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1972 (2) TMI 8

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..... e which is equivalent to 13 months' salary was excessive and not justified by the profits derived by him in the assessment year, and disallowed a sum of Rs. 19,000 from and out of the total claim of the assessee on the ground that the bonus equivalent to six months' salary can alone be justified. The assessee preferred an appeal before the Appellate Assistant Commissioner against the disallowance of a portion of his claim. The Appellate Assistant Commissioner, however, confirmed the disallowance of Rs. 19,000 from the assessee's total claim. There was a further appeal by the assessee to the Tribunal, and the Tribunal held that the claim of deduction for Rs. 39,541 which is equivalent to about 13 months' salary was excessive and that the bonus could be allowed at 10 months' salary. At the instance of the assessee the Tribunal has referred the following question for our decision : " Whether, on the facts and in the circumstances of the case, the dis- allowance of the claim for deduction of bonus paid to the employees to the extent of three months' salary is lawful ? " In the preceding two years and the assessment year in question, the profits as well as the salaries and bonu .....

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..... account, the profits were low compared to the previous years, which has formed the basis for the assessee giving the bonus as before. The idea of justice inevitably suggests the notion of certain equality. This equality is lacking so far as the profits are concerned, even though there is some valid reasons for the fall in profits ...... So whatever might be the yard-stick by which the assessee measures the bonus which he has got to pay, it has to confirm to certain standards laid down in the law obtaining in the business and in the locality. By these standards, it seems to us the claim for 13 months' salary is excessive and we would allow ten months. " The fact that the assessee paid a bonus of 12 months' salary to his employees for a long time and successfully claimed it as allowance under section 10(2)(x) is not disputed. We are, therefore, at a loss to know how the Income-tax Officer fixed six months' salary as the proper bonus for the assess- see's employees. We are equally at a loss to know how the Tribunal came to the conclusion that a bonus equivalent to 10 months' salary is allowable. The Tribunal has not set out the " standards laid down in the law obtaining in the busi .....

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..... 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 scope of section 10(2)(x) has been considered by the various High Courts and the Supreme Court in several cases. In Subodhchandra Popatlal v. Commissioner of Income-tax the Bombay High Court laid down that whether the payment of the bonus or commission is voluntary or contractual, if an employee is remunerated in the manner laid down in section 10(2)(x) then such an emolument is a permissible deduction only if the emolument is of a reasonable amount, that in determining the reasonableness of the bonus or commission all the three factors mentioned in clauses (a), (b) and (c) of the proviso to section 10(2)(x) should, at the same time, be taken into consideration and that it is not sufficient to take one or two of these factors alone into consideration. In Mysore Fertiliser Co. v. Commissioner of Income-tax .....

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..... commission must be judged in the light of all the circumstances which existed at the time when the agreement was made. In Commissioner of Income-tax v. Walchand Co. Private Ltd., their Lordships of the Supreme Court, while dealing with a claim of business expenditure falling under section 10(2)(xv), expressed thus : " In applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue ...... But it is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee. An employer in fixing the remuneration of his employees is entitled to consider the extent of his business, the nature of the duties to be performed, and the special aptitude of the employee, future prospects of extension by the business and a host of other related circumstances. It is erroneous to think that increased remuneration can only be justified if there is a corresponding increase in the profits of the employer. " In Commissioner of Income .....

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..... nected with the assessee, would, prima facie, show that the payment has been made because the assessee considered that it was necessary to do so from the point of view of commercial expediency. The learned counsel for the revenue would, however, contend that this court cannot set aside the findings of the Tribunal and reappraise the evidence with reference to the question of reasonableness of the quantum of the bonus paid and rely on the decision of the Supreme Court in Commissioner of Excess Profits Tax v. N. M. Rayaloo Iyer Sons. It has been expressed in that case that, in considering whether the deduction claimed under section 10(2)(x) of the Income-tax Act and clause 12 of Schedule I of the Excess Profits Tax Act was proper, the primary duty was vested by the legislature in the Excess Profits Tax Officer and it was for him, subject to review by the Tribunal, to decide whether the deduction was reasonable and necessary having regard to the requirements of the business, that the jurisdiction which the High Court exercised on questions referred to it under the Excess Profits Tax Act was merely advisory, and that if the taxing authorities, having regard to the circumstances, ha .....

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..... the view that the order of the Tribunal holding payment of bonus equivalent to 10 months' salary as reasonable, without assigning any reasons and disallowing a part of the bonus paid, cannot be sustained as it was not supported by any evidence on record. The view of the revenue authorities that the shortfall in the profit of the assessee as compared to the previous years did not justify the payment of bonus equivalent to 13 months' salary appears to us to be erroneous as they proceeded on the basis that payment of increased bonus can only be justified if there was a corresponding increase in the profits of the assessee. In deciding the quantum of bonus to be paid to the employees the assessee is entitled to consider the extent and turnover of his business, the nature of duties to be per- formed, and the future prospects of expansion of his business. Besides, there is, however, this circumstance that the Tribunal has not given any specific reason as to why it considered the bonus equivalent to 10 months' salary to be reasonable nor is the decision of the Income-tax Officer which fixed the bonus equivalent to six months' salary as reasonable supported by any reasoning. We feel that .....

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