1961 (10) TMI 102 - HC - Income Tax

Summary

Issues Involved:
1. Whether the commission of Rs. 2,45,557 was exempt in the hands of the assessee by virtue of Notification No. 878-F dated March 21, 1922, as amended by Notification No. 8 dated March 24, 1928.

Detailed Analysis:

Issue 1: Exemption of Commission under Notification No. 878-F

Background:
The assessee was appointed as a manager by the employer with a salary and commission agreement. The commission payable amounted to Rs. 2,45,557 for the relevant year. The employer's claim for this commission as a revenue deduction was disallowed by the Income-tax Officer, concluding it was a method to reduce income and tax liability. The assessee claimed exemption from tax on this commission under the specified notification, which was rejected by the Income-tax Officer and the Appellate Assistant Commissioner but allowed by the Tribunal.

Legal Question:
"Whether on the facts and in the circumstances of the case the commission of Rs. 2,45,557 was exempt in the hands of the assessee by virtue of Notification No. 878-F dated March 21, 1922, as amended by Notification No. 8 dated March 24, 1928?"

Conditions for Exemption:
The Supreme Court in Commissioner of Income-tax v. M.K. Kirtikar outlined three cumulative conditions for exemption under the notification:
1. The sum must be paid out of, or determined with reference to, the profits of the business.
2. The sum paid must not be allowed as a deduction but included in the profits of the business.
3. Income-tax must have been assessed and charged on the sum under the head "business."

Fulfillment of Conditions:
- Third Condition: It was undisputed that the third condition was fulfilled as income-tax was assessed and charged on the commission in the employer's hands.
- First Condition: The contention was whether the commission was paid out of profits or determined with reference to profits. The agreement specified commission on all sales, implying it was a prior charge before profits. However, the court noted that if the business resulted in a profit and the commission was added to the employer's profits upon disallowance, it could be considered paid out of profits.
- Second Condition: The court examined the Income-tax Officer's reasoning, which indicated the disallowance was due to the commission being a method to reduce income and tax liability, thus falling within the second condition of the notification.

Precedents and Judicial Opinions:
- M.K. Kirtikar Case: The court inferred that commission paid out of profits, even if calculated on gross turnover, could be exempt if added to the employer's profits upon disallowance.
- Other Cases: The court acknowledged diversity in judicial opinions but emphasized the specific facts and findings of each case.

Conclusion:
The court concluded that both the first and second conditions were fulfilled based on the agreement's context and the Income-tax Officer's findings. The Tribunal's decision to grant exemption was upheld.

Final Decision:
The court answered the referred question in the affirmative, confirming the assessee was entitled to exemption from payment of tax on the commission amount of Rs. 2,45,557. The Commissioner was ordered to pay the costs of the assessee.