Excess profits tax is a tax on income and not an expense incurred in the earning of profits.

Harnam Singh, J.

1. In Civil Reference Case No. 18 of 1952, the question referred to us for decision is in these terms:

"Whether on a true construction 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."

2. By Clause II of the managing agency agreement made in April 1936, the Delhi Flour Mills Company, Limited, hereinafter referred to as the assessee-company, agreed to pay to the managing agents commission equal to ten per cent of the annual net profits to be computed after allowing the working expenses, Interest on loans and due depreciation, but without setting aside anything to reserve or other special funds.

3. In calculating the commission of the managing agents for the period between 1-11-1944, and 31-10-1946, the assessee-company did not take into account the income-tax and the excess profits tax. The Income-tax Officer, however, held that in arriving at the annual net profits of which a percentage was the commission of the managing agents the excess profits tax was to be deducted. On appeal the decision given by the Income-tax Officer was upheld by the Appellate Assistant Commissioner.

4. In proceedings under Section 33, Income-tax Act, 1922, hereinafter referred to as the Act, the Income-tax Appellate Tribunal found that the excess profits tax, not being an expense for the purpose of earning profits of the business, was not to be deducted in computing annual net profits of tne Company on which commission was to be paid to the managing agents.

5. On the application of the Income-tax Com-missioner under Section 66(1) of the Act, the Appellate Tribunal referred for decision to this Court the question of law stated strove.

6. For the reason that the only reported case on the point, -- Walchand & Co. Ltd. v. Hindustan Construction Co. Ltd., AIR 1944 Bom 5 (A), did not arise on a reference under the Indian Income-tax Act, a Division Bench of this Court has referred for decision to the Pull Bench the question of law stated above.

7. Clearly, the answer to the question referred to us for decision turns on the construction of Clause II of the managing agency agreement which provides for payment of commission to the managing agents of the following amount;

"In consideration for acting as Managing Agents the Company should pay to the firm * * 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 reserve or other special funds."

8. Now, the agreement says nothing about excess profits tax for the very good reason that in India no such tax was in existence or in contemplation in April 1938, when the managing agency agreement was made. In construing such an agreement the rule to be followed was stated by Viscount Simon Lord Chancellor in -- L. C. Limited v. G. B. Ollivant, Ltd. and others, (1944) 1 All E. R. 510 (B), in these words

"The rule to be followed in such cases is clear. The only difficulty is in applying it. The rule is that we are not to make a new agreement for the parties, or to speculate how they would have dealt with the new contingency had they anticipated it; but that (except in cases when the intervening event produces frustration) we have to take the words of the agreement as they stand and apply them, as best we can to the new situation which has caused the difficulty."

9. Excess profits tax was imposed in India by Act 15 of 1940, and the charging section, Section 4, provides:

"Subject to the provisions of this Act, there shall, in respect of any business to which this Act applies, be charged, levied and paid on the amount by which the pro