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TMI Blog1962 (5) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 1,00,000 the lease money was to be payable at the rate of 0-7-9 in the rupee. It appears that the partners of the assessee firm appointed one Sri Shital Prasad by a power of attorney to manage the business of the mills on behalf of the partnership. Sri Shital Prasad, by letter dated September 20, 1944, appointed his own son, Sri J.P. Vaish, to be the general manager of the lessee firm. The terms regarding his remuneration are stated in this letter in paragraph 6 as follows: "6. Your remuneration and allowances will be as follows: (a) A fixed salary at the rate of ₹ 1,000 p. m. including the period of probation from 1st May, 1944, up to date. (b) A commission of 12% on the net profits of the firm payable after the accounts have been ascertained and vouched by the auditors, the certificate of the auditors to be conclusive: Provided, firstly, that the net profits shall be arrived at after defraying all manufacturing charges, including cost of raw materials, stores, coal, steam power, electric energy consumed, wages, salaries of clerks, supervisors, accountants, mill staff including technical experts, depreciation on machinery employed in the business, intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion to Shri J.P. Vaish as an allowable deduction under section 10(2). The Income-tax Officer, by notice under section 23(3), called upon the assessee to prove the allowability of this amount. The notice required the assessee to state: 1. the previous employment of Shri J.P. Vaish, 2. the salary drawn by him and 3. the technical and other qualifications by reason of which this amount of ₹ 75,465 became payable to Shri Vaish. The assessee filed a written reply dated June 16, 1949. In this reply regarding point No. 1, viz., previous employment, it was stated as follows: "He had training in the Aluminium Corporation of India Ltd., Laxmiratan Cotton Mills Ltd. and the Food Products Ltd., Rampur." From this it is clear that he was not previously employed anywhere. He was merely a trainee in the three concerns mentioned. None of these concerns was a woollen textile mills. The period of his training was not mentioned. The particular line in which he took training was also not mentioned. Regarding point No. 2, viz., the salary drawn by him, it was mentioned: "His salary during the period is not known." It is clear that the assessee (sic) withheld information a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer observed that, having regard to the share of profits of the three partners of the assessee, the remuneration of Shri J.P. Vaish amounting to ₹ 92,465 was "highly excessive and unreasonable". As a matter of law the Income-tax Officer took the view that irrespective of the fact that commission was payable to Shri J.P. Vaish under the letter of appointment, the question of reasonableness or otherwise of the commission paid fell to be determined under section 10(2)(x). He went on to apply tests laid down under that provision and observed that having regard to the salary and allowances of Shri J.P. Vaish and further having regard to the profits of the year the amount of ₹ 75,465 commission was "very excessive and unreasonable". He also found that there was "no general practice of giving commission at 25% of the net profits of business in the assessee's line of business". In the result he allowed a sum of only ₹ 5,000 on account of commission and disallowed the balance of ₹ 70,465. From the above it will be clear that, even though the Income-tax Officer ultimately determined the question of the allowability of the commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... showing the payment of commission were signed by the proprietors and 2. that Mr. Vaish was not related to the proprietors. It is noticeable that the Appellate Assistant Commissioner did not fully meet the point raised by the Income-tax Officer. The Income-tax Officer had observed that "the letter of appointment was not solely actuated by business considerations". An agreement may be entered into for "business considerations" but it may not be "solely" for such considerations. Under section 10(2)(xv) unless the expenditure is "wholly and exclusively "for purposes of business, it is not allowable. From what the Appellate Assistant Commissioner went on to hold it is clear that he was of the view that the whole of the commission was not paid exclusively for business purposes even though has the Appellate Assistant Commissioner considered the payment under section 10(2)(x) he did not specifically use the language which he would have used if he had applied section 10(2)(xv). He was, however, not very much impressed by the qualifications and experience of Sri Vaish and observed that the commission of 25% over and above the salary and allowances of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusive and self contained or whether there is a certain amount of overlapping in the two sub-sections as regards the tests which might bring an allowance within the one sub-section or the other. These questions shall be examined hereafter. Against the order of the Appellate Assistant Commissioner the assessee went up in appeal to the Income-tax Appellate Tribunal. The Tribunal started by observing that both the Income-tax Officer and the Appellate Assistant Commissioner had considered the payment of commission under section 10(2)(x) and quoted the provisions of that section but held on the supposed authority of Jethabhai Hirji & Co. v. Commissioner of Income-tax [1949] 17 ITR 533 that the allowability of commission in the circumstances could be considered only under section 10(2)(xv) and quoted the provision in that section as it stood at the material time as follows: "Any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly or exclusively for the purposes of such business, profession or vocation." It held that under this provision it is to be seen whether the "remuneration paid to an employe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xv) clearly before them, the Tribunal asked the question, what would be the expense wholly and exclusively for purposes of business on the person in-charge of the management of the business whether as general manager or as director. On the facts of the case before them they equated the responsibility of the general manager with that of the director. Then, having regard to the remuneration of the director for shouldering that responsibility they came to the Conclusion that reasonable or proper business expenditure for getting a person to shoulder that responsibility was ₹ 24,000. Anything paid over and above that amount was improper and unreasonable business expenditure. In the words of the Tribunal the excess amount paid over ₹ 24,000 was "not really paid wholly for the purpose of carrying on business". On this finding as seen above the Tribunal affirmed the disallowance of the sum of ₹ 37,732, viz., half of the amount of ₹ 75,465. Thereafter, the assessee asked for the statement of a case to this court but the Tribunal refused the request. The assessee then got the Tribunal to state a case under orders of this court on an application under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount by reference to the pay of the employee and the conditions of his service under section 10(2)(x) is concerned, it is not possible to agree with the contention that there is anything absurd or anomalous in that provision in the case of a contractual payment of commission. A commission payable to an employee is different from his pay or salary. The conditions of his service include many other matters and not merely the remuneration payable to him. As such, even if commission payable to an employee under a contract may be considered to be one of the conditions of his service, there is no anomaly or absurdity in requiring the reasonableness of the amount of commission to be determined by reference to all the conditions of his service. In Subodhchandra Popatlal v. Commissioner of Income-tax, Bombay [1953] 24 ITR 566, the Bombay High Court took the same view, namely, that whether the payment of the bonus or commission is voluntary or contractual, the question of its admissibility falls for consideration under section 10(2)(x) and not under section 10(2)(xv). With respect this view seems to be the correct view. If the matter had rested there, the question referred to us might hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with a special case section 10(2)(xv) was a general provision. One may agree that section 10(2)(x) was specific to this extent that it dealt with bonus or commission alone and section 10(2)(xv) dealt with all classes of business expenditure including bonus or commission which are also business expenditure. If the matter had rested there it would have been possible to say that section 10(2)(x), the specific provision, excluded the operation of section 10(2)(xv), the general provision. What seems to have been overlooked in the Bombay decision is the fact that the two provisions lay down different tests and by reason of those tests the two provisions might very well constitute different categories and not merely the one a special category and the other a general category. This may be explained by pointing out that if an amount of commission paid to an employee does not satisfy the tests laid down under section 10(2)(x) it might still fall for consideration under section 10(2)(xv) and may be allowable if it satisfied the test of having been laid out or expended wholly and exclusively for the purpose of the assessee's business. It may also be pointed out that a portion of the commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s soon as an assessee has established these two facts, viz., the existence of an agreement between the employer and the employee and the fact of actual payment, no discretion is left to the Income-tax Officer except to hold that the payment was made wholly and exclusively for the purposes of the business. Although the payment might have been made and although there might be an agreement in existence, it would be open to the Income-tax Officer to take into consideration various factors which would go to show whether the amount was paid as required by the section. For instance, the Income-tax Officer may take into consideration whether the moneys were paid to a near relation of an employer. He may take into consideration the extent of the business and the particular services rendered by the employee which called for a special remuneration at the hands of his employer. He may take into consideration the quantum of the payment made with a view to decide whether the payment was or was not grossly put of proportion to the work done by the employee. If after taking these factors into consideration he copies to the conclusion that the payment was not made wholly and exclusively for the pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence that this expense of ₹ 7,512 Was incurred wholly and exclusively for the purpose of the business of the assessee." From these observations it is clear that the entire burden of proof is on the assessee to clinch the issue that the whole amount of the claim Was exclusively laid out or expended for the purpose of business. No part of the burden is on the department, In other words it is the duty of the assessee to justify every pice of the expenditure which he claims as a deduction. If he satisfies the Income-tax Officer not as to the whole but only as to a part, then it is not necessary for the Income-tax Officer before he disallows the part to produce positive evidence to prove the negative fact that that portion of the expenditure was not incurred as required by the section. In another decision of this court in Nihori Lal Prabhudayal v. Commissioner of Income-tax [1951] 19 ITR 240 it was observed at page 245 as follows: "Learned counsel for the assessee has...urged with great force that for every finding recorded by the Tribunal there must be some evidence to justify it and if there is no evidence to support the finding, then that finding cannot stand. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability or otherwise of an expenditure under section 10(2)(xv). Naturally the enumeration of these circumstances neither is nor can be exhaustive. It can only be illustrative. The circumstances cited there are: (1) whether the payment was made to a near relation, (2) the extent of the business, (3) the particulars of service rendered, (4) whether the service was such as to require special remuneration, (5) what was the quantum of payment, (6) whether the payment was or was not grossly out of proportion to the work done by the employee. To this list of circumstances might be added other circumstances, e. g., (7) what was the practice in the trade for payment to an employee in similar circumstances, (8) what were the qualifications of the employee, (9) what was the amount paid to a predecessor or a successor rendering the same service, (10) whether the allowance of a certain percentage was a normal allowance or was extraordinary having regard to the profits and the practice in the trade, (11) whether the method of working out profits for calculating the percentage of commission was the normal method or an abnormal method, and (12) if there was any extraordinari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be considered to fall under clause (xv). A specific provision expressly governing a case would govern it in super session of the general provision. Clause (x) applies to all commissions alike and makes no distinction between commissions payable under a contract and commissions paid voluntarily. A commission payable under a contract may be like a salary inasmuch as the contract confers upon the party a right to enforce the payment of the commission, but the similarity stops there and is not to be carried further so as to make the commission come within clause (xv) merely because a salary comes within it. One has to understand why a salary comes within clause (xv); it does so because it does not come under clause (x) or under any other clause. This reason does not hold good in respect of a commission and, therefore, it cannot be said to fall under clause (xv) merely because it is contractual. There is no justification for saying that only a contractual commission can be said to be an expenditure laid out wholly and exclusively for the purpose of the business. Payment of a voluntary or gratuitous commission also can be such an expenditure. The real question is what was the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X
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