TMI Blog1977 (4) TMI 4X X X X Extracts X X X X X X X X Extracts X X X X ..... ng a trust. Chaman Lal was the son of Saheb Dayal and Raj Mohan was the son of one Gurditta Mal. During the accounting year relevant to the assessment year 1963-64, Chaman Lal and Harbans Lal had their own independent factories and hence they were not attending to the business of the assessee 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 ₹ 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 y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assistant Commissioner in appeal affirmed the disallowance on the ground that no evidence had been produced by the assessee to prove that the activities of Saheb Dayal and Gurditta Mal in the relevant accounting year were of a nature different from those in the earlier years or that they put in any extra time or energy in the conduct of the business of the assessee so as to justify the payment of the commission and hence it could not be said that the commission was paid for services rendered by them. The matter was carried 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 commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of commission made to Saheb Dayal and Gurditta Mal was at no time doubted by the revenue authorities. It was not the case of the revenue that this payment was not made or that it was sham or bogus. If that had been the finding, there would have been an end of the case of the assessee. No question would then have arisen for considering the applicability of section 36, sub-section (1), clause (ii). No payment having been made, no deduction would have been permissible. But here the commission was paid : it was a genuine payment 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: Provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n which the High Court negatived the applicability of section 36, sub-section (1),clause (ii), was that during the relevant accounting year Saheb Dayal and Gurditta Mal rendered the same services which they were rendering in earlier years and no extra services were rendered by them which could justify payment of commission in addition to salary and bonus. The High Court appeared to take the view that there must be correlation between the payment of commission and the services rendered and since commission was paid by the assessee for the first time 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r it was reasonable under section 36, sub-section (1), clause (ii). Turning to the provisions of section 36, sub-section (1), clause (ii), we find that the proviso to that clause lays down three factors for the purpose of determining the reasonableness of the commission paid to an employee. The question whether the amount of the commission is a reasonable amount or not has to be determined with reference to these three factors. Sometimes these three factors are loosely described as conditions but they are not really, conditions on the fulfilment 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 det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the result of the services rendered by Saheb Dayal and Gurditta Mal, a part of the overriding commission should be paid to them, so that they may carry a sense of satisfaction that their efforts have been suitably rewarded and they may have an added incentive to work and may be spurred to greater efficiency in the future. It may be noted that the overriding Commission of the assessee during the relevant accounting year was ₹ 1,13,449 and the total profit was ₹ 3,08,034 and if out of this total profit of ₹ 3,08,034, an aggregate sum of ₹ 45,380 was paid to 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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