TMI Blog1986 (10) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... gineers, importing certain technical know-how developed by it, in collaboration with foreign collaborator Dr. Herman Stage and also erects chemical plant for various parties in India. During the assessment year 1980-81, the assessee-company paid bonus to two directors of the company Dr. B. Bose and Shri S. Aga of Rs. 3,500 each besides increase in their salaries from Rs. 3,500 per month to Rs. 5,000 per month. They have also given commissions. The ITO restricted the allowance by applying section 36(1) of the Income-tax Act, 1961 ('the Act') that the provisions of section 36(1) specifically provides for disallowance of any payment to employees, in excess of what is not payable to any employee under the Payment of Bonus Act, 1965. On appeal before the Commissioner (Appeals), the payment of bonus was also considered as unjustifiable and, therefore, the order of the ITO was confirmed by the Commissioner (Appeals) on this point. The assessee is on further appeal before us. 3. The learned counsel for the assessee submitted that these two directors were obviously directors in Exomet, another company where they were drawing a salary of Rs. 1,500 per month each. From 1-4-1979, the directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fession for the previous year in question ; and (c) the general practice in similar business or profession ;" The question is whether the grant of bonus to these two directors qualifies for the deduction as an allowable expenditure under section 36(1)(ii). According to the assessee-company, these two directors were paid bonus besides the salaries and commission because according to the assessee-company, during the relevant accounting year, there was considerable enhancement in the turnover and profits of the assessee-company. Section 36(1)(ii) postulates three factors on fulfillment alone, the payment of bonus to employee can be regarded as reasonable one. They are : "(a) the pay of the employee and the conditions of his service ; (b) the profits of the business or profession for the previous year in question ; and (c) the general practice in similar business or profession ;" While considering these three factors, the Hon'ble Supreme Court in the case of Shahzada Nand Sons laid down that the three factors laid down by the proviso to section 36(1)(ii) are not really conditions on the fulfillment of which alone the amount of commission paid to an employee can be regarde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1978-79 to Rs. 35,985 in the year under appeal. There is further increase in the net profits in the assessment year 1981-82. In this way, there is sufficient increase in the turnover and the profits during the relevant accounting year which may be taken as a result of any extra work made by these two directors as argued by the learned counsel for the assessee. Hence, applying the ratio of the case of Shahzada Nand Sons, we are also of the opinion that the payment of bonus to these two directors to the tune of Rs. 7,000 in addition to hike in their salaries is also justifiable. 7. Similarly, in the case of Extrusion Process (P.) Ltd., the Bombay High Court has held that the test of reasonableness has to be considered from the point of view of a businessman. In that case also, increase in remuneration was held justifiable. We, therefore, hold that it is an allowable deduction under section 36(1)(ii), The Commissioner (Appeals) had wrongly disallowed the same. We, therefore, set aside the order of the Commissioner (Appeals) and direct the ITO to allow deduction of bonus paid to two directors of Rs. 7,000. 8. The next ground in the assessee's appeal is against the disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his duties as a director and as a member of this club, he has derived any benefit for the business of the assessee-company. If any employee or director of the company is a member of such club for the purpose of his private enjoyment or for recreation, or for partly performance of his employment or office as a director and partly for the purpose of his private enjoyment, namely, facilities provided by the club, this will not mean that the amount spent is necessarily for the performance of his duties and it is beneficial for the purpose of the assessee-company. 13. In common parlance, admission to club is principally for the purpose of private enjoyment, amusement and entertainment because employee of high status in a company is busy in business during the working hours of the company but after that he requires some time for enjoyment and entertainment or amusement where he is not expected to discuss the business matters. In any case, if he became the member of the club, contrary to the presumption of amusement and entertainment and for purpose of promotion of his business, he should lead evidence to show that by his becoming a member of this club, he had gained so much business f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Taxes) v. Newton 34 TC 558, the facts of that case were similar to the case discussed above wherein an army officer because of his duties was compelled to sustain the expenditure in question which was obligatory upon him under the conditions in which he served. Their Lordships has held that these expenses are not deductible because they were not incurred for the performance of his duties as an officer in the army. Applying the ratio of the said decisions, we can say that the case of the present assessee is on much lower footing than these two cases. There is no such condition or compulsion in the appointment of director in the present case. Hence, we can hold that the subscription and entrance fees are perquisites in the hands of the assessee. 17. It is obvious that if the assessee was a member of this club, he was the sort of a man who would be acceptable in that sort of social circle and that, no doubt, would be useful to him and to the company because he would thereby meet people who might, as a result of meeting him and liking him, tend to have business relations with him or with the company. But then it was not wholly and exclusively for the business of the company or ne ..... X X X X Extracts X X X X X X X X Extracts X X X X
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