Leonard Stone, Kt., C.J.
1. This is a reference made to us under Section 66(J) of the Indian Income-tax Act, by the Income-tax Appellate Tribunal at Bombay. The assessment out of which the question arises is the assessment upon, the Loyal Motor Service Co., Ltd., in respect of the financial year 1943/44 of that company, and the question formulated is in these terms:
Whether in the circumstances of the ease the sum of Us. 4,130 paid as bonus to the shareholder employees of the assessee company in the account year is allowable as deduction under the provisions of Section 10 (2) (a:) of the Indian Income-tax Act, 1922 ?
2. The question raised is a short one but it is not one which is free from difficulty. The Indian Income-tax Act provides by Section 6 for five heads of income, profits or gains to be brought to tax and the first head is 'Salaries' whilst the fourth is 'Profits and Gains of Business, Profession or Vocation,'
3. It is Section 7 which deals with salaries and it is to be noted that 'salary' includes a gratuity and a commission. Section 10 provides that tax should be payable by an assessee under the head profit and gains of business, profession or vocation in respect of the profits and gains of any business carried on by him, and by Sub-section (2) of that section it is provided that such profits and gains shall be computed after making the allowances set out in a number of sub-paragraphs, the one with which, we are concerned being paragraph (x) which says:
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 has not been paid as bonus or commission.
4. Now the facts as shown by the reference are that this company was formed by fourteen persons thirteen of whom were originally owner-drivers of motor vehicles, the fourteenth member contributing in money. The thirteen not only contributed their motor vehicles but also their services and accordingly became employees of this company. Besides the thirteen there are twenty-eight other employees making a total of forty-one. In the year in question the company granted a bonus at the rate of two months' salary to its forty-one employees and the total sum required to pay this bonus was Rs. 6,084, of which Rs. 1,954 went to the twenty-eight other employees and Rs. 4,130 to the thirteen shareholder employees. It is to be noted that the quantum of bonus paid to each of the shareholder employees was by reference to their salaries and not to their stakes in the company. A tabulated result is set out in the application for this reference and is printed on p. 12 of the record. It is there shown that of the thirteen shareholder employees six employees got less bonus than they would have got as dividends if the sum of Rs. 4,130 had been distributed by way of additional dividends. Five of them got more bonus than such dividends and in the case of two of them the figure works out the same. That is an accident in the sense that the bonus payment being referential to their wages and the dividends being referential to their shares have no relation to each other. Now the answer to the question referred to us depends on the construction that is to be placed upon para, (x) of Sub-section (2) of Section 10. It should be noted that the body of this sub-section provides an allowance and the qualifying part of it is by way of exception to that allowance. What is to be allowed is 'any sum' paid to an employee as bonus or commission for services rendered and the exception is, where 'such sum' would not have been paid to him as profits or dividends if it had not been paid as bonus or commission. In the exception the words 'such sum' can, in my opinion, only refer to the last and the only antecedent, which is 'any sum' paid as commission or bonus. Therefore unless the commission or bonus would be paid to the assessee as profits or dividends the exception to the allowance does not operate. Mr. Setalvad on behalf of the Commissioner has pointed out with considerable force that strictly construed there can hardly ever be a case which comes within the ambit of the exception. Sir Jamshedji Kanga on behalf of the assessee company suggests two such cases, viz. in the case of what is generally called a one-man-company which is not unlawful under the Indian Companies Act, and also in a case in which a company, in declaring a dividend, or a partnership, in declaring division of their profits, say that instead of distributing their profits by way of dividends, or shares of profits, they will distribute the amount to themselves, as salaried employees in their own company, or partnership, as bonus. We are construing a taxation statute and the subject is entitled to have such a statute strictly construed in his favour. In my opinion in placing a strict construction on this sub-section, the sum excepted under the expression 'such sum' must be the same sum as is described by the expression 'Any sum paid as bonus or commission', and that an equivalent sum even in the two cases where by accident the bonus and the prospective dividend are the same, is not included in that construction. If that is the construction which is to be placed upon this sub-section, then the answer to the question is, that the whole of the sum of Rs. 4,130 paid as bonus to the shareholder employees is allowable as deduction under the provisions of Section 10(2) (x). I answer the question referred to us in the affirmative. The Commissioner must pay the costs of this reference.
5. In submitting the question for the Court's consideration the Tribunal, in the statement of facts, has stated as follows:-
Several owners of motor vehicles used to individually ply them for passenger transport on certain specified routes in the Poona District. Some time ago, they combined and formed themselves into a private limited company called the Loyal Motor Service Co. Ltd. They made over their vehicles to the company, receiving in return the company's shares of equivalent value. Since then the company is carrying on the business of passenger transport. It has engaged a number of employees, about forty-one, as drivers, mechanics, supervisers, etc., out of whom, in the account year, thirteen were the shareholders of the company being the former owners of the motor vehicles. The employees are paid salaries in which there was an all round increase in the year of account. Also, the company paid each of them a bonus equal to two months' salary.
It appears that the company claimed deduction in respect of the salaries paid to the employees and after some discussion that question was set at rest. The next question debated was in respect of the bonus paid to the thirteen shareholder employees. There is no dispute about the others. On behalf of the assessee company it was contended that it was an allowance permitted to be deducted under Section 10(2) (x) of the Indian Income-tax. Act. That clause runs as follows:
(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 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.
On behalf of the assessee company it was pointed out that as the sum was paid as bonus to all employees, it was a permissible allowance under the clause. Having regard to the fact that out of forty-one employees thirteen were shareholders of the -company it was contended on behalf of the taxing authority that such sums would have been payable to the thirteen shareholders as profits or dividends, if the same had not been paid to them as bonus. On that ground they contend that while the payment of bonus to non-shareholders was a legitimate deduction, the bonus paid to the shareholders was not permitted to he deducted under the clause. In the process of assessment at one stage this bonus was allowed to be deducted. The Income-tax Officer being dissatisfied with it took the matter to the higher officer. When the matter came he-fore the Tribunal the department rested their claim on a ground, which, according to the judgment of the Tribunal, was raised for the first time before them. It was argued that 'such sum' referred to the character of the payment and not the quantum. It was therefore contended that the amount, if it was capable of reaching the hands of the shareholders, was not permitted to be deducted, if paid as bonus to the shareholders. It was argued that it was outside the scope of Section 10(2) (x), The argument found favour with the Tribunal.
6. In my opinion, that construction of the clause is not correct. The word 'such' must refer to what had been previously mentioned in the same clause in connection with the word 'sum'. To find that out we must look to the first part of the clause. That refers to 'any' sum. Reading the clause in that way the plain meaning appears to be that when a particular amount was paid by way of bonus to an employee, if the same amount would have been paid to him as a shareholder as dividend or profit, the company cannot be allowed a deduction on the ground of payment of bonus. To put it in other words the clause is intended to prevent an escape from taxation by describing a payment as bonus, when in fact ordinarily it should have reached the shareholder as profit or dividend. The argument would be equally applicable in the case of a partnership as in the case of a limited company. This construction leads to no hardship. It does not allow a wrong payment of bonus to escape taxation. In the first instance the bonus in the hands of the employee is liable to be taxed, unless exempted by a special notification. Moreover, the proviso contains conditions under which if a wrong claim is made, the same can be investigated and disallowed. An illustration will perhaps make the position clear. Five persons in a firm realising that the profits of the year were Rs. 50,000 and they had an equal share in the profits of the business decide that instead of receiving Rs. 10,000 each as the share of profit each of them will be paid Us. 10,000 as bonus or commission. In such a case the firm, when sought to be assessed, may contend that Rs. 10,000 were paid as bonus. The contention will be clearly rejected. But the safeguards do not end there. The firm will have to prove to the satisfaction of the taxing authority that the five partners were employees, in the first instance. Secondly, that the bonus was a reasonable amount having regard to the pay of the employee and the conditions of his service. Thirdly, that the profits of the business for the year in question made it reasonable to pay the amount granted as allowance; and lastly, the general practice in similar businesses or trade justified the payment of the amount as bonus. It seems to me that the plain reading of the clause means that the profits of a business will not be allowed to be dwindled by merely describing the payment as bonus, if the payment is in lieu of dividend or profit. I do not see any reason why any strained construction should be put on the plain meaning of the words of the clause. I therefore agree with the learned Chief Justice with regard to the answer to be given to the question referred to us.