TaxTMI 
TaxTMI 
2011 (12) TMI 320
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....al is right in holding that commission of Rs.25,00,000 paid to Mr. Ashok Gupta, managing director of the assessee, cannot be allowed as a deduction in view of section 36(1)(ii) of the Income-tax Act, 1961, and the said amount can be only allowed under section 36(1)(ii) if dividend of Rs. 25,00,000 could not have been paid to Mr. Ashok Gupta ?" 3. With the consent of the parties, the matter is taken up for hearing/dis- posal and arguments have been heard. 4. The facts are not in dispute. The appellant is a company and for the assessment year 2005-06 had filed a return declaring nil annual income after accounting for unabsorbed depreciation of Rs. 1,18,68,142. The Assessing Officer in the assessment order observed that an ....
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..... He directed the Assessing Officer to verify the said contention from records and if the same was paid as salary, then delete the said disallowance. This direction was given as an application under section 154 of the Act was pending before the Assessing Officer. On the question of commission of Rs. 25,00,000, after examining the factual matrix of the case, the Commissioner of Income-tax (Appeals) held that section 36(1)(ii) was not attracted and the disallowance made by the Assessing Officer was incorrect. It was observed that the payment of com- mission to the managing director, who was an employee, was towards services rendered by him and was allowable. 7. The Revenue preferred an appeal before the Tribunal against the dele- ti....
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.... paid at Rs. 25 lakhs an amount of dividend payable to the assessee will be allowable as deduction under section 37(1) of the Act subject to fulfilment of the requirements of section 37(1) of the Act. The Assessing Officer is directed accordingly." 8. Section 36(1)(ii) of the Act reads as under : "36. Other deductions.-(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-. . . (ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or com- mission ;" 9. A similar pro....
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....n accident in the sense that the bonus payments being referential to their wages and the dividends being referential to their shares have no relation to each other. Now, the answer to the question referred to us depends on the construction that is to be placed upon para. (x) of sub-section (2) of section 10. It should be noted that the body of this sub-section provides an allow- ance and the qualifying part of it is by way of exception to that allow- ance. What is to be allowed is 'any sum' paid to an employee as bonus or commission for services rendered and the exception is, where 'such sum' would not have been paid to him as profits or dividends if it had not been paid as bonus or commission. In the exception the words 'such sum' can, in ....
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....o be placed upon this sub-section, then the answer to the question is, that the whole of the sum of Rs. 4,130 paid as bonus to the share- holder employees is allowable as deduction under the provisions of section 10(2)(x). I answer the question referred to us in the affir- mative. The Commissioner must pay the costs of this reference." (emphasis supplied) 10. Kania J. in his judgment had elucidated and interpreted section 10(2)(x) of the Indian Income-tax Act, 1922, and observed (page 652) : "In my opinion, that construction of the clause is not correct. The word 'such' must refer to what had been previously mentioned in the same clause in connection with the word 'sum'. To find that out we must look to the first part....
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.... end there. The firm will have to prove to the satisfaction of the taxing authority that the five partners were emplo- yees, in the first instance. Secondly, that the bonus was a reasonable amount having regard to the pay of the employee and the conditions of his service. Thirdly, that the profits of the business for the year in question made it reasonable to pay the amount granted as allowance ; and lastly, the general practice in similar businesses or trade justified the payment of the amount as bonus. It seems to me that the plain reading of the clause means that the profits of a business will not be allowed to be dwindled by merely describing the payment as bonus, if the payment is in lieu of dividend or profit. I do not see any reason ....