TMI Blog1954 (2) TMI 17X X X X Extracts X X X X X X X X Extracts X X X X ..... sion calculated at the rate of 2a. 6p. on the total amount of profits earned in the salt business. For the period in question, the assessee showed in his return a net profit of ₹ 46,533 in the salt business, after making deduction of ₹ 8,649, which was the share of profits payable to Kedarnath Jhunjhunwala, and also a sum of ₹ 900, which was paid to Kedarnath Jhunjhunwala as salary for the whole year. It should be noticed that the commission was actually paid to Kedarnath Jhunjhunwala on the 19th of November, 1944, after the close of the accounting year. Before the Income-tax Officer, the assessee produced a receipt given by Kedarnath Jhunjhunwala for the share of profits paid to him. Kedarnath Jhunjhunwala was also examined by the Income-tax Officer under Section 37 of the Income-tax Act, but the Income-tax Officer formed the opinion that the claim for deduction of the sum of ₹ 8,649 and ₹ 900 paid to Kedarnath Jhunjhunwala was fictitious and could not be allowed. The assessee preferred an appeal to the Appellate Assistant Commissioner of Income-tax, who reversed the order of the Income-tax Officer and directed that both the sums of ₹ 8,649 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or pocket expenses. The assessee also produced a receipt granted by Kedarnath Jhunjhunwala for the amount of ₹ 8,649. The receipt is dated the 9th of November, 1944, and the Appellate Tribunal does not say that this receipt is not a genuine document. It is also the admitted case that the account of the assessee showed that payment of ₹ 8,649 was made to Kedarnath Jhunjhunwala. Mr. R.J. Bahadur, appearing on behalf of the Income- tax department, pointed out that the assessee was related as maternal cousin to Kedarnath Jhunjhunwala, and this was a circumstance which must be taken to show that the alleged payment was a fictitious payment. But the existence of relationship has no real bearing on the question whether the payment was actually made. The other two circumstances which the Appellate Tribunal has taken into account have also no bearing in determining the question whether the payment of ₹ 8,649 was made to Kedarnath Jhunjhunwala as alleged on behalf of the assessee. In other words, the reasons given by the Income-tax Appellate Tribunal in support of its finding are no reasons in the eye of law because the reasons have no proximate connection or relevance in d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission: Provided that the amount of the bonus or commission is of a reasonable amount with reference to--(a) the pay of the employee and the conditions of his service; (b) the profits of the business, profession or vocation for the year in question; and (c) the general practice in similar businesses, professions or vocations; . The other section under which the deduction is claimed is Section 10(2)(xv) which relates to any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation. The finding of the Appellate Tribunal in this case is that Kedarnath Jhunjhunwala was not a partner of the firm of the assessee and, therefore, the question whether Section 10(4)(b) has any application does not arise in this case. The real contention put forward by Mr. Datta is that the case falls both under Section 10(2)(x) and Section 10(2)(xv). Section 10(2)(x) entitles an assessee to deduct any sum paid to an employee as bonus or commission for serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business, of the assessee and that the managers shall pay to the assessee a certain percentage of the gross realisations and also a further sum of ₹ 1,000 per year and, after paying all the expenses of the business, retain the balance to themselves as remuneration. In respect of the year of assessment, the assessee received in accordance with the terms of the agreement ₹ 14,510 but income-tax was levied on the assessee in respect of the whole of the profits of the business, namely, ₹ 45,082. It was held by the High Court that the assessee was not entitled to deduct from the profits of the business the sum retained by the managers, under Section 10(2)(viii-a) of the Income-tax Act, and further that the sum retained by the managers was not expenditure incurred solely for the purpose of earning profits or gains under Section 10(2)(ix) and was not a permissible deduction under that clause. With great respect, we think that the decision reached in this case is not correct in holding that the assessee was not entitled to the deduction claimed. The learned Judges relied upon a dictum of Lord Macmillan in Pondicherry Railway Company Limited v. Commissioner of Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the commission, that is, in the case supposed, a commission on the 10,000. We think that the learned Judges of the Calcutta High Court misapprehended the effect of Lord Macmillan's judgment in the Pondicherry case [1931] 58 I.A. 239 and, therefore, the decision in Nrisinga Chandra Nandy's case [1936] 4 I.T.R. 428 cannot, in our view be taken to be the correct exposition of the law on the point. In the matter of this description, the true principle is to find out, on examination of the facts of each case, whether the payment represents a payment of a share of profits simpliciter or whether the payment represents an item of expenditure the calculation of which is made with reference to the profits. If the payment falls in the first class, the payment cannot be deducted in the assessment of profits of the assessee, but, if the payment falls in the second class, the assessee is entitled to a deduction of the payment under Section 10(2)(xv) as a payment laid out or expended wholly or exclusively for the purpose of the trade. The question whether the payment falls on either side of the line must be answered with reference to the specific facts of each particular case. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right sense. Some suggestion was made by the Attorney-General that the absence of a fixed salary in addition to commission affected the matter. I am unable to see that. I can see no reason at all in principle why a contract providing for remuneration by commission and nothing else should not produce the result that the sum payable under it to the employee is a proper deduction. In our opinion, the present case falls within the ambit of the principle laid down by Lord Greene in British Sugar Manufacturers Limited v. Harris. We have already given reasons to hold that the payment to Kedarnath Jhunjhunwala of 2a. 6p. share of the total profits of the business was not a mere division of profits Simpliciter, but that the payment represents a remuneration for services rendered by him and that remuneration was to be calculated with reference to the total profits. If this is the legal character of the payment, it follows that the assessee is entitled under Section 10(2)(xv) to claim deduction of ₹ 8,649 which was paid to Kedarnath Jhunjhunwala. We hold that the Income-tax Appellate Tribunal was not justified in law in disallowing this claim, and the question referred to the High ..... X X X X Extracts X X X X X X X X Extracts X X X X
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