TMI Blog1975 (7) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... determining the company's business profits for the year 1958-59? " The assessment year to which these questions relate is 1958-59, corresponding previous year being the year ended 31st March, 1958. The assessee is a private limited company. It carries on business of importing dyes and selling the same. It is also acting as managing agents of Amar Dye-Chem Ltd., a company doing business in the manufacture of dyes and chemicals. In the relevant year of account an amount of Rs. 7,500 was paid by the assessee-company to each of its to directors, viz., Shri A. K. Doshi and Shri S. V. Desai. Shri Doshi was the managing director of the company while Shri Desai was an ordinary director. The amount of Rs. 7,500 was paid to these persons in addition to remuneration which they were getting normally. The remuneration of Shri Doshi was Rs. 57,000 per annum, while that of Shri Desai was Rs. 34,250 per annum. Admittedly there was no resolution in support of the additional payment made to Shri Doshi, but in the case of Shri Desai, who was designated as sales manager, the directors passed a resolution on 12th May, 1955, sanctioning payment of Rs. 7,500 to him " to meet with expenses wholly or nec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure claimed to have been incurred by these officers for the purpose of the company's business. The assessee-company also paid commission to two other employees, viz.,Shri Kamat and Shri Shah. Normal remuneration received by Shri Kamat in the year of account amounted to Rs. 11,975 which included bonus of Rs. 2,405 while Shri Shah's emoluments amounted to Rs. 5,975. In addition to their regular remuneration, Shri Kamat was paid commission of Rs. 16,894 and Shri Shah was paid commission of Rs. 12,410. It appears that this commission was paid to these two persons in pursuance of the resolution of the directors dated March 4, 1958 " as recognition of their valuable services so that it may be an incentive to their efforts of pushing up sales of products of the company ". Such commission was paid at the rate of 1/4% on sales to mills and vadgadi parties in the case of Shri Kamat and 1/4% on sales to bazar parties in the case of Shri Shah. Such commission was not paid to these two employees in the earlier years. The sales of the assessee-company in the year of account were Rs. 1,17,22,145 as against Rs. 1,58,15,289 in the immediately preceding year. Before the Income-tax Officer the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons, one dated May 12, 1955, which had been passed in connection with Shri Desai and the other dated December 20, 1955, which had been passed in connection with the payments of increased commission to the salesmen. As regards commission paid to Shri Kamat and Shri Shah, it was contended that the payment had to be judged from the point of view of the businessman and that no extra commercial considerations were imputed in their cases. It was generally stressed that the market in colours and chemicals was highly competitive and it required high salesmanship to keep the sales at the level at which they were shown in the year of account. On behalf of the department it was contended that there was no evidence whatsoever about the disbursement of the amounts paid to the two directors or to the employees and that mere interposition by the company of the names of the directors and the employees did not change the essential nature of the claim which was a claim for deduction of the expenditure for which there were no details. In other words, the contention was that the purpose for which the payments had been made had not been satisfactorily established by the assessee-company,though details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under consideration the payments made to the directors were not as large as they were in those earlier years but were confined to the small amount of Rs. 7,500 each to the two directors. He fairly conceded that even in the year immediately preceding the year in dispute also the question pertained to the payment of Rs. 7,500 made to Shri Doshi and Shri Desai and even for that year the Tribunal had disallowed the amount in full, but, according to Mr. Kolah, the real question that falls to be considered in this case is whether the payment of Rs. 7,500 each made by the assessee-company to its two directors fell within the purview of section 10(2)(xv) of the Act or not and he pointed out that though there was no resolution passed by the company in the matter of payment made to Shri Doshi, there was a specific resolution passed by the company on May 12, 1955, sanctioning the payment of Rs. 7,500 to Shri Desai indicating the purpose for which the payment was being made to him and the payments made to these two directors should be considered in the light of that resolution, for, the purpose of making the payment was the same in the case of both these directors and the Tribunal has also pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... solutions and the circular letter clearly indicate the purpose for which payment was made to the two directors and additional commission was to be paid to the salesman and in view of this purpose the deduction claimed on account of these various payments that were made by the assessee-company to its employees ought to have been allowed by the taxing authorities and even by the Tribunal, inasmuch as the expenses incurred could be said to have been wholly and exclusively laid out for the purpose of business of the company. Mr. Kolah contended that the taxing authorities as well as the Tribunal were in error in coming to the conclusion that the claim for deduction under section 10(2)(xv) had not been made out simply because the details of the expenses that were actually incurred by the recipients of these amounts had not been set forth before the authorities. According to him, it was for the recipients of those amounts to furnish such details and not for the assessee-company and, moreover, the enquiry with regard to these details dwells more on the question of reasonableness of the expenses incurred which under the authorities of this court as well as of the Supreme Court was not with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade to Sarvashri Kamat and Shah, these had to be judged from the point of view of business and that no extra commercial considerations were imputed in the matter of these payments. He pointed out that it was only after the assessee-company had seen the performance of these two employees during the year of account that the board of directors felt that such additional payment should be made to these two employees in addition to their regular remuneration in recognition of their valuable services so that it may be an incentive to their efforts of pushing up sales of products of the company. He, therefore, urged that all the payments in respect of which deductions were claimed by the assessee-company should have been allowed by the taxing authorities as well as by the Tribunal. On the other hand, Mr. Joshi appearing for the revenue has contended that though it may be true that payments were in fact made by the assessee-company to the two directors as well as to the four salesmen, it was necessary on the part of the assessee-company to establish further the fact that the said expenses had been laid out wholly and exclusively for the purpose of business of the company and when details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e two directors and the four salesmen in question had been clearly set out in the two concerned resolutions, one dated May 12, 1955, in connection with the sanctioning of the payment of Rs. 7,500 to Shri Desai and the other dated December 20, 1955, sanctioning of the payment of additional commission to the four salesmen in question and, according to him, the purpose of the payment to the two directors was to meet the expenses " wholly or necessarily in the performance of duty " and also " to meet the contingency expenses, such as commission and entertainment to several persons " and the purpose of payment of additional commission to the four salesmen in question was to enable the salesmen " to meet all incidental expenses which they have to incur in connection with the business of the company " and, therefore, the payments should be regarded as having been made for the business purpose of the company. He pointed out that in the colours and chemicals business sales could only be effected with the co-operation of the dyeing masters in mills and secret commissions had to be paid to them in order to ensure steady sales and such practice of paying commission to the dyeing masters in mil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, urged that this court also should take the view that it was not necessary for the assessee-company to prove the further fact that the recipients of these amounts had made actual payments in satisfaction of the purpose for which the recipients were paid by the assessee-company. Strong reliance was also placed by Mr. Kolah upon the decision of the Gujarat High Court in Income-tax Reference No. 47 of 1972 decided on December 7, 1973 [Addl. Commissioner of Income-tax v. Moolchand Jaikishandas Co. [1977] 108 ITR 500 (Guj)] in support of the self-same contention. It is not possible to accept this submission of Mr. Kolah for the reasons which we shall presently indicate. In the first place, having regard to the provision of section 10(2)(xv), it cannot be disputed that before an assessee can become entitled to an allowance under that provision he must satisfy the department of the purpose for which the amount is spent. It is true that the taxing authorities are not entitled to go into the reasonableness of the expenses but they are certainly entitled to be satisfied as to the commercial necessity of expending that amount. On the facts as have been found by the Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the four salesmen in question could not carry the matter any further, for, that fact itself would not be sufficient to entitle the assessee-company to claim a deduction under section 10(2)(xv) of the Act. The contention of Mr. Kolah that the practice of paying commission to dyeing masters in mills prevailing in the colours and chemical business has been judicially recognised and that, therefore, the taxing authorities could not call for details of the actual payments made cannot avail him. His reliance on the decision of this court in Ciba's case [1954] 25 ITR 102 (Bom) in this behalf is misplaced because of the facts that obtained in that case. In that case the decision of the court that proof of actual payment by the representative was not necessary was rendered in the peculiar facts and circumstances obtaining therein. It will appear clear from the relevant portion of the judgment at page 106 of the report that the purpose mentioned in the agreement which obtained before the court in that case was not doubted by the taxing authorities and in fact the genuineness of the agreement which contained the purpose for which the payment was made to the representatives was accepted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore an assessee can become entitled to an allowance under section 10(2)(xv) he must satisfy the department of the purpose for which the amount is spent. Although the department is not entitled to go into the reasonability of the expense, the department is entitled to be satisfied as to the commercial necessity for expending the amount. It would have been perfectly open to the department in this very case to have asked the assessee to satisfy it that this 5 per cent. commission was necessary for the particular business which the assessee-company was carrying on. But, for obvious reason, the department did not make any such request upon the assessee, and the reason is this : it would have been difficult for the department to contend that although in the hands of the recipient this 5 per cent. commission has been held to be for the purpose of the performance of his duties and the amount has been granted wholly and exclusively for that purpose, yet when it comes to consider the question of the assessee-company which pays that amount to its representative, it may not be for the purpose contemplated by section 10(2)(xv) ." The aforesaid passage which we have quoted clearly brings out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyees in computing its business profits. The Income-tax Officer doubted the genuineness of the payment of such commission to its employees. He took the view that commission in fact was not paid to the employees but was paid to some unknown persons and the details of such payments were not given either by the assessee or its employees in their statements when asked for and he further held that there was no commercial expediency proved by the assessee. In other words, the Income-tax Officer came to the conclusion that neither the quantum of the commission nor its direction had been proved by the assessee and he, therefore, disallowed the claim in respect of the commission amount. The Appellate Assistant Commissioner confirmed the Income-tax Officer's disallowance as, according to him, he had reasonable ground to infer that the so-called commission to employees was nothing but a camouflage for assessee's payment of secret commission to employees of the mills who were assessee's customers. When the matter was carried further in second appeal to the Tribunal, the Tribunal took a contrary view. Taking all the relevant facts into account, the pay of the employees, the nature of the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ascribed to the contingency of entertainment mentioned in the resolution dated May 12, 1955. In view of this position which obtains in the instant case, it is difficult to accept Mr. Kolah's contention that the payments that were made to the two directors of the assessee-company and the four salesmen in question should have been allowed as a deduction under section 10(2)(xv) of the Act. Turning to the payments that were made to Sarvashri Kamat and Shah during the year of account, it cannot be disputed that the claim to deduct the same was preferred under section 10(2)(x) of the Act and obviously, unless the requirements of that provision were satisfied by the assessee, the deduction could not be allowed. Section 10(2)(x) runs thus : " 10. (2) Such profits or gains shall be computed after making the following allowances, namely : ...... (x) any sum paid to an employee as bonus or commission for services rendered, 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 conditi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s incorrect and reliance on the Gujarat High Court judgment in I.T. Ref. No. 47 of 1972 [Addl. Commissioner of Income-tax v. Moolchand Jaikishandas and Co. [1977] 108 ITR 500 (Guj)] is entirely misplaced. The observation in the Gujarat High Court judgment (I.T.Ref. 47/72), on which reliance has been placed by Mr. Kolah were in the context of a case where there were regular agreements with the employees by the assessee under which remuneration consisted of two types, viz., commission and salary. In other words, the remuneration comprised of two items and when such is the case it is possible that the commission which is part of the remuneration and not ex gratia payment for the services rendered will be larger than the regular salary drawn by an employee in order to equalise the total amount and ensure fairly high remuneration to an employee. In the instant case before us, there were no agreements entered into by the assessee-company with the two employees under which remuneration consisting of two parts was payable to the said employees. The two employees in question were merely drawing salary for the services rendered which they were rendering to the assessee-company and it was alm ..... X X X X Extracts X X X X X X X X Extracts X X X X
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