Notifications issued by the Cabinet of the Holkar State in 1931, 1932 and 1933, which disallowed the deduction of agent's commission on profits from the assessable profits under R. 3(2)(ix) of the Indore Industrial Tax Rules, 1927, had the force of law and were not open to challenge.

Judgment:

HIDAYATULIAH, J.: These three consolidated appeals by special leave are against a common judgment and order of the High Court of Madhya Pradesh, dated September 8, 1958, in three second appeals filed under R. 13 of the Indore Industrial Tax Rules, 1927 of the former Holkar State, which were in force before the State became part of Madhya Bharat State. They concern three assessments relating to the assessment years, 1941, 1942 and 1943 respectively. These second appeals were originally filed in the Madhya Bharat High Court as early as 1952; but the records of the appeals were destroyed by fire and had to be reconstructed. By the time the appeals were ready, Madhya Bharat had merged in the new State of Madhya Pradesh, and the appeals were accordingly heard by a Divisional Bench of that High Court.

2. The appellant is a Textile Mill and a Public Joint Stock Company called the Nandlal Bhandari Mills, Ltd. The appellant had appointed a firm, Messrs. Nandlal Bhandari and Sons as agents, secretaries and treasurers of the Mills, and under cl. (6) of the agreement of agency, it agreed to pay to the agents an office allowance, commission on the Company s net profits and commission on the sale proceeds of sales of yarn, cloth, etc. The remuneration of the agents for the three accounting years was as follows:

Remuneration As per agreement Accounting Years

1941 1942 1943

Rs. Rs. Rs.

Clause 6 1500 18,000 18,000 18,000

(a) Fixed monthly allowance as office allowance P.M. for the year for the year

(b) Commission on the Company s Net Profits @ 16% net on profits 2,68,335 6,15,946 10,52,939

(c) Commission on the sale proceeds of sales of yarn cloth etc. @ 1-9-0 Per Cent. 1,10,156 1,64,751 2,71,672

3. In computing the tax, the Mills claimed to deduct under R. 3(2)(ix) of the Rules the above amounts paid as remuneration. The Rule reads :

"(ix) any expenditure (not being in the nature of capital) incurred solely or the purposes of earning such profits or gains."

The Assessing officer accepted the appellant s claim for deduction but only as to a part. We are not required in these appeals to consider the correctness of the quantum of the deduction in view of what transpired later. The Assessing officer also disallowed certain other claims made by the appellant, which again need not be mentioned. The appellant then appealed to the Appellate Authority, and on December 31, 1951, the Appellate Authority, while accepting some of the appellant s other contentions, upheld the order refusing to deduct the agent s commission on profits under R. 3(2)(ix). Three second appeals were preferred in the Madhya Bharat High Court under R. 13 of the amended Rules. They were dismissed by the High Court of Madhya Pradesh, and hence the present appeals.

4. The Indore Industrial Tax Rules were first promulgated in 1926 by a Cabinet Resolution (No. 373 dated March 22, 1926). In 1927, by Cabinet Resolution No. 1991 dated November 23, 1927, the Rules were modified, and the new Rules were made applicable retrospectively from May 1, 1926. These Rules were framed for the levy of the tax and for ascertainment and determination of the income of cotton mills. The tax called the "Industrial Tax" was leviable under R. 3, which imposed the charge. It says that the Industrial Tax shall be payable by an assessee in respect of the profits or gains of any Cotton Mill industry carried on by him in the Holkar State. Sub-rule (2) of R. 3 provides that such profits or gains are to be computed after making allowances, inter alia, for any expenditure incurred solely for the purpose of earning such profits or gains. Rule 6, which is a part of Rule imposing a charge, lays down the rates which are: (a) on all incomes up to Rs. 50,000, at 1 1/2 annas per rupee, and (b) above, at 2 1/2 annas per rupee. The short question thus was whether in computing the profits and gains of the appellant, the remuneration paid to the agents was deductible under R. 3(2)(ix).

5. It is necessary at this stage to