1950 (3) TMI 20 - HC - Income Tax

Deductibility of Special Bonuses under Indian Income-tax Act

TATA SONS LTD. Versus COMMISSIONER OF INCOME-TAX, BOMBAY CITY

TATA SONS LTD. Versus COMMISSIONER OF INCOME-TAX, BOMBAY CITY - [1950] 18 ITR 460 (Bom) Issues Involved:1. Deductibility of Rs. 39,000 paid as a special bonus for the assessment year 1943-44.2. Deductibility of Rs. 34,125 paid as a special bonus for the assessment year 1944-45.Issue-Wise Detailed Analysis:1. Deductibility of Rs. 39,000 Paid as a Special Bonus for the Assessment Year 1943-44The primary issue is whether the sum of Rs. 39,000 paid by the assessee company towards the special bonus to certain superior executive officers of Tata Iron & Steel Co. Ltd. is deductible under Section 10(2)(xv) of the Indian Income-tax Act for the assessment year 1943-44. The Tribunal initially disallowed the claim, reasoning that the payment was voluntary and not dictated by any contractual obligation. The Tribunal also noted that the payment was made after the profits for the relevant accounting year had already been earned, thus questioning its connection to the earning of profits.However, the High Court found that the commission payable to the assessee company was directly dependent on the profits earned by the managed company. The court emphasized that commercial expediency and the principles of ordinary commercial trading must be considered. It was noted that the bonus was paid to increase the efficiency of the managed company's officers, which in turn would increase the profits of the managed company and consequently the commission earned by the assessee company. The court held that even voluntary payments made out of commercial considerations could be deductible if they were intended to facilitate the carrying on of the business.The High Court concluded that the Rs. 39,000 paid as a special bonus was an expenditure laid out or expended wholly and exclusively for the purposes of the assessee company's business. Therefore, it was deemed deductible under Section 10(2)(xv).2. Deductibility of Rs. 34,125 Paid as a Special Bonus for the Assessment Year 1944-45Similarly, the issue for the assessment year 1944-45 was whether the sum of Rs. 34,125 paid by the assessee company towards the special bonus to certain superior executive officers of Tata Iron & Steel Co. Ltd. is deductible under Section 10(2)(xv). The Tribunal had disallowed this claim as well, applying the same reasoning as for the previous year.The High Court reiterated its earlier findings, emphasizing that the payment was made out of commercial expediency to ensure the efficient working of the managed company, thereby increasing its profits and the commission earned by the assessee company. The court noted that the bonus was a reasonable one and fell within the ambit of Section 10(2)(x), and the assessee company had shared this bonus voluntarily to safeguard and potentially increase its own profits.The High Court held that the Rs. 34,125 paid as a special bonus was also an expenditure laid out or expended wholly and exclusively for the purposes of the assessee company's business. Thus, it was deemed deductible under Section 10(2)(xv).Conclusion:The High Court answered both questions in the affirmative, ruling that the sums of Rs. 39,000 and Rs. 34,125 paid by the assessee company towards the special bonus for the respective assessment years were deductible in arriving at the taxable profits. The Commissioner was ordered to pay the costs of the reference.