1974 (1) TMI 3 - HC - Income Tax

Partner getting salary and commission on sales partner entered into an agreement with an employee taking charge of the sales section agreeing to pay commission out of his own commission if sales reached certain target - Whether commission paid by the partner is deductible from his income

Summary

Issues Involved:
1. Genuineness of the Agreement
2. Services Rendered by Shri Laxmi Narain
3. Nature of the Amount Paid
4. Applicability of Section 67 of the Income-tax Act, 1961
5. Application of Profits

Issue-wise Detailed Analysis:

1. Genuineness of the Agreement:
The Income-tax Officer (ITO) initially rejected the assessee's claim on the grounds that the agreement dated April 1, 1960, between the assessee and Shri Laxmi Narain was not genuine. However, the Appellate Assistant Commissioner (AAC) disagreed with this view, finding the agreement to be genuine after examining the evidence. The Tribunal confirmed the AAC's finding, establishing that the agreement was genuine and that remuneration was indeed paid for services rendered.

2. Services Rendered by Shri Laxmi Narain:
The ITO contended that Shri Laxmi Narain did not render any services to the assessee but only to the firm, as he was already an employee of the firm. The AAC found that Shri Laxmi Narain had indeed rendered services to the assessee, distinct from his services to the firm. The Tribunal upheld this view, noting that the assessee was entitled to a 1% commission on sales and had employed Shri Laxmi Narain to assist in promoting sales, which was necessary for earning his commission.

3. Nature of the Amount Paid:
The ITO argued that the amount paid to Shri Laxmi Narain was a disposition of income by the assessee after it had accrued to him. The AAC and the Tribunal disagreed, finding that the payment was an expenditure necessary for the assessee to earn his commission. The Tribunal noted that the business of the firm was also the assessee's business in his capacity as a partner, and the amount paid was laid out wholly and exclusively for the purposes of his business.

4. Applicability of Section 67 of the Income-tax Act, 1961:
The revenue argued that the deductions allowable in computing the partners' share income from the firm are only those mentioned in section 67 of the Act. The Tribunal, referencing the Supreme Court's decision in Commissioner of Income-tax v. Ramniklal Kothari, held that section 67 is not exhaustive of all allowances to which a partner is entitled. The Delhi High Court in Commissioner of Income-tax v. Ganpat Rai Jaggi and Co. also supported this view, stating that deductions permissible under section 37 of the Act must be allowed even if they do not fall within section 67.

5. Application of Profits:
The revenue contended that the expenditure was an application of the assessee's profits after they had accrued to him, citing Commissioner of Income-tax v. Sitaldas Tirathdas. The Tribunal distinguished this case, noting that the payment to Shri Laxmi Narain was directly related to the assessee's business and necessary for earning his commission. The Delhi High Court in Ganpat Rai Jaggi and Company had similarly allowed a deduction for commission paid to a manager employed by a partner to look after his business interests, deeming it not an application of income but a permissible business expenditure.

Conclusion:
The High Court answered the referred question in the affirmative, holding that the sum of Rs. 7,568 constituted a proper deduction from the assessee's share income from the firm of M/s. Beli Ram & Sons. The Court ruled in favor of the assessee and against the revenue, also awarding the assessee the costs of the proceedings with a counsel fee fixed at Rs. 250.