TMI Blog1962 (2) TMI 80X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 nothing contained in section 2 of this Act shall apply to the assessment of such assessee for that particular year. The contention of the assessee was that the said Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nth from August, 1942, while the salaries of Shri B.B. Kapur and Shri G.P. Bhargava per month were ₹ 350 and ₹ 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 be done by the great attention and personal exertion of honest and energetic workers. It was stated that the commission payable to the aforesaid three persons was to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year under consideration, a bonus of two months' salary was paid, He accordingly allowed a sum of ₹ 669 out of ₹ 6,669 and added back a sum of ₹ 6,000. 5. In the Nawal Kishore Book Depot, Lucknow, the assessee claimed an allowance of ₹ 6,657 as commission payable to Shri Hari Ram, manager. This Hari Ram was paid a salary of ₹ 300 per month. The commission of ₹ 6,657 at the rate of 1 % 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 ₹ 392,000, Hari Ram was paid only ₹ 950 as war allowance, whereas in the account year 1943-44, which is the period under consideration, the sales were of ₹ 4,37,147 and the total commission debited as being payable to him was ₹ 6,657. He accordingly allowed a commission of ₹ 1,000 and added back a commission of ₹ 5,557 as inadmissible. 6. A copy of the order of the Income-tax Officer dated 30th of August, 1949, is part of the case and is annexure C . 7. The assessee challenged the assessment order passed by the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered 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 ₹ 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 ₹ 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 in that year. According to the Tribunal, the commissioner ₹ 23,239 and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 63,283 paid as commission to K.N. Tangri, B.B. Kapur and G.P. Bhargava in respect of their work done in execution of contracts with the Government was expenditure incurred or laid out wholly and exclusively for the purpose of the business of the assessee? Q. 2. Whether if the answer to the first question is in the affirmative, the sum of ₹ 23,239 out of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in respect of cases to which this Explanation was not to be applicable. Section 3 of the Amending Act is as follows: 3. Section 2 not to apply in certain cases.--Where before the 7th day of October, 1950, the Supreme Court has, on an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of those particular years in respects of which the decision of the Supreme Court had been obtained, learned counsel himself had to concede that it was difficult for him to challenge the classification was made by his provision of law. The effect of the classification was that the assessment cases, in which the Supreme Court had given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure, 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 according to the law applicable at the time when the rights or liabilities accrued and the proceedings commenced is a reasonable law founded upon a reasonable classification of the assessees which is permissible under the equal protection clause and to which no exception can be taken . It is true that in terms the dictum laid down by their Lordships of the Supreme Court in this case does not apply to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate of ₹ 350 per mensem and G.P. Bhargava at the rates of ₹ 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 accepted this contention put forward on behalf of the assessee and, consequently, proceeded to, deal with the point as to whether it was an allowable expenditure by applying the provision of section 10(2)(xv) of the Act. The income-tax department did not seek any reference to this court against the view of the Tribunal that this expenditure had to be considered under section 10(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 . The word commission , in business practice, covers various kinds of payments made under different circumstances. There are cases where a servant is employed by a businessman and as a condition of his employment, it is agreed prior to the service having been rendered that he would be paid for his services at a fixed rate of percentage of the turnover or profits. In such a cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 reasonableness, consideration of commercial expenditure must undoubtedly be taken into account. Learned counsel for the department urged that this view was expressed by the Supreme court in a case where, according to the facts before the Supreme Court, the assessee had written to the employee concerned, agreeing to pay him remuneration at the rate of ₹ 1,800 per annum and 5 per cent, of the net profits of the concern (colours Trading Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ability 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 in the judgment of a full Bench of this court in Shyamlal Pragnarain v. Commissioner of Income-tax [1955] 27 I.T.R. 404. One of us was a member of that Full Bench. The Full Bench held: It was admitted in the case before us that commission was paid to the manager and the assistant manager at the rate of 12 per cent. and 3 per cent. Without deducting either income-tax or excess profits tax and no dispute has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion 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 scope of the word solely used in section 12(2) of the Act cannot be very different from the scope of the words wholly and exclusively used in section 10(2)(xv) of the Act. Their Lordships, in the case cited above, held that the principle, which are relevant, are: (a) Though the question must be decided on the facts of each case, the final conclusion is one of law...; (b) it is not necessary to show that the expenditure was a profitable one or that, in fact, any profit was ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure 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 within these principles. The assessee, in order to put forward the facts and circumstances under which those payments were made, filed an affidavit sworn by the assessee, Raja Ram Kumar Bhargava, himself, as well as affidavits sworn by two of the employees concerned, K.N. Tangri and B.B. Kapur. The assessee, in his affidavit, stated that the manufacture of cartons was a new business of a pioneer nature, that trained and experienced hands were not available and that, with a view to secure more personal interest and infuse a greater spirit of efficiency and carefulness in doing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk 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 disregarding the affidavits filed, the Tribunal clearly committed an error of law. The error is exactly similar to that pointed out by their Lordships of the Supreme Court in the case of Mehta Parikh and Co. v. Commissioner of Income-tax*. In that case, the assessee had filed the cash book and three affidavits. The Income-tax Officer and the Appellate Assistant Commissioner of Income-tax accepted the cash book and did not challenge the entries therein, did not call for further documents or vouchers in relation to those entries, not did they require the presence of the deponents of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een 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 various types were to be manufactured. In fact, the organisation for manufacture of cartons had to be altered and the employees had to supervise the new organization and not merely continue to supervise the previous organisation. These are the facts which appear in the affidavits and which have been ignored by the tribunal in the appellate order. Another circumstance held against the assessee by the tribunal was that, for period of four months, G.P. Bhargava was absent due to illness and yet he was paid this commission though he was not paid the salary for that period. This ground agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible 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 Assistant Commissioner of Income-tax had disallowed the payment made to these three employees on the ground that it was not justified under section 10(2)(x) of the Act without recording any finding that any part of the amount claimed as deductible expenditure was expenditure not incurred in to the previous year relating to the assessment year in question. In these circumstances, it does appear that it was not open to the tribunal, on its own initiative, to record a reverse finding. The second ground urged by learned counsel, which must also be accepted, is that, even on merits, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 questioned In these circumstances, this second question is also answered in the affirmative in favour of the assessee. Question Nos. 3 and 4.--These two questions may be taken up together. Question No. 3 relates to the disallowance of payment claimed to have been made to one Hari Ram, manager, Nawal Kishore Book Depot, as commission. Question No. 4 relates to the payment made as commission on the sales in the assessee's Bhargava Ice Factory to the employees of that factory. It appears from the appellate order of the Tribunal that these payments were justified by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
