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TMI Blog1946 (3) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... stances of the case the sum of Rs. 4,130 paid as bonus to the shareholder employees of the assessee company in the account year is allowable as deduction under the provisions of Section 10(2) (x) of the Indian Income-tax Act, 1922" The question raised is a short one but it is not one which is free from difficulty. The Indian Income-tax Act provides by Section 6 for five heads of income, profits or gains to be brought to tax and the first head is "Salaries " whilst the fourth is " Profits and gains of business, profession or vocation. " It is Section 7 which deals with salaries and it is to be noted that "salary " includes a gratuity and a commission. Section 10 provides that tax shall be payable by an assessee under the hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is reference and is printed on page 12 of the record. It is there shown that of the thirteen shareholder employees six employees got less bonus than they would have got as dividends if the sum of Rs. 4,130 had been distributed by way of additional dividends. Five of them got more bonus than such dividends and in the case of two of them the figure works out the same. That is an accident in the sense that the bonus payment being referential to their wages and the dividends being referential to their shares have no relation to each other. Now the answer to the question referred to us depends on the construction that is to be placed upon para. (x) of sub-section (2) of Section 10. It should be noted that the body of this sub-section provides a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... struction on this sub-section, the sum excepted under the expression " such sum " must be the same sum as is described by the expression " any sum paid as bonus or commission, " and that an equivalent sum even in the two cases where by accident the bonus and the prospective dividend are the same, is not included in that construction. If that is the construction which is to be placed upon this sub-section, then the answer to the question is, that the whole of the sum of Rs. 4,130 paid as bonus to the shareholder employees is allowable as deduction under the provisions of Section 10(2)(x). I answer the question referred to us in the affirmative. The Commissioner must pay the costs of this reference. KANIA, J.-In submitting the question for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission : Provided that the amount of the bonus or commission is of a reason- able amount with reference to- (a) the pay of the employee and the conditions of his service ; (b) the profits of the business, profession or vocation for the year in question ; and (c) the general practice in similar businesses, professions or vocations. " On behalf of the assessee company it was pointed out that as the sum was paid as bonus to all employees, it was a permissible allowance under the clause. Having regard to the fact that out of forty-one employees thirteen were shareholders of the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was paid by way of bonus to an employee, if the same amount would have been paid to him as a shareholder as dividend or profit, the company cannot be allowed a deduction on the ground of payment of bonus. To put it in other words the clause is intended to prevent an escape from taxation by describing a payment as bonus, when in fact ordinarily it should have reached the shareholder as profit or dividend. The argument would be equally applicable in the case of a partnership as in the case of a limited company. This construction leads to no hardship. It does not allow a wrong payment of bonus to escape taxation. In the first instance the bonus in the hands of the employee is liable to be taxed, unless exempted by a special notification. Mo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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