TaxTMI 
TaxTMI 
1977 (4) TMI 4
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....sessee and Raj Mohan too was not actively associated with the conduct of the business of the assessee as he was working with the Oriental Carpet Manufacturers India Pvt. Ltd. (hereinafter referred to as "OCM"). Thus, from amongst the partners, only Madan Lal was looking after the day-to-day management of the business of the assessee and he was assisted by Saheb Dayal and Gurditta Mal who were engaged as employees of the assessee. Saheb Dayal and Gurditta Mal were looking after the business of the assessee since a long time and they were each paid remuneration of Rs. 1,000 per month. The business of the assessee consisted of sole selling agency of OCM in respect of yarn, cloth and blankets manufactured by OCM and for the sales effected by the assessee as such sole selling agents, commission was paid to the assessee by OCM. The figures show that the business of the assessee prospered from year to year from 1959-60 onwards and there was a gradual increase in the turnover of the assessee which jumped from the figure of Rs. 39.99 lakhs for the assessment year 1962-63 to the figure of Rs. 54.28 lakhs for the assessment year 1963-64. Since the assessee showed very satisfactory turnover fr....
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....arried in further appeal before the Tribunal, but the Tribunal also took the same view and held that since there was no proof to show that any services were rendered by Saheb Dayal and Gurditta Mal for which payment of commission in addition to salary and bonus could be justified, commission could not be said to have been paid for services rendered so as to attract the applicability of section 36, sub-section (1), clause (ii). The Tribunal observed that it was not possible to say " that the increase in the turnover in the year under appeal was due to the extra efforts put in by these two employees or that the employees had worked in the hope of receiving extra commission " and since bonus equivalent to three months' salary was paid to Saheb Dayal and Gurditta Mal in addition to their salary during the relevant accounting year, any extra services rendered by them, if any, " should be deemed to have been covered by the payment of this bonus". Since in the view taken by the Tribunal it was necessary that there should be some extra services rendered by Saheb Dayal and Gurditta Mal for which payment of commission could be said to be justified and there was nothing to show that any s....
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....nt and the only question was whether it was deductible as an allowable expenditure under section 36, sub-section (1), clause (ii). Section 36, sub-section (1), provides for making of various deductions in computing the income of an assessee under the head " profits and gains of business or profession " and one such deduction is set out in clause (ii) which, as it stood at the material time during the assessment year 1963-64, read as follows: " 36. (1)(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 profit or dividend if it had not been paid as bonus or commission: Provided that the amount of bonus or commission is reasonable with reference to-- (a) the pay of the employee and the conditions of his service ; (b) the profits of the business or profession for the previous year in question; and (c) the general practice in similar business or profession." Saheb Dayal and Gurditta Mal were admittedly employees of the assessee. They were each paid salary of Rs. 1,000 per month an or the previous year relevant to the assessment year 1963-64, bonus equivalent to three months' salary was also paid to....
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....ime during the relevant accounting year, there must be some extra services rendered by Saheb Dayal and Gurditta Mal in that year over and above the usual services rendered by them in the earlier years. Since, according to the High Court, there was no proof that any extra services were rendered by Saheb Dayal and Gurditta Mal, the High Court held that the payment of commission could not be said to be for services rendered within the meaning of section 36, sub-section (1), clause (ii). This view taken by the High Court is, in our opinion, plainly erroneous. Section 36, sub-section (1), clause (ii), does not postulate that there should be any extra services rendered by an employee before payment of commission to him can be justified as an allowable expenditure. What it requires is only this, namely, that commission paid to an employee should be for services rendered by him. For example, if an employee has not rendered any services at all during the relevant accounting year, no commission can be paid to him which would be an allowable expenditure. There must be some services rendered by an employee and where commission is paid for the services so rendered, section 36, sub-section (1), ....
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....t of which alone the amount of commission paid to an employee can be regarded as reasonable. They are merely factors to be taken into account by the revenue authorities in determining the reasonableness of the amount of commission. It may be that one of these factors yields a negative response. To take an example, there may be no general practice in similar business or profession to give commission to an employee, but, yet, having regard to the other circumstances, the amount of commission paid to the employee may be regarded as reasonable. What the proviso requires is merely that the reasonableness of the amount of commission shall be determined with reference to the three factors. But it is well settled that these factors are 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. Let us see whether the amount of commission paid to Saheb Dayal and Gurditta Mal in the present case can be said to be reasonable from this standpoint. It is clear from the order of the Tribunal....
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....o Saheb Dayal and Gurditta Mal as commission, it is difficult to see how such payment could be regarded as unreasonable. It is true that there was no obligation on the assessee to make payment of this commission to Saheb Dayal and Gurditta Mal, but it is now well-settled that the mere fact that commission is paid ex gratia would not necessarily mean that it is unreasonable. Commercial expediency does not mean that an employer should not make any payment to an employee unless the employee is entitled to it under a contract. Even where there is no contract, an employer may pay commission to an employee if he thinks that it would be in the interest of his business to do so. It is obvious that no business can prosper unless the employees engaged in it are satisfied and contented and they feel a sense of involvement and identification and this can be best secured by giving them a stake in the business and allowing them to share in the profits. It would indeed be a wise step on the part of an employer to offer incentives to his employees by sharing a part of his profits with them. This would not only be good business but also good ethics. It would be in consonance with Gandhian concept a....