TaxTMI 
TaxTMI 
1964 (9) TMI 56
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....e also partners in a firm called Messrs. Badarmal Ishverlal for and from the assessment year 1954-55 onwards. This firm of Messrs. Badarmal Ishverlal was closed down towards the end of Samvat year 2014. At about the same time, another firm called Messrs. Badarmal Mithalal was started. Both Mithalal and Badarmal became partners of Messrs. Badarmal Mithalal since its inception. Mithalal was also a partner in another firm called Messrs. Multanmal Mukundchand. 4. The assessee-firm had in its employment for many years prior to the previous year an employe? called Kevalchand. Before the beginning of the accounting year in question, this Kevalchand in addition to being an employee of the assessee was also a partner in a firm called Messrs. Rasiklal Ranmal. For his services to the assessee-firm, Kevalchand was getting a modest salary of Rs. 200 per month. On or about December 17, 1957, however, he entered into an agreement with the firm by which for Samvat year 2014 he was to get bonus equal to the salary and for Samvat year 2015 in addition to the bonus and salary as in the previous year, he was to get commission at the rate of three annas per cent. of all the outstation sales for the ....
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....practice in this line of business to pay such a heavy commission to the employee getting a salary of Rs. 2,400 and the same employee was looking to the affairs of the firm's business without any commission and there were no special circumstances to justify the heavy commission paid to him in this year, and hence, relying on the conditions laid down in section 10(2)(x), the Income-tax Officer has disallowed half of the commission paid to this employee. The appellant contends that Shri Kevalchand Dholchand is an old employee of the appellant firm and he has cloth business for over a decade and is closely associated with the firm and all its constituents. It is stated that he was formerly a full-fledged partner in the wholesale cloth business of the firm in ?he name of Rasiklal Ranmal and he remained there up to Samvat year 2014 and is separately assessed by the Income-tax Officer, Circle 1, Ward-E, at Ahmedabad. The appellant states that Rasiklal Ranmal closed down its business in the assessment year 1959-60 and two of the partners, Shri Mithalal and Badarmal, jointly joined the firm of Badarmal Ishverlal at Maskati Market, Ahmedabad, and, consequently, Messrs. Badarmal Mithalal ....
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....thereto and that two of the partners of the assessee- firm had joined other firms and, therefore, could not look after the assessee-firm. It was contended that no consideration other than business weighed with the partners of the assessee-firm and that the agreement entered into between the firm and Kevalchand was a bona fide agreement. The Tribunal, however, upheld the contention of the departmental representative. Its reasons for upholding the departmental action are contained in paragraph 7 of the order which is extracted below: "Now it will be necessary to find out the real facts with regard to the payment of commission to the said Kevalchand. It will be seen that the said Kevalchand was an old employee of the assessee-firm and was serving in the assessee-firm on a small salary plus bonus and it was only on December 17, 1957, that an agreement was entered into between the said Kevalchand and the assessee-firm wherein it is stated that if the said Kevalchand 'decides to leave the assessee-firm it will take an year to complete the work of recovery of debts and settlement of accounts which ....
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....me-tax Officer and allow the departmental appeal." A copy of the order of the Tribunal is marked annexure "D" and forms part of the case. 8. The following question of law arises from the order of the Tribunal: "Whether, on the facts and in the circumstances on the case, disallowance of an amount of Rs. 8,167 out of commission paid to Kevalchand was justified in law while determining the business profits of the firm for the assessment year 1960-61?" M. M. Thakore with P. D. Desai, for the assessee J. M. Thakore (Advocate-General) for the Commissioner JUDGMENT The judgment of the court was delivered by BHAGWATI J.--The question which arises in this reference is whether a certain commission paid by the assessee to an employee is an allowable expenditure in comp?ting the profits of the assessee from business. The assessee is a registered firm carrying on business in cloth at Mahavir Market, Ahmedabad. There were at the material time seven partners in the assessee-firm, two of them being Badarmal and Mithalal. These two were also partners in another firm called Messrs. Badarmal Ishverlal whic....
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....between the assessee-firm and Kevalchand which struck a middle path. The agreement was dated Magsar Vadi 11th, Samvat year 2014, that is, 17th December, 1957, and under the agreement Kevalchand agreed to continue to work for the assessee-firm up to the end of Samvat year 2015 and if no other arrangement was made and he desired to be relieved from the commencement of Samvat year 2016, he was to be allowed to be relieved after settling all his responsibilities in connection with the affairs of the assessee-firm and in consideration for this, the assessee-firm agreed to pay to Kevalchand for Samvat year 2014 the salary which he was then receiving together with bonus of an equivalent amount and for Samvat year 2015 not only salary and bonus as in Samvat year 2014 but also, in addition, commission at the rate of three annas per Rs. 100 on out-station sales. Kevalchand accordingly continued with the asse?see-firm and for Samvat year 2014 the assessee-firm paid him Rs. 2,400 as salary and an identical amount as bonus. For Samvat year 2015 the assessee-firm paid to Kevalchand Rs. 2,400 as salary and an identical amount as bonus and in addition, the assessee-firm also paid Rs. 16,334 as com....
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....thereupon carried the matter in appeal before the Tribunal. The Tribunal did not disbelieve the genuineness of the agreement nor did it disbelieve the genuineness of the payment made to Kevalchand but took the view that the payment of such a large commission was unreasonable and the Income-tax Officer was, therefore, justified in disallowing one half of it. The Tribunal held that no special circumstances which justified the payment of such a large commission were established and in taking this view the only circumstance to which the Tribunal adverted was the fact that Kevalchand continued to do the same work after the agreement which he was doing prior to the agreement as if that was the only circumstance on record bearing upon this point. The Tribunal negatived the argument urged before it that because Badarmal and Mithalal, two of the partners of the assessee- firm, joined the firm of Messrs. Badarmal Mithalal and were consequently unable to?attend to the management of the affairs of the assessee-firm, it was found necessary to continue the services of Kevalchand on the new terms as to payment of bonus and commission. The Tribunal stated that even prior to their joining the firm ....
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....enditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business." It would thus be seen that if the deduction claimed is of an expenditure of the nature specified in section 10(2)(x), the claim for deduction of that expenditure must be considered with reference to that provision and the benefit of deduction under section 10(2)(xv) cannot be claimed because by its express language the provision contained in section 10(2)(xv) applies only to an expenditure which is not of the nature described in any of the clauses (i) to (xiv) which include clause (x). The question which, therefore, requires to be considered is whether commission paid to Kevalchand in the present case is an expenditure of the nature specified in section 10(2)(x). If it is, then the claim for deduction of that expenditure can be allowed only if the conditions of section 10(2)(x) are satisfied and section 10(2)(xv) cannot be invoked by the assessee. The contention urged by Mr. M.M. Thakore on the construction of section 10(2)(x) was that that provision applied only to those cases where a sum was paid by an employer to an employee as bonus or commission afte....
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....ertain amount provided the business made profit it would be a bonus, and the employee would be legally entitled to recover that amount." Bonus can thus be as much a matter of contractual obligation as salary. The word "commission" cannot, therefore, be read in a narrow and constricted manner as Mr. M.M. Thakore would have us do. The payment of commission may be voluntary or it may be under a contractual obligation. But whatever it is, if it is commission over and above the salary, then the claim for deduction of such commission must be considered with reference to the provisions of section 10(2)(x). Mr. M.M. Thakore relied on a decision of the Allahabad High Court in Raja Ram Kumar Bhargava v. Commissioner of Income-tax [1963] 47 I.T.R. 680. It is no doubt true that in this decision there are observations which seem to suggest that the learned judges of the Allahabad High Court who decided this case regarded bonu? and commission mentioned in section 10(2)(x) as in the nature of ex gratia payments. But with the greatest respect to those learned judges we do not think that that view is a correct one. As a matter of fact that view is directly contrary to what has been held by the Bomb....
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.... factors. But it is now well-settled that these factors have to be considered from the point of view of a normal prudent businessman. The reasonableness of the payment with reference to these factors has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency (vide Mysore Fertiliser Co. v. Commissioner of Income-tax [1956] 30 I.T.R. 734). Now let us see whether this approach has been adopted by the Tribunal in the present case. It is clear from the order of the Tribunal that the Tribunal relied mainly and substantially on the fact that he nature of the work done by Kevalchand remained unchanged even after the agreement and concluded that since the work which Kevalchand was required to do after the agreement was the same which he was doing prior to the agreement, it could not be said that there were any special circumstances which warranted the payment of such a large commission to Kevalchand. Now it is undoubtedly true that the work which Kevalchand was required to do under the agreement was in no way greater or more onerous than that which he was doing before, but there are, as observed by the Madras High Court in ....
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...., during Samvat year 2015, Kevalchand would be paid, in addition, commission at the rate of annas 3 per Rs. 100 on outstation sales. It is significant to note that these terms were agreed to only up to the end of Samvat year 2015 and not for a longer duration. It was necessary to keep Kevalchand for some time at least in order to attend to outstation sales and for this purpose these terms as regards payment of bonus and commission were agreed to by the assessee-firm. It is also important to note that the assessee-firm could have granted an increas? in salary to Kevalchand to retain him in employment, but what the assessee-firm did was not to increase the salary beyond Rs. 200 per month but to grant by way of additional remuneration a percentage on outstation sales. This was certainly a prudent act of management on the part of the assessee-firm, for correlating additional remuneration with outstation sales would certainly act as an incentive to Kevalchand to increase outstation sales and thereby increase the profits of the assessee-firm. These circumstances clearly emerge from the agreement and it is significant that the genuineness of the agreement was not disbelieved by the Tribun....
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....e by Kevalchand continued to be the same as before. This was clearly a wrong approach and it vitiated the finding of the Tribunal that the amount of commission paid to Kevalchand was to the extent of one half unreasonable. The learned Advocate-General contended that this finding of the Tribunal was a finding of fact and since the Tribunal had taken into account all the three tests laid down in the proviso to section 10(2)(x) in reaching the finding, it was not open to us to reappreciate the evidence and to substitute our own determination as regards the r?asonableness of the amount. This contention however suffers from a two-fold infirmity. In the first instance it is not correct to say that the Tribunal took into account all the three tests set out in the proviso to section to 10(2)(x). One of the factors required to be taken into account was the profit of the assessee-firm and this the Tribunal clearly failed to take into account. The profit of the assessee-firm in Samvat year 2015 was Rs. 1,24,712 and having regard to this profit we do not see how the commission of Rs. 16,334 can be said to be unreasonable. It is no doubt true that the Tribunal in confirming the order of the Inc....