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Issues Involved:
1. Whether the payment of commission to the employees is allowable under Section 37 of the Income-tax Act, 1961. Issue-Wise Detailed Analysis: 1. Allowability of Commission under Section 37 of the Income-tax Act, 1961 Facts of the Case: The assessee, a registered firm, paid commissions to its employees during the assessment years 1963-64 and 1964-65. The Income-tax Officer (ITO) doubted the genuineness of these payments, leading to a series of inquiries. The assessee supported its claim with agreements, statements, account books, and past history. Despite this, the ITO disallowed the commission, deeming the agreements sham and the payments fictitious. The Appellate Assistant Commissioner (AAC) upheld the ITO's findings, suggesting the commissions were camouflaged payments to customers' employees. Tribunal's Findings: The Tribunal examined the evidence and found the agreements genuine. It noted that secret commissions were common in the dye-stuff trade, referencing the case of *Ciba Dyes Ltd. v. Commissioner of Income-tax [1954] 25 ITR 102 (Bom)*. The Tribunal held that the commissions were necessary for business purposes and allowable under Section 37 of the Income-tax Act, 1961, emphasizing the commercial expediency of such payments. High Court's Analysis: The High Court analyzed whether the commissions should be allowed under Section 37 or Section 36(1)(ii), which specifically deals with bonuses and commissions to employees. The court referred to *Laxmandas Sejram v. Commissioner of Income-tax [1964] 54 ITR 763 (Guj)*, which held that the reasonableness of such payments should be judged from the point of view of commercial expediency. Key Findings: - The agreements with the employees were genuine and acted upon. - The commissions were necessary for the business and reasonable. - The practice of paying secret commissions was prevalent in the trade. - The payments were not ex gratia but part of the employees' remuneration. Conclusion: The High Court concluded that the commissions were allowable under Section 36(1)(ii) of the Income-tax Act, 1961, rather than Section 37. The court emphasized that the payments were reasonable and necessary from a commercial expediency perspective. The Tribunal's decision was upheld, but the applicable section was corrected to Section 36(1)(ii). Final Judgment: The High Court answered the question in favor of the assessee, holding that the commission was allowable under Section 36(1)(ii) of the Income-tax Act, 1961. The Commissioner was directed to pay the costs of the reference to the assessee.
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