TMI Blog1964 (9) TMI 56X X X X Extracts X X X X X X X X Extracts X X X X ..... sment 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 ₹ 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 year. The agreement was to be in force for a year and if the agreement was to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 in the same premises. As two of the partners of the appellant firm were usually attending to this business, the appellant firm invited Shri Kevalchand who was familiar with the business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is at present the moral responsibility of the said Kevalchand' It is admitted that the said Kevalchand was already serving in the assessee-firm and doing work and the agreement does not mention what special and further work was to be done by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and in the circumstances on the case, disallowance of an amount of ₹ 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 which carried on business in Maskati Market, Ahmedabad. The firm, Messrs. Badarmal Ishverlal, closed down some time towards the end of Samvat year 2014, but at or about this time a new firm called Messrs. Badarmal Mithalal was started in which both Badarmal and Mithalal joined as partners. This firm of Mes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rangement 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 ₹ 100 on out-station sales. Kevalchand accordingly continued with the asse?see-firm and for Samvat year 2014 the assessee-firm paid him ₹ 2,400 as salary and an identical amount as bonus. For Samvat year 2015 the assessee-firm paid to Kevalchand ₹ 2,400 as salary and an identical amount as bonus and in addition, the assessee-firm also paid ₹ 16,334 as commission as provided in the agreement. The profit of the assessee-firm for Samvat year 2015 came to ₹ 1,24,712 after deducting interest payable to the partners. The agreement expired on Asovad 30, Samvat year 2015, and on the expiration of the agreement, Kevalchand was take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asonable 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 of Messrs. Badarmal Mithalal they were partners in the firm of Messrs. Badarmal Ishverlal and they could not, therefore, have been giving their whole time attention to the assessee-firm prior to their joining the firm of Messrs. Badarmal Mithalal. The Tribunal in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 after the services were rendered and where the payment was in the nature of an ex gratia payment. He urged that bonus was an ex gratia payment and commission following as it did after bonus must, therefore, be construed ejusdem generis so as to be confined only to an ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow 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 Bombay High Court in Subodhchandra Popatlal's case [1953] 24 I.T.R. 566. The learned judges of the Allahabad High Court also held that having regard to clause (a) of the proviso to section 10(2)(x) it was clear that bonus or commission , the reasonableness of whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing 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 Mysore Fertiliser Co. v. Commissioner of Income-tax [1956] 30 I.T.R. 734, obvious limits to the exaltation of this plea to a rigid and inflexible principle in deciding on the basis of commercial expediency of what constitutes reasonable expenditure...under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ger 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 ₹ 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 Tribunal nor did the Tribunal find any of the statements made in the agreement incorrect. As a matter of fact we find that on the expiration of the agreement Kevalchand was taken up as a partner in the assessee-firm and this lends considerable suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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 ₹ 1,24,712 and having regard to this profit we do not see how the commission of ₹ 16,334 can be said to be unreasonable. It is no doubt true that the Tribunal in confirming the order of the Income-tax Officer took into account the factor of pay and conditions of service but that factor was wrongly interpreted by the Tribunal. The Tribunal appeared to take the view that such a large commission would not be paid to an employee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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