1977 (4) TMI 4 - SC - Income Tax

Partnership Deed - When commission is paid to an employee whether it is necessary that the employee should have rendered extra services - in order to claim the deduction under s. 36(1)(ii) it is not necessary that the commission should have been paid under a contractual obligation - Assessee s appeal is allowed

Summary

Issues Involved:
1. Whether the commission paid by the assessee to its employees is an allowable expenditure under section 36(1)(ii) of the Income-tax Act.
2. The reasonableness of the commission paid to the employees.
3. The requirement of extra services for the justification of commission payment.

Issue-wise Detailed Analysis:

1. Allowability of Commission under Section 36(1)(ii):
The primary issue was whether the commission paid by the assessee to its employees, Saheb Dayal and Gurditta Mal, was an allowable expenditure in computing the profits of the assessee from business. The assessee, a registered firm with five partners, paid a commission to these employees due to their significant contribution to the business's increased prosperity. The Income-tax Officer disallowed the claim, stating there was no evidence of services rendered by these employees justifying the commission. The Appellate Assistant Commissioner and the Tribunal upheld this view, emphasizing the lack of proof of extra services rendered by the employees during the relevant accounting year. The High Court also supported this view, stating that the commission payment must be for services rendered, and no extra services were proven.

2. Reasonableness of the Commission:
The Supreme Court analyzed whether the commission paid was reasonable under section 36(1)(ii). The court noted that the genuineness of the payment was never doubted by the revenue authorities. Section 36(1)(ii) allows deductions for any sum paid to an employee as bonus or commission for services rendered, provided it is reasonable with reference to the pay of the employee, the profits of the business, and the general practice in similar businesses. The court found that the commission paid was reasonable given the substantial increase in the business's turnover and profits, largely attributed to the employees' efforts. The court emphasized that commercial expediency justified the payment, even if it was ex gratia.

3. Requirement of Extra Services:
The High Court's view that extra services must be rendered to justify the commission was deemed erroneous by the Supreme Court. The court clarified that section 36(1)(ii) does not require extra services for commission payment to be justified. It only requires that the commission be for services rendered. The court highlighted that the employees had rendered services during the relevant accounting year, and the payment of commission was a commercial decision to reward their contribution to the business's success. The court supported the view that commercial expediency, not contractual obligation, should guide the reasonableness of such payments.

Conclusion:
The Supreme Court concluded that the commission paid to Saheb Dayal and Gurditta Mal was an allowable expenditure under section 36(1)(ii). The court emphasized that the payment was reasonable and justified by commercial expediency, considering the employees' significant contribution to the business's increased turnover and profits. The appeal was allowed, the High Court's judgment was set aside, and the question referred by the Tribunal was answered in the affirmative, in favor of the assessee. The Commissioner was directed to pay the costs of the appeal and the reference to the assessee.