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TMI Blog1982 (7) TMI 96X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate of 25% of net profit in accordance with the agreement entered into by the assessee with Pithwa. It was next claimed that Shri Pithwa was not the partner of the firm and the said amount was paid as remuneration. The ITO, however, judged the reasonableness of the remuneration so paid with reference to provisions of s. 36(1)(ii) of the Act. He next observed that while Pithwa shared 25% of the net profit the balance net profit of 75% was shared by three partners in proportion of 30:30:40. Thus each partner effectively got 22-1/2% as against 25% given to Pithwa. In this view of the matter the ITO considered the payment of remuneration as aforesaid paid to Pithwa as excessive and unreasonable. He, therefore, restricted the allowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not withdrawing the entire amount and, therefore, the disallowance which was made by the ITO applying provisions of s. 36(1)(ii) was fully justified. 3. Being aggrieved, the assessee has come up in appeal before us. Shri Divetia for the assessee contended that the approach of the CIT(A) did not represent a correct approach firstly because the provisions of s. 36(1)(ii) were not applicable in the instant case but provisions of s. 37 has to be applied in determining the claim of the assessee. In support of this contention Shri Divatia relied upon the decision of the Gujarat High Court reported at (1964) 54 ITR 763 (Guj) (Laxmandas vs. CIT) and pointed out that the said decision has since been approved by the Supreme Court in Shahzadanand a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was paid over and above the salary of an employee and bonus or commission paid in lieu of salary as follows : "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 commission represents his salary or is part of his salary, section 10(2)(x) would apply. The reasonableness of the payment with reference to the factors mentioned in section 10(2)(x) has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , depreciation, reserves, etc., a part of it should in all fairness go to the employees." It is in light of this well-settled principle that the assessee's claim is required to be considered. The assessee has been paid the said commission in lieu of salary and it is a mode of payment of remuneration which is assessed as such in the hands of Shri Pithwa as per the assessment order of Shri Pithwa placed before us. In light of the above decisions, therefore, the assessee's claim for deduction would fall u/s 37 of the Act and not u/s 36(1)(ii) of the Act. Now, we agree with Shri Divetia that except for making a bald observation that the agreement was entered into with a view to divert profits of the firm, there is absolutely no evidence to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards. It is also not correct to say that Shri Pithwa did not utilise the remuneration paid to him by the assessee as the copies of the account maintained by Shri Pithwa with the assessee firm show substantial withdrawals year after year including the withdrawals made for purchase of a house property, the income from which is assessed in the hands of Pithwa. It is well-settled that the reasonableness of payment of remuneration has to be judged from the point of view of commercial expediency and not by subjective standard of the taxing authorities. In light of these facts, therefore, the disallowance as made by the authorities below, which is based on erroneous application of law and wrong appreciation of facts, is unsustainable in our view. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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