Judgment

HIDAYATULLAH, J. : This appeal by special leave of this Court, has been filed against the judgment and order of the Bombay High Court dated August 27, 1954, by the Ahmedabad Manufacturing and Calico Printing co. Ltd., Ahmedabad, hereinafter called the assessee Company. By that judgment, the High Court of Bombay answered the first of the two following questions referred to it by the Income-tax Appellate Tribunal, Bombay, in the negative, and declined to answer the second question, inasmuch as, in its opinion, that question did not arise in view of the answer to the first question:

1. "Whether in law, if there is an obligation on the employer to pay a certain bonus, the E. P. T. Officer is bound to allow it as a deduction and is precluded from exercising his discretion under Rule 12(1) of the First Schedule of the Excess Profits Tax Act.

2. If the answer to the first question is in the affirmative whether on a true construction of the agreement between the assessee and his employees and the Provident Fund Rules, the assessee Company is under obligation to pay the bonus without deducting the Excess Profits Tax."

2. The facts out of which the reference arose were as follows: The assessee Company is a limited liability Company, and is one of the well-known manufacturers of textile goods. We are concerned with three chargeable accounting periods corresponding to the Calendar years 1943, 1944 and 1945. While making the assessment of the assessee Company, the Excess Profits Tax Officer found that large payments had been made to five of the employees of the Company during the chargeable accounting periods. He also found that in the case of 53 employees of the assessee Company, excessive contributions had been made by the Company to their Provident Funds. These payments and contributions were on the basis of a percentage of the profits of the assessee Company made in the years of account. In determining the profits on which the said percentage was to be calculated, the assessee Company did not first deduct either the income-tax or the excess profits tax. The Income-tax Officer upheld the action of the assessee Company in not deducting the income-tax, but he objected to its not deducting the excess profits tax before calculating the amounts payable to the five employees and to the Provident Fund. The Excess Profits Tax Officer also held, applying R,. 12 of the First Schedule of the Excess Profits Tax Act, that it was not necessary for the assessee Company for the purpose of its business to make the calculations on the basis of net profits without the deduction of excess profits tax.

3. The appellate Tribunal also upheld the Excess Profits Tax Officer s decision. It, however, declined to state a case to the High Court of Bombay, and the assessee Company moved and obtained from the Bombay High Court a rule nisi, by which the High Court asked the Department to show cause why it should not state a case on the following two questions:

1. "Whether on a true and proper construction of the Provident Fund Rules and of the five agreements with the five officer employees, the amount of Excess Profits Tax determined to be payable should be deducted in the first instance for the purposes of determining the amount of bonus or commission payable to the said employees and the five officer employees.

2. Whether in the circumstances of the case the finding of the Tribunal that the full amount of commission or bonus paid to the employees of the Petitioners under the Provident Fund Rules and to the five officer employees under their respective agreements is not an allowable deduction in computing the taxable profits of the Petitioners for the purpose of Excess Profits Tax is justifiable in law."

4. It appears that when the rule nisi came to be heard, the High Court of Bombay accepted the contentions of counsel for the Department, and modified the questions to those which have been stated at the commencement of this judgment. We mention this fact, because