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TMI Blog1973 (12) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... ission of salary 1963-64 Rs. Rs. p. m. 1 . Shri N. J. Trivedi 25,320 325 2. Shri B. K. Gutta 18,465 500 --------------- 43,785 --------------- 1964-65 1. Shri N.J. Trivedi 28,675 400 2. Shri B. K. Gutta 25,094 515 3. Shri K. G. Nayak 24,929 315 ---------------- 78,698 ---------------- In 1963-64, the assessee-firm had two employees, namely, N. J. Trivedi and B. K. Gutta, whereas in 1964-65 one more employee was taken up in service, namely, K. G. Nayak, and he joined the assessee-firm's service as a probationer some time in August, 1962 and with the commencement of the calendar year 1963 which is the previous year relevant to the assessment year 1964-65, K. G. Nayak was appointed as a regular employee under a proper agreement of service. The Income-tax Officer doubted the genuineness of these payments of commission to the assessee's employees and caused various inquiries to be made. He asked the assessee to prove the genuineness of the claim made. The assessee relied upon four factors in support of its contention before the Income-tax Officer: (1) the agreements entered into with the employees at the beginning of the year ; (2) stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any commission to the employees in the trade which was similar to that of the assessee. For the two assessment years, the assessee-firm filed appeals before the Appellate Assistant Commissioner and urged the same contentions as had been urged before the Income-tax Officer. The Appellate Assistant Commissioner confirmed all the findings of the Income-tax Officer and he further observed that there was no necessity for paying such commission to the employees, inasmuch as no canvassing was absolutely necessary for selling the products of the assessee-firm which was a very old concern. According to the Appellate Assistant Commissioner the products of the assessee needed no introduction and there was no necessity of any sales representative. He also held that the employees were not such qualified persons having any special skill or ability for canvassing the goods of the assessee. Before the Appellate Assistant Commissioner, the Income-tax Officer who represented the department urged that the claim could not be allowed in terms of section 36(1)(ii)(a), inasmuch as the entire payment which was the subject-matter of dispute was claimed to have been paid to the employees. The Appellate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases, it was not possible to make any comments. The Tribunal examined all contentions urged before it and held that the report made by the Income-tax Officer to the Appellate Assistant Commissioner should not be taken into consideration inasmuch as the assessee was never given an opportunity of looking into the report. The Tribunal found that the purchases were made from the companies producing dye-stuffs at Bombay and other places and it appeared to the Tribunal that in the sale of dye-stuffs there was always a question of payment of some commission to employees of the mills to whom the dealers supplied dye-stuffs and colours and the assessee bad also to incur expenditure of that nature. In assessment proceedings of this very assessee for assessment years 1956-57 and 1957-58, the Tribunal held that the payments made cannot be said to be unusual or extraordinary. Taking all the relevant facts into account, the pay of the employees, the nature of the business, and profits made and the practice prevalent in the said business, the Tribunal on the earlier occasion considered that the payment of remuneration by way of commission in the manner done in that particular case was not liabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no difference between the commission actually paid and the commission stipulated in the different agreements with the respective employees. The Tribunal came to the conclusion that the employees were in fact going about for the purpose of obtaining the orders and for this purpose the Tribunal relied upon letters written by some of the mills to the effect that the employees of the assessee went to the mills on various occasions for the purpose of securing business. The Tribunal observed at several places that the commission to the employees was paid under the agreements and was made substantially to cover the expenditure that the employees in turn had to incur for paying to printing masters, dyeing masters, etc., of the various mills. The Tribunal considered the depositions of all the employees and came to the conclusion that the revenue authorities misunderstood the scope of the claim made by the assessee. The Tribunal concluded that it was not a case of specific services rendered by the employees ; it was a question of reimbursement of certain expenditure which was required to be incurred in this type of business. The Tribunal observed that apart from the fact that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o us for our opinion. Before proceeding with the consideration of the main points, we may point out that the agreements with these three different employees, N. G. Trivedi, Gutta and K. G. Nayak, are on the record of this case. Each of these three agreements is on the footing that each of the three employees is entitled to a certain amount of salary, Rs. 325 per month in the case of N. J. Trivedi, Rs. 500 in the case of B. K. Gutta and Rs. 315 per month in the case of K. G. Nayak. Over and above these fixed amounts of salaries, the relevant agreements provided for payment of commission at various rates of percentage depending upon the different types of dye-stuffs and colour chemicals sold through the efforts of the employee concerned and it is the common feature of all the agreements entered into with each of the three employees that the figure of commission payable to each of the employees was to be worked out at the end of the quarter of three months in each calendar year and it has been found that in each of the two assessment-years under consideration, the amounts of commission were so worked out and credited in the respective accounts of the three employees and there were w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to income-tax under the head " profits and gains of business or profession ". We may point out that under the Indian Income-tax Act, 1922, identical provisions comparable to section 36(1)(ii) and the proviso to that clause were set out in section 10(2)(x) and there also the bonus or commission paid to an employee could be claimed as deduction if the requirements of section 10(2)(x) of the Act of 1922 were satisfied. The provisions of section 10(2)(x) came up for consideration before this High Court in Laxmandas Sejram v. Commissioner of Income-tax [1964] 54 ITR 763 (Guj). There a Division Bench of this High Court consisting of Shelat C.J. and Bhagwati J. held that bonus and commission referred to in section 10(2)(x) of the Indian Income-tax Act, 1922, referred not only to ex gratia payment but also to amounts payable under contract. It further held that the bonus or commission, to fall within section 10(2)(x), must be over and above the salary of the employee. If any bonus or commission is paid to an employee over and above his salary, the claim for deduction in respect of such bonus or commission would have to be tested under section 10(2)(x), but if such bonus or commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count all the three tests set out in the proviso to one of the factors required to be taken into account was the profit of the assessee-firm and this the Tribunal clearly failed to take into account. The profit of the assessee-firm in Samvat year 2015 was Rs. 1,24,712 and having regard to this profit we do not see how the commission of Rs. 16,334 can be said to be unreasonable. It is no doubt true that the Tribunal in confirming the order of the Income-tax Officer took into account the factor of pay and conditions of service but that factor was wrongly interpreted by the Tribunal. The Tribunal appeared to take the view that such a large commission would not be paid to an employee with such a meagre salary as Rs. 200 per month. Now, this would certainly be true if the commission was paid ex gratia in reward of the services rendered but whereas in the present case the remuneration under the contract of service consists of two parts, namely, salary and commission, and as commission is paid as part of remuneration, this would be a totally wrong approach. In such a case, if the salary is low, the commission would have to be large in order to make up adequate total remuneration and to sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eases his sales. The Tribunal has also held that the three employees of the assessee-firm were visiting the various mills with whom the assessee had dealings and were securing business from those different mills for the assessee-firm. In view of those conclusions of the Tribunal and particularly in view of the conclusions of the Tribunal that the payment of commission under the three agreements was necessary in the interest of the assessee's business, in our opinion, applying the correct test required to be applied for ascertaining the reasonableness of the commission paid in the light of the provisions of section 36(1)(ii), namely, the test of commercial expediency as has been laid down by the Division Bench of our court in Laxmandas Sejram's case [1964] 54 ITR 763 (Guj), the question that we have to ask ourselves is, in view of these findings of' fact reached by the Tribunal, can it be said that the payment of commission to the employees in the light of the peculiar facts and circumstances of this particular case was not reasonable? We have already pointed out that the amount of commission paid by the assessee-firm to its emloyees increased from year to year. So did the quantum o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3)(ia) of the Act or or the ground raised by the assessee ". The Bombay High Court in that case held that it was not necessary for the assessee to suggest under which particular section of the Act the income was exempt and the proper question the Tribunal should have framed was whether the income was exempt from tax. The Tribunal might point out under which section in its opinion the income was exempt but the High Court was not bound necessarily to take the same view. It was open to the High Court to decide that the income was exempt from taxation under some other provision. The jurisdiction of the High Court was not confined only to deciding whether the exemption fell under section 4(3)(ia) or not. If the High Court came to the conclusion that the relevant provision of the Income-tax Act was section 4(3)(i) and not section 4(3)(ia) it was open to the court to so decide under its advisory jurisdiction. Applying the test laid down by the Bombay High Court in the case of Commissioner of Income-tax v. Breach Candy Swimming Bath Trust [1955] 27 ITR 279 (Bom) to the instant case, we also can hold that though the Tribunal has come to the conclusion that the amount of commission paid by t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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