Excluding directors' bonuses and commissions from profit calculation under Income-tax Act

The High Court held that bonus and commission paid to directors should be excluded when computing profits for the purpose of sections 80E and 80-I of the Income-tax Act. The Court emphasized that these amounts are part of business expenses and should be deducted before arriving at net profits. The Court ruled in favor of the Revenue, denying the deductions claimed by the assessee for the assessment years 1967-68 and 1968-69. The question for the assessment year 1969-70 was not addressed. No costs were awarded, and counsel's fee was set at Rs. 1,000.

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Issues Involved:
1. Whether the bonus and commission paid to the directors should be excluded for computing the profits of the priority industry under section 80E of the Income-tax Act, 1961, for the assessment year 1967-68.
2. Whether the bonus and commission paid to the directors should be excluded for computing the profits of the priority industry under section 80-I of the Income-tax Act, 1961, for the assessment years 1968-69 and 1969-70.

Issue 1: Exclusion of Bonus and Commission under Section 80E for Assessment Year 1967-68

The assessee-company claimed a deduction of Rs. 1,82,469, being eight per cent of the assessable profits from the priority industry, without accounting for the bonus and commission payable to the directors. The Income-tax Officer, however, deducted Rs. 2,30,020 for bonus and commission and Rs. 7,931 for depreciation, arriving at a net profit of Rs. 20,42,907 and allowed a deduction of Rs. 1,63,432, which is eight per cent of the net profit.

The Appellate Assistant Commissioner held that the deduction should be calculated at eight per cent of the profits and gains of the business, without reducing the profits attributable to the priority industry by the bonus and commission payable to the directors. The Tribunal upheld this view, stating that the bonus and commission should not be included in the profits for calculating the relief under section 80E.

The High Court, however, concluded that the bonus paid to an employee is part of his salary or wages, and the commission paid to the directors is part of the business expenses. Therefore, these amounts must be deducted before arriving at the net profits for the purpose of section 80E. The Court relied on the Supreme Court's decision in Cambay Electric Supply Industrial Co. Ltd. v. CIT, which outlined the steps for computing the special deduction under section 80E. The Court held that the deduction should be on the net profits after accounting for the bonus and commission.

Issue 2: Exclusion of Bonus and Commission under Section 80-I for Assessment Years 1968-69 and 1969-70

For the assessment year 1968-69, the assessee claimed a deduction of Rs. 35,536 under section 80-I, based on profits of Rs. 4,44,205 from the priority industry. The Income-tax Officer deducted Rs. 1,03,403 for bonus, Rs. 5,875 for commission, and Rs. 4,850 for depreciation, arriving at a net profit of Rs. 3,30,077 and allowed a deduction of Rs. 26,406.

The Appellate Assistant Commissioner and the Tribunal held that the bonus and commission should not be included in the profits for calculating the relief under section 80-I. The Tribunal modified the order to exclude depreciation, stating it is referable to the machinery used in the new industrial undertaking.

The High Court reiterated its stance from the 1967-68 assessment year, stating that the bonus and commission must be deducted before arriving at the net profits for the purpose of section 80-I. The Court emphasized that the legislative mandate requires computing the total income in accordance with the provisions of the Act, which includes deducting business expenses such as bonus and commission.

Conclusion:

The High Court concluded that the benefits under sections 80E and 80-I are available only on the net profits of the new industrial undertaking, after deducting the bonus and commission payable to the directors. The Tribunal's reasons were deemed extraneous to the provisions of the Act. Therefore, the Court answered the questions for the assessment years 1967-68 and 1968-69 in the negative, in favor of the Revenue. The question for the assessment year 1969-70 was not answered as it did not arise out of the Tribunal's order. No costs were awarded, and counsel's fee was fixed at Rs. 1,000.

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