made, excess profits tax cannot be deducted for it does not come under any one of them. But it seems to us that the agreement was not intended to lay down all the deductions that can be made. It is not in dispute that expenses like overhead expenses, litigation expenses and similar other expenses properly incurred for carrying on the business can be deducted in arriving at the net