TaxTMI 
TaxTMI 
1962 (2) TMI 80
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....his properties. This claim was negatived by the department. The Tribunal agreeing with the department held that the amount is inadmissible under the Act (71 of 1950) which Act amended the Income-tax Act, 1922. The relevant amended section reads as under: "To sub-section (1) of section 9 of the Indian Income-tax Act, 1922 (hereinafter referred to as the said Act) the following explanation shall be added.... Explanation.--For the purposes of clause (iv) of this sub-section, the expression 'annual charge' does not include any tax in respect of property or income from property levied by a local authority or a State Government or the Central Government. Section 2 not to apply in certain case.--Where before the 7th day of October, 1950, the Supreme Court has, on an appeal in respect of the assessment of an assessee for any particular year, held that any tax paid by that assessee in respect of the relevant previous year is an 'annual charge not being a capital charge' within the meaning of clause (iv) of sub-section (1) of section 9 of the said Act, then no....
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....te of ¼% on the payments of contracts Nos. 3 and 4 and ½% on the rest. Besides these commission, Shri K.N. Tangri was getting a remuneration of Rs. 450 per month from August, 1942, while the salaries of Shri B.B. Kapur and Shri G.P. Bhargava per month were Rs. 350 and Rs. 300 respectively. The Income-tax Officer by a notice under section 23(3) dated 23rd of April, 1948, called upon the assessee to prove the admissibility of the commission that was so set apart. In reply to that notice, the assessee sent a letter dated 16th of June, 1948, stating how the commission was worked out at different rates on different contracts. In that letter, the assessee stated that no formal written stamped agreements were executed between the recipients of the commission and the assessee nor was there any agreement regarding their salaries. It was claimed that the manufacture of card-board boxes was a new business carried on by the assessee and the boxes that were initially required to be supplied to the Government were of simple types and the assessee was subsequently called upon to manufacture and supply large boxes requiring high techniques, skill and speedy disposal, which could b....
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....y of Rs. 270 and Shri Shyam Sundar a salary of Rs. 92 per month and in the preceding year a bonus of three months' salary was paid, while in the year under consideration, a bonus of two months' salary was paid, He accordingly allowed a sum of Rs. 669 out of Rs. 6,669 and added back a sum of Rs. 6,000. 5. In the Nawal Kishore Book Depot, Lucknow, the assessee claimed an allowance of Rs. 6,657 as commission payable to Shri Hari Ram, manager. This Hari Ram was paid a salary of Rs. 300 per month. The commission of Rs. 6,657 at the rate of 1½% was set apart as being payable to him on sales effected by him and was subsequently paid to him. The Income-tax Officer noticed that in the accounting year 1943-44, although the sales amounted to Rs. 392,000, Hari Ram was paid only Rs. 950 as war allowance, whereas in the account year 1943-44, which is the period under consideration, the sales were of Rs. 4,37,147 and the total commission debited as being payable to him was Rs. 6,657. He accordingly allowed a commission of Rs. 1,000 and added back a commission of Rs. 5,557 as inadmissible. 6. A copy of the order of the Income-tax Officer dated 30th of August, 1949, is part of ....
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....'s contention that the payment of extra remuneration and commission fell to be considered under section 10(2)(x) of the Income-tax Act. The Tribunal, however, felt that, on the facts and evidence on record, the payment was not justified either as a business necessity or commercial expediency. The Tribunal accordingly confirmed the add-backs made on account of extra remuneration and commission payable to the employees of the R.K.B. Carton Factory, the Bhargava Ice Factory, Kanpur, and Nawal Kishore Book Depot, Lucknow. In regard to the add-back of Rs. 63,283 on account of commission payable to the three employees of the R.K.B. Carton Factory, the Tribunal considered an additional ground for confirming the add-back which had not been considered by the Income-tax Officer or the Appellate Assistant Commissioner. The additional ground is that the commission of Rs. 63,283 was based upon contracts carried on not only during the previous year of the assessment year 1945-46, but of the preceding year and although the income of the work done of the preceding year has been taken into consideration in the preceding year's account, the commission was payable on account of the work done ....
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....made part of the case. It is, therefore, not necessary to reproduce paragraph 6 of the Tribunal's order in the statement of the case. The statement is, therefore, finalised. R. S. Pathak, for the assessee Gopal Behari, for the Commissioner JUDGMENT V. BHARGAVA J.- These two separately numbered references, in fact, constitute one single reference. Under section 66(1) of the Indian Income-tax Act (hereinafter referred to as the Act), the Income-tax Appellate Tribunal referred the following question for the opinion of this court: "Whether the Act (71 of 1950) is ultra vires the Constitution of India?" Thereafter, under section 66(4) of the Act, this court called for a supplementary statement of the case with reference to four other question which, according to the court, arose out of the appellate order of the Income-tax Appellate Tribunal. The question in respect of which the further statement of the case has been received, are: "Q. 1. Whether, on the facts and circumstances of this case, the sum of Rs. 63,283 paid as commission to K.N. Tangri, B.B. Kapur and G.P. Bhargava in respect ....
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.... up for decision before the Supreme Court in Commissioner of Income-tax v. Gappumal Kanhaiya Lal [1950] 18 I.T.R. 584; [1950] S.C.R. 563 and the Supreme Court for the reasons given in an earlier judgment in New Piece Goods Bazar Co. Ltd. v. Commissioner of Income-tax [1950] 18 I.T.R. 516; [1950] S.C.R. 553, held that the house tax and water tax imposed by a municipal board are annual charges which are not capital charges to which the property is subject within the meaning of clause (iv) of sub- section (1) of section 9 of the Act. The legislature, after this decision by the Supreme Court intervened and enacted the Amending Act. By section 2 of the Amending Act, the following Explanation was added to sub-section (1) of section 9 of the Act: "Explanation. -For the purposes of clause (iv) of this sub-section, the expression 'annual charge' does not include any tax in respect of property or income from property levied by a local authority or a state Government or the Central Government." This Explanation was added with a further provision that it shall be deemed always to have been added. Then there was a provision in section 3 of the Amending Act laying down an exception....
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....planation added to section 9(1) of the Act was made retrospective by laying down that it was to be deemed always to have been added and was thus applicable to all cases of assessees but, by section 3 of the Amending Act, the assessees, whose case had been decide by the Supreme Court on appeal before the 7th of October, 1950, were not to be governed by this retrospective addition of the Explanation. In urging this point learned counsel at first proceeded on the assumption that, if there was an assessee, in whose case the Supreme Court had, before the 7th of October, 1950, held that any tax paid by the assessee in respect of the previous years was an annual charge, not being a capital charges within the meaning of clause (1) of sub- section (1) of section 9 of the Act, the provision contained in the Explanation was not to apply to that assessee in respect of any year whatsoever and it was urged that a classification between such assessees, who were exempted from the applicable of the Explanation and all other assessees was totally unreasonable. When, however, it was pointed out that the exemption granted by section 3 of the Amending Act was confined to those proceedings of assessment....
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....ving sanctity to decision of the Supreme Court Cannot be said to be an unreasonable classification nor can it be said that such a classification has no nexus with the object of the enactment. The law, as it stood earlier, was interpreted by the Supreme Court in the cases which were finally decided by the Supreme Court and the legislature, in making exception contained in section 3 of the amending Act, only desired that those judgments already pronounced. By the Supreme Court should not be affected by the fresh legislation. All other cases in which the Supreme Court had not given its final decision were to be governed by the amended law so as to give effect to the intention expressed by the legislature itself by adding the Explanation to sub-section (1) of section 9 of the Act. That classification based on cases pending or decided is a reasonable classification was held by the Supreme Court in Ramjilal v. Income-tax Officer, Mohindargarh [1951] 19 I.T.R. 174; [1951] S.C.R. 127; A.I.R. 1951 S.C. 97. Their Lordships held: "In any case the provision that pending proceedings should be concluded....
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....ver off other contracts G.P. Bhargava was paid the sum of Rs. 12,698 at the rate of ? per cent on the turnover of contracts Nos. 3 and 4 and ? per cent on the turnover of other contracts. It seems that these three persons. In addition to the commission paid to then were drawing monthly remuneration. K.N. Tangri was getting remuneration at the rates of Rs. 450 per mensem, B.B. Kapur at the rate of Rs. 350 per mensem and G.P. Bhargava at the rates of Rs. 300 per mensem. The Income-tax Officer held that the commission paid to these three persons was an allowance of the nature covered by section 10(2)(x) of the Act and disallowed it on the ground that it was not a reasonable expenditure. Before the Income-tax Tribunal, it was urged on behalf of the assessee that the claim for deduction of this amount paid to these three persons should have been considered under section 10(2)(x) of the Act on the ground that the case of the assessee really was that this was expenditure laid out wholly and exclusively for the purpose of carrying on, the business in connection with which this payment was made and was not a commission of the nature mentioned in section 10(2)(x) of the Act. The Tribunal acc....
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....10(2)(x) of the Act, the claim for deduction of that expenditure has to be confined to that provision and the benefit of deduction under section 10(2)(xv) of the Act cannot be claimed because of the exception made therein by which that provision has been made applicable only to all such expenditure as may not be an allowance of the nature described in any of the clauses (i) to (xiv) which includes clause (x). The question that has, therefore, to be seen in this case is whether this allowance, being claimed by the assessee, is an allowance of the nature mentioned in section 10(2)(x) of the Act or not. It is no doubt true that this amount in question was paid to K.N. Tangri, B.B. Kapur and G.P. Bhargava, who were in the service of assessee, and the amount paid has been described as commission, but we do not think that this mere description of this amount as commission necessarily makes the provision of section 10(2)(x) of the Act applicable. Under section 10(2)(x) of the Act, the sum in question must be that paid to an employee as bonus or commission for service rendered. The word "commission" in this clause should, in our opinion be interpreted ejusdem generis with the word "bonus".....
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....has to be determined, must be bonus or commission apart from the pay and the condition of service, so that its reasonableness can be tested on the basis of the pay and the conditions of service. The submission of learned counsel for the department that all kinds of commission paid to an employee even if they form part of the pay of the employee or part of the conditions of his service would still be governed by the provisions of section 10(2)(x) of the Act, cannot, therefore, be accepted by us. In this connection, learned counsel for the department drew our attention to a sentence in the judgment of their Lordships of the Supreme Court in Commissioner of Excess profits Tax v. N.M. Rayaloo Iyer and Sons [1961] 41 I.T.R. 671; [1961] 3 S.C.R. 60 where it was said: "It is true that in considering whether the deduction claimed by the assessees for payments made as bonus or commission paid to an employee is to be allowed, the taxing officer must have regard to the provision of section 10(2)(x) of the Income-tax Act; and clause (12) of Schedule 1 of the Excess Profits Tax Act, and in assessing the reasonablenes....
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....ng from gross profits amounts of other allowable expenses, salaries paid to the employees including that employee. That was, therefore, a case where the commission was not of the particular nature explained by us above where a forms part of the salary and is paid under the conditions of service. It is also to be noticed that in that case the ultimate decision given by their Lordships of Supreme Court was based on the applicability of clause (12) of Schedule 1 of the Excess profits Tax Act and not of section 10(2)(x) of the Acts. In the circumstance, we are unable to agree with learned counsel that the Supreme Court in that decision, intended to lay down that the provision if section 10(2)(x) of the Act would apply for judging whether an amounts is an allowable deduction or not in all cases where the amount is described as commission irrespective of the nature of that commission or the circumstances under which that commission is paid. Their Lordships, at no stages, considered the case of an amount paid as commission representing salary payable to the employee under his conditions of service. Reliance has also been placed by learned counsel for the department on certain remarks i....
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....) of the were applicable, still appears to have fallen into an error in basing its decision, disallowing this claim on the ground that the amount already estimated by the Appellate Assistant Commissioner of Income-tax was reasonable in the circumstance of the case. Expenditure claimed under section 10(2)(xv) of the Act is not to be tested on the basis of reasonableness at all. All expenditure incurred wholly and exclusively for the purpose of the business must be allowed and the only question that is to be seen is whether the particular expenditure claimed was expended wholly and exclusively for the purpose of the business. The principles that have to be kept in view in arriving at a decision on such a point can be taken from the view expressed by their Lordships of the Supreme Court in Eastern Investment Ltd. v. Commissioner of Income-tax [1951] 20 I.T.R. 1; [1951] S.C.R. 594. In that case, the Supreme Court had occasion to consider the scope of section 12(2) of the Act where income, profits and gains have to be computed after making allowance for "any expenditure incurred solely for the purpose of making or earning such income, profits or gains". It has appeared to us that the sc....
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....the reality of the payment is challenged or is in dispute, different considerations arise; so also in cases where the tax authorities are able to point to some consideration other than the purpose of the business as accounting for any portion of the payment made. In such cases, of course, such portion of the amount claimed, which is either not held to have been paid or is held to have been paid for reasons other than business expediency, could and should be disallowed; but the reason for the disallowance is because either the portion disallowed is not paid, or because the expenditure is not solely and exclusively for the business, and not on the ground that in the opinion of the Income-tax Officer or other taxing authority the remuneration is 'unreasonably' high--either because the employee does not, in the authority's opinion, deserve so much, or because the assessee could have secured other employees on more favourable terms". We consider that these are the principles which apply to the present case also and we have, therefore, to examine and see whether the payments made by the assessee to the three employees, viz., K.N. Tangri, B.B. Kapur and G.P. Bhargava, fall ....
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....ness. For this reason, the initial commission fixed by the assessee and paid at that initial rate to these three employees was allowed and that allowance was upheld by the Income-tax Appellate Tribunal also. The Income-tax Appellate tribunal, however, agreed with the Appellate Assistant Commissioner of Income-tax in disallowing the commission at the increased rate which was allowed by the assessee to the employees during the subsequent conduct of the business. This rate was with effect from 1st October, 1943. The tribunal held that they had no doubt in their minds that no extra work was done by these employees, so that there was no justification in the increase of the rate of commission. The affidavit filed on behalf of the assessee clearly showed how and why extra work fell upon these employees when it became necessary to raise the rate of commission with effect from 1st October, 1943. On these affidavits the persons swearing the affidavits were not cross-examined by the income- tax authorities or by the tribunal and, in fact, no indication was given to the assessee that the facts given in the affidavits were not going to be accepted in those assessment proceedings. In thus disreg....
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....commission had been agreed to be paid on the turnover and not on the profits. This fact, if at all, supports the case of the assessee rather than militating against it. The turnover will determine the amount of work which would have to be done or which would have to be supervised by the employees put in charge of the business. If the turnover increased enormously, the work done would also increase in the same proportion and such increase in work would certainly justify increase in payment. The Tribunal also considered that an initial commission at a total rate of 1? per cent, between the three employees fixed at the time when this business was begun would have been sufficient because with the increase in the turnover the actual amount calculated at that trade would automatically increase and the employees would have been properly remunerated by that increase. The Tribunal seems to have lost sight of the fact, asserted in the affidavit, that there was an increase not only in the volume of the work but there were other complications so as to make the nature of the work more complicated. Initially, the cartons to be supplied were to be only of one type, but, later on, cartons of vario....
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.... the decision given by the Income-tax Appellate Tribunal should be held to be incorrect on two grounds. The first ground is that the Income-tax Appellate Tribunal proceeded to record the finding that commission to the extent of Rs. 23,239 should have been claimed in the preceding year without any appeal having been filed by the department before the Tribunal and even without away such ground having been raised on behalf of the department. The Income-tax Officer and the Appellate Assistant Commissioner of Income-tax had recorded the finding that the entire sum claimed as deductible expenditure in respect of payments made to K.N. Tangri, B.B. Kapur and G.P. Bhargava was to be treated as expenditure in the previous year relating to the assessment year in question and that view was not challenged before the income- tax Appellate Tribunal. The Tribunal, however, on its own initiative, recorded the finding that this commission was earned by the employees in the preceding year, meaning the previous year relating to the assessment year preceding the assessment year in question so that this expenditure could not be claimed in this assessment. The Income-tax Officer and the Appellate Assista....
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....hat the contracts were carried out in the preceding year as well as in the previous year in question which necessarily implies that the contracts were completed in the previous year in question and not in the preceding year. The income accruing from the contract had to be credited in the accounts as income already accrued if payment from the Government in respect of the portion of the contract carried out in the preceding year became due on that portion of the contract having been carried out. This would not, however, change the position between the assessee and his employees. The employees could not claim that any commission became due to them, until each contract was completed in its entirety and, since all the contracts were completed in the previous year in question, the entire amount paid as commission to the employees became payable only for the previous year in question and could legitimately be claimed as a deductible expenditure in this very assessment. The Tribunal fell into an error because the Tribunal ignored the circumstance that the right to receive the commission accrued to the employees only on completion of the contracts which took place in the previous year in qu....