TMI Blog1956 (8) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... at Madras. Venkatamuni undertook the necessary touring. Venugopal was the undivided son of Sreenivasalu, while Venkatamuni was the undivided brother of Venkatesam. Venugopal and Venkatamuni were all along paid remuneration for the services they rendered to the firm, but the remuneration paid to them was consistently disallowed by the Departmental Authorities under section 10(4)(b) of the Income-tax Act. 2. In the assessment year 1946-47, the claim preferred by the assessee for the deduction of the remuneration it had paid to its two managers, Venugopal and Venkatamuni, was again disallowed by the Income-tax Officer and on appeal by the Appellate Assistant Commissioner. The disallowance was again under section 10(4)(b) of the Act. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd it was the expenditure of ₹ 9,178 that was claimed by the assessee as deduction from its assessable income. The Income-tax Officer held : The agreement appears to be merely a make-believe, not strictly adhered to . In his order of assessment the Income-tax Officer further observed: The commission to those two persons are deliberately made with a view to reduce the taxable profit. Apart from this aspect, it has been repeatedly held on appeals in earlier years, that these two persons were engaged in the business in the capacity of representatives of the Hindu undivided families which were the real partners in the firm. There is no change in the constitution of the partnership and in the status of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance of a sum of ₹ 18,178 will be sustained . The Income-tax Officer and the Appellate Assistant Commissioner disallowed all the three items of remuneration, salary, the 12 per cent. commission as also the house rent allowance paid to Venugopal. The assessee appealed to the Tribunal. The Tribunal held that the payments to the two managers did not fall within the scope of section 10(4)(b) of the Act. The Tribunal upheld the claim of the assessee to deduct the payments made to the managers as salary and house rent allowance. With reference to the payment of the commission under the terms of the agreements dated 2nd April, 1945, the Tribunal recorded : The only question that remains is as to the reasonableness ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel for the respondent was right in the contention that the claim of the assessee could fall only under section 10 (2) (x). The tests to be satisfied before the claim of an assessee that the payment of commission to its employee was reasonable and should be allowed, are those specified by the proviso to section 10(2)(x) which runs : Provided that the amount of the bonus or commission is 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 . It is, however, well settled now that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tamuni, remained 'unchanged even after the agreements dated 2nd April, 1945. There are obvious limits to the exaltation of that plea to a rigid and inflexible principle in deciding on the basis of commercial expediency of what constitutes reasonable expenditure, even for purposes under section 10 (2)(x) of the Act. Under the argument put forward by the learned counsel for the respondent pushed to its logical extreme, even an annual increment of salary would become unreasonable. The learned counsel's argument also ignores what we pointed out earlier, an incentive on the part of the employee to help to make larger profits. 9. No doubt the salaries of the two managers were increased every year after 1941-42 as the statement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnover of the business secured by the canvassers. That did not really affect the question the Tribunal had to consider, was it a reasonable remuneration that the assessee firm contracted to pay its employees, the two managers. Judged by the test of commercial expediency, the only view point to adopt in applying the tests prescribed by the proviso to section 10 (2) (x), the contracts dated 2nd April, 1945, and the payments thereunder appear to be quite reasonable. It is not the percentage of the net profits that concludes the issue, nor the quantified sum. It may be that in some cases even both taken together may not be conclusive. All the circumstances specifically referred to in the proviso to section 10 (2) (x), judged from the view poin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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