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Amritlal and Co. Pvt. Ltd. Vs. Commissioner of Income-tax, Central, Bombay - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 5 of 1966
Judge
Reported in[1977]108ITR719(Bom)
ActsIncome Tax Act, 1922 - Sections 10(2); Income Tax Act, 1961 - Sections 37
AppellantAmritlal and Co. Pvt. Ltd.
RespondentCommissioner of Income-tax, Central, Bombay
Appellant AdvocateR.J. Kolah, Adv.
Respondent AdvocateR.J. Joshi, Adv.
Excerpt:
direct taxation - deduction - section 10 (2) of income tax act, 1922 and section 37 of income tax act, 1961 - whether payment made to directors and salesmen of company allowed as deduction in determining profits of company - assessee-company failed to establish that payments were made exclusively for purpose of business of company - deduction could not be allowed to assessee-company. - - the income-tax officer disallowed the claim for deduction of the payments made to the two directors and four salesmen on the ground that the assessee-company had failed to establish that the payments were made wholly and exclusively for the purpose of business of the company. kolah upon the resolution of the board directors passed on december 20, 1955, as well as a circular letter that was issued by.....tulzapurkar, j.1. at the instance of the assessee the income-tax appellate tribunal has referred the following three questions of law for our determination under section 66(1) of the income-tax act, 1922 : '(1) whether, on the facts and in the circumstances of the case, half of the allowance paid to shri doshi and shri desai could be disallowed in determining the profits of the company for the year 1958-59 (2) whether, on the facts and in the circumstances of the case, the amounts of rs. 17,520 paid to shri dutt, rs. 9,660 paid to shri khopkar, rs. 5,500 paid to shri bhatt and rs. 8,625 paid to shri adalja could be disallowed in determining the company's profit for the assessment year 1958-59 (3) whether, on the facts and in the circumstances of the case, the commission paid to s/shri.....
Judgment:

Tulzapurkar, J.

1. At the instance of the assessee the Income-tax Appellate Tribunal has referred the following three questions of law for our determination under section 66(1) of the Income-tax Act, 1922 :

'(1) Whether, on the facts and in the circumstances of the case, half of the allowance paid to Shri Doshi and Shri Desai could be disallowed in determining the profits of the company for the year 1958-59

(2) Whether, on the facts and in the circumstances of the case, the amounts of Rs. 17,520 paid to Shri Dutt, Rs. 9,660 paid to Shri Khopkar, Rs. 5,500 paid to Shri Bhatt and Rs. 8,625 paid to Shri Adalja could be disallowed in determining the company's profit for the assessment year 1958-59

(3) Whether, on the facts and in the circumstances of the case, the commission paid to S/Shri Kamat and Shah could be disallowed under section 10(2)(x) in determining the company's business profits for the year 1958-59 ?'

2. 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 necessarily in the performance of his duties and also as compensation in lieu of the contingency expenses he has to meet with, such as commission and entertainment to several persons without any liability on the sales manager to account for the same and with liberty to the company to terminate the said payment at any time without any prior notice to the sales manager.' The assessee-company further paid commission to some of its employees in the year of account, viz., Sarvashri H. L. Dutt, A.M. Khopkar, C.J. Bhatt and B. M. Adalja. The normal remuneration in the case of Shri Dutt was Rs. 9,594, in the case of Shri Khopkar was Rs. 6,751, in the case of Shri Bhatt was Rs. 11,848 and in the case of Shri Adalja was Rs. 7,767. Such normal remuneration included commission of Rs. 2,709 in the case of Shri Dutt, Rs. 2,332 in the case of Shri Khopkar, Rs. 4,048 in the case of Shri Bhatt and Rs. 2,307 in the case of Shri Adalja. In addition to these emoluments the assessee-company paid further commission of Rs. 17,522 to Shri Dutt, Rs. 9,660 to Shri Khopkar, Rs. 5,500 to Shri Bhatt and Rs. 8,625 to Shri Adalja, which additional commission was paid in pursuance of a resolution of the board of directors dated 20th December, 1955, according to which the rate of commission hitherto paid at 1/2% was increased so as to cover increased cost subject to maximum of 3 1/2% on the volume of business attended to by each one of them. It appears that on the very day when the resolution was passed a circular letter was issued by the assessee to these employees in which it was stated that the management had decided that the rate of commission to be paid would increase by 2 1/2% in addition to 1/2% commission that was hitherto being paid to them and that this increase would enable these salesmen to meet all the incidental expenses which they had to incur in connection, with the business of the company. It was also made clear in that circular letter that the practice which was hitherto followed of making payments of certain amounts to certain officers of the company for incidental expenses incurred in connection with the business of the company would be discontinued and that such incidental expenses should be borne by the salesmen out of the additional commission that was being paid to them. No details were, however, made available for the scrutiny of the income-tax authorities of the expenditure 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 Kumar 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.

3. Before the Income-tax Officer the whole of the amounts said to have been paid to Shri Doshi, Shri Desai, Shri Dutt, Shri Khopkar, Shri Bhatt, Shri Adalja, Shri Kamat and Shri Shah were claimed by the assessee-company as allowable deduction in computing its business profits. The payments made to Shri Doshi and Shri Desai - the two directors - and Sarvashri Dutt, Khopkar, Bhatt and Adalja - the four salesmen - were sought to be deduct under section 10(2)(xv) of the Act while the payments made to Shri Kamat and Shri Shah were sought to be deducted under section 10(2)(x) of the Act. The Income-tax Officer disallowed the claim for deduction of the payments made to the two directors and four salesmen on the ground that the assessee-company had failed to establish that the payments were made wholly and exclusively for the purpose of business of the company. The payments made to Shri Shah and Shri Kamat were also disallowed on the ground that they were ex gratia payments. Against the order of the Income-tax Officer the assessee-company preferred an appeal to the Appellate Assistant Commissioner who confirmed the disallowance on the ground that the payments were not made for business. The matter was carried further in second appeal by the assessee-company to the Appellate Tribunal and it was contended on its behalf that it had made payments to the two directors and the four salesmen(Sarvashri Dutt, Khopkar, Bhatt and Adalja), that the payments were not challenged, that they were not for any extra-commercial consideration and that it was not for the company but for the recipients to satisfy the department that they spent the amount for the purpose for which they had been paid to them. It was pointed out that in the colours and chemicals business sales could only be effected with the co-operation of the dyeing masters in the mills and secret commission had to be paid to them in order to ensure steady sales. It was pointed out that the assessee-company was paying commission at the rate of 7 1/2% to is selling agents at Indore and Ahmedabad and these commissions were allowed without any question and that in the other regions where there were no selling agents the company had its own salesmen and it had necessarily to reimburse them for the expenditure they had to incur by was of secret commission and other contingency expenditure. In support of these contentions reliance was placed upon the two resolutions, 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 in that behalf had been asked for by the department. Reliance was also placed upon the Tribunal's orders that were passed in relation to the earlier assessment years. It was pointed out that before 1955 Shri Doshi was paid Rs. 75,000 per annum and Shri Desai was paid Rs. 25,000 per annum more or less for the same purpose except that there was no mention of expenditure on entertainment in the earlier arrangement, and that the claim to deduct those amounts while computing the business profits has been disallowed by the Tribunal. It was pointed out that even for the year in question the company was not in a position to give any details of expenditure incurred by the directors nor were the directors able to give the details of expenditure in their assessment. In regard to Shri Kamat and Shri Shah it was contended that the payments to these two employees had to be judged in the light of section 10(2)(x) of the Act and in the light of that section the payments were disproportionately high as compared to salaries and that these were not justified even on the ground of higher profit and higher sales and no trade practice was pointed out in support of such payments.

4. On a consideration of the relevant material that was placed before it and on a consideration of the rival submissions that were urged before it the Tribunal allowed the deduction of payments made to the two directors to the extent of Rs. 3,750 for each of them and the balance was disallowed. It disallowed the payment of additional commission to four salesmen, viz., Dutt, Khopkar, Bhatt and Adalja, as also the commission to Shri Kamat and Shri Shah. At the instance of the assessee-company, therefore, the aforementioned three questions which have been set out at the commencement of the judgment have been referred to us for our determination.

5. Mr. Kolah, appearing for the assessee-company, contended before us that the position which obtained in the relevant year of account was entirely different from the position that obtained in the earlier years, when the Tribunal had disallowed the payments which were made to its directors in those years. He pointed out that in respect of earlier years Shri Doshi and Shri Desai were paid Rs. 75,000 and Rs. 25,000, respectively, and when the matter had reached before the Tribunal, the Tribunal had disallowed the amounts in the assessment of the company, while in the year 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 payment 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 proceeded to approach the question from this angle. In its resolution dated May 12, 1955 (a copy whereof has been annexed as annexure 'A' to the statement of the case) the board of directors had expressly stated that the company should pay to Shri Desai a sum not exceeding Rs. 7,500 every year 'to meet with expenses wholly or necessarily in the performance of his duties and also as compensation in lieu of the contingency expenses he had to meet with, such as commission and entertainment to several persons without any liability on the sales manager to account for the same.' In other words, according to Mr. Kolah, the purpose for which the payment was made to Shri Desai and also to Shri Doshi was to meet the expenses which they were required to incur wholly or necessarily in the performance of their duties and also as compensation in lieu of the contingency expenses they had to meet - the contingency expenses being of two types : payment of commission and entertainment to several persons. As regards additional commission that was paid to four salesmen, namely, Sarvashri Dutt, Khopkar, Bhatt and Adalja, reliance was placed by Mr. Kolah upon the resolution of the board directors passed on December 20, 1955, as well as a circular letter that was issued by the company to these salesmen on that very day (copies of both the documents have been annexed as annexures 'D' and 'E', respectively, to the statement of the case). He pointed out that the salesman had represented to the board of directors that the expenses they had to meet for exceeded the commission which they were hitherto receiving and, therefore, the company decided that the rate of commission hitherto paid at 1/2% should be increased so as to cover the increased costs, etc., but that the commission paid to any salesman should not exceed 3 1/2% on the volume of the business attended to by every one of the salesmen. He further pointed that pursuant to this resolution a circular letter was issued to these four salesmen and they were informed that the management had decided that the rate of commission to be paid to them would be increased by 2 1/2% in addition to the 1/2% commission that was hitherto being paid to them and that such increase would enable them 'to meet all incidental expenses which they have to incur in connection with the business of the company'. According to Mr. Kolah, these resolutions 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 within the province of the taxing authorities. In support of his contentions strong reliance was placed by Mr. Kolah upon a judgment of this court in the case of Ciba Dyes Ltd. v. Commissioner of Income-tax : [1954]25ITR102(Bom) as well as upon a judgment 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 and Co. - since reported in : [1977]108ITR500(Guj) - (a typed copy of which judgment was made available for our perusal)]. He also relied upon a decision of the Madras High Court in the case of Newtone Studios Ltd. v. Commissioner of Income-tax : [1955]28ITR378(Mad) and a decision of the Supreme Court in the case of Commissioner of Income-tax v. Walchand and Co. Private Ltd. : [1967]65ITR381(SC) , where a view has been categorically taken that it is open to the Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of a trader or that it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But it is not the function of the Tribunal determine the remuneration which in their view should be paid to an employee of the assessee. In other words, according to Mr. Kolah, it was not open to the income-tax authorities to adopt a subjective standard of reasonableness of the amounts paid. He particularly relied upon the latter two authorities in the context of the position which is obtaining in the instant case that the Tribunal by impugned order has allowed deduction to the extent of half the amounts that were paid to each of the two directors, the contention being that it was not open to the Tribunal to go into the question of reasonableness of the payment made and to decide that only half of the payment made to the two directors would be allowable to the assessee. As regards payments that were made to Shri Kamat and Shri Shah, he contended that considerable emphasis was laid by the taxing authorities as well as by the Tribunal upon the fact that the resolution sanctioning the payment of commission was passed at the fag end of the year and that, therefore, the resolution as well as payments made in pursuance thereof were an after-thought on the part of assessee-company. He contended that even with regard to these payment s that were made 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 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 have been allowed by the taxing authorities as well as by the Tribunal.

6. 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 were called for, which was an occasion to establish the purpose that was set out in the resolution concerned, the company did not furnish any particulars and as such the assessee-company has failed to satisfactorily establish that the expenses had been incurred wholly and exclusively for business purpose. As regards payments that were made to Sarvashri Kamat and Shah, he contended that the claim for deduction in respect of this payment was based upon the provisions contained in section 10(2)(x) and unless the conditions indicated in that provision were fully satisfied by the assessee-company, the assessee-company was not entitled to any deductions in that behalf. He pointed out that the taxing authorities as well as the Tribunal have clearly pointed out how some of the requirements of that provision had not been satisfied by the assessee-company.

7. Since the payments that were made to the two directors and to the four salesmen were claimed as business expenditure falling under section 10(2)(xv) of the Act, it would be necessary to set out that relevant provision. Under sub-section (1) of section 10 the tax is payable by an assessee under the head 'profits and gains of business, profession or vocation' in respect of the profits or gains of any business, profession or vocation carried on by him and under sub-section (2) of section 10 such profits or gains are to be computed after making the allowances specified in that sub-section. Section 10(2)(xv) runs thus :

'10. (2) Such profits or gains shall be computed after making the following allowances, namely : - .....

(xv) any expenditure (not being an allowance of the nature described in any of the clauses (i) to (xiv) inclusive, and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purpose of such business, profession or vocation.'

8. In order that an expenditure should qualify for deduction or allowance contemplated by the aforesaid provision, one of the requirements of the provision is that the expenditure must have been laid out wholly and exclusively for the purpose of such business and the question in the instant case before us is whether the assessee-company could be said to have satisfied this requirement of the provision. The argument of Mr. Kolah has been that the purpose for which these payments were made to the 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 mills in the case of this business had been recognised by the decided cases and in particular he placed strong reliance upon the decision of this court in Ciba's case : [1954]25ITR102(Bom) . In view of this position which obtained in the matter, he urged that it was not necessary for the assessee-company not was it possible for the assessee-company to place the details or the particulars regarding the persons to whom the payments had been made by the recipients of these amounts from the assessee-company and that the purposes as set out in the two resolutions should have been accepted as sufficient material to come to a conclusion that the expenditure had been laid out wholly and exclusively for the business of the assessee.

9. In the case of Ciba Dyes Ltd. v. Commissioner of Income-tax : [1954]25ITR102(Bom) the facts were these : The assessee-company carrying on business of importing dyestuffs and chemicals had agreed to pay to its representative, whose business was to push the sales of the products, a commission of 12 1/2 per cent. on net sales. Subsequently, this commission was split up and assessee wrote to the representative that 5 per cent. of the commission was allowed to him to meet contingency expenses which consisted of commission to dyeing masters, agents, etc., which had to be paid by the representative for the purpose of canvassing business. In the relevant year of the assessee paid to its representative a certain. In the relevant year the assessee paid to its representative a certain amount representing this 5 per cent. commission and claimed to deduct it as a permissible allowance under section 10(2)(xv). The income-tax authorities disallowed the claim solely on the ground that it had not been proved that the representative had in fact expended the sum for the purpose for which the said sum was paid to him. On a reference, this court held that proof of actual payment by the representative was not necessary and that the assessee was, therefore, entitled to the deduction under section 10(2)(xv). Relying upon this decision Mr. Kolah strenuously urged before us that in the instant case also the purpose of the payments made to the two directors and the four salesmen in question had been clearly set out in the two concerned resolutions and admittedly the assessee-company was dealing in dyes and colours and chemicals in which industry the practice of paying commission to dealers and agents had been judicially recognised. He, 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 amount had made actual payments in satisfaction of the purpose for which 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]108ITR500(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.

10. 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 this case the only material on the basis of which Mr. Kolah could advance his argument that the purpose for which the amount has been paid has been established consists of two resolutions, one in the case of Shri Desai and the other in the case of four salesmen in question. It is true that the purpose of making payment to the two directors and the four salesmen has been to some extent indicated in these resolutions but that itself does not mean that the assessee-company could be said to have established that in point of fact the expenditure was incurred for that purpose and it is up to the taxing authority to enquire into the matter and satisfy themselves as to whether the purposes as indicated in the two resolutions were in reality the purposes for which the payment had been made. It was in this behalf that the details and particulars were sought by the department from the assessee-company, but the assessee-company did not furnish any details or particulars and the Tribunal has in its order categorically stated that in the absence of such details the company was not in a position to satisfy the income-tax authorities that the expenditure was for the purpose of the assessee's business and to that extent the assessee-company's claim for deduction could not be upheld. The Income-tax Officer stated in his order that for the same reasons as in the past, i.e. failure on the part of the assessee-company to prove that these expenses had been incurred, meaning the expenses incurred by way of payments made to the two directors and the four salesmen in question were wholly and exclusively for the purpose of the business, the deduction claimed was disallowed and this conclusion was confirmed by the Appellate Assistant Commissioner. The Appellate Assistant Commissioner has observed in his order thus :

'It may be stated in this connection that similar payments were claimed for the assessment year 1956-57 when the question was gone into in greater detail by the Income-tax Officer who also examined some of the employees. He disallowed the claim. The Appellate Assistant Commissioner of Income-tax in appeal, for detailed reasons given in his order, confirmed the Income-tax Officer's action. This year too, the position is not very much different'.

11. The mere fact that the assessee-company had proved that payments were made to the two directors 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.

12. 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]25ITR102(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 contained the purpose for which the payment was made to the representatives was accepted by the taxing authorities and it was in those circumstances that the court took the view that proof of actual payment by the representative was not necessary. At page 106 of the report, the court observed thus :

'Now, in this particular case, the finding of the Tribunal is that these two sums were actually paid by the assessee-company to its representative. The agreement under which these amounts were paid has not been challenged as an agreement which is not a genuine agreement or not a bona fide agreement. It has not been suggested that the payment to the representative was not for the purpose of contingency expenses which the representative had to meet for paying commission to dyeing masters, agents, etc.'

13. In other words, the taxing authorities as well as the Tribunal had accepted the position that the payment that was made by the company to a representative was for the purpose of contingency expenses which the representative had to meet for paying commission to dyeing masters, agents, etc., and it was on the basis of this position which obtained in the matter that the court took the view that proof of actual payment by the representative was not necessary and the assessee-company was entitled to the deduction under section 10(2)(xv) and since the Tribunal had accepted the position that the payment that was made by the company to its representatives was for the purpose of contingency expenses which the representative had to meet for paying commission to the dyeing masters, agents, etc., the court went on to observe that any further enquiry into the details of expenses that were incurred by the representative would pertain to the domain of reasonableness or otherwise of the expenditure incurred by the assessee-company which the court held that the taxing authorities were not entitled to make. It would be pertinent to point out that in this very decision, so far as the legal position under section 10(2)(xv) is concerned, the same has been categorically stated in the following terms on page 107 of the report :

'Sir Nusserwanji says that this construction would entitle an assessee to pay any amount to his agent and claim the payment as a permissible deduction under section 10(2)(xv) merely by proving payment of the amount to the agent. Now, we are laying down no such proposition of law. We wish to make it perfectly clear that before 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).'

14. The aforesaid passage which we have quoted clearly brings out the fact that the entire decision proceeded on the basis that the taxing authorities as well as the Tribunal had accepted the position that the payment of 5 per cent. which was made by the assessee-company to its representative was for the purpose of contingency expenses which the representative had to meet for paying commission to dyeing masters, agents, etc., and in this view of the matter it was held that proof of actual payment by the representative was not necessary and perhaps any enquiry for particulars or details about such payment made by the representative for the purpose of meeting such expenses would pertain to the domain of reasonability or otherwise of the expenses incurred. In other words, the case decided by this court in Ciba Dyes Ltd. v. Commissioner of Income-tax : [1954]25ITR102(Bom) is clearly distinguishable from the facts of the present case, inasmuch as, in the instant case, neither the taxing authorities nor the Tribunal was satisfied about the purpose for which the payments were made by the assessee-company to the two directors and the four salesmen in question. In fact, the taxing authorities called upon the assessee-company to establish satisfactorily the purpose of the expenditure incurred and that the assessee-company had incurred the expenditure wholly and exclusively for the purpose of its business - a fact which the assessee-company had failed to establish. Since the purpose itself was not proved by the assessee-company it is quite clear to us that the decision in Ciba Dyes Ltd. v. Commissioner of Income-tax : [1954]25ITR102(Bom) cannot be availed of by the assessee-company before us in substantiating their contention and the expenditure incurred, in our view, was rightly disallowed.

15. We may also mention that the decision of the Gujarat High Court in I. T. Ref. No. 47 of 1972 decided on 7-12-1973 [Addl. Commissioner of Income-tax v. Moolchand Jaikishandas and Co. : [1977]108ITR500(Guj) ] is also clearly distinguishable on facts. In that case for the two relevant assessment years 1963-64 and 1964-65, the assessee-company had paid commission to two of its employees for the first year and to two of its employees in the second year in addition to regular salary that was drawn by each of the employees during the relevant years. The assessee-company claimed a deduction in respect of such commission that was paid by it to its employees 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 business, the profits made and the practice prevalent in the said business, the Tribunal held that the payment of remuneration by way of commission in the manner done in that particular case was not liable to be disallowed to any extent. It took the view that the agreements under which such remuneration which included commission was paid to the employees were quite natural and were genuine and not sham. It also observed that the payment of secret commission had been the feature by the assessee in the past and it also appeared that it was common in the dye-stuff trade and in those circumstances it was not necessary that the names of persons to whom secret commission was paid should have been disclosed to the taxing authorities and applying the test of commercial expediency to the facts and circumstances of the case the Tribunal held that the case fell under section 37 of the Act of 1961. These findings of facts which were recorded by the Tribunal about the genuineness of the agreements under which remuneration which included commission was paid to its employees were accepted by the High Court and the question that was referred to it was answered by the High Court in favour of the assessee. It will thus appear clear that on the facts the Tribunal had come to the conclusion that the purpose for which commission was paid by the assessee to its employees had been satisfactorily proved by the assessee and, therefore, the ratio of that decision would clearly be inapplicable to the facts of the present case. As stated earlier, in the case before us, in spite of opportunity being given to the assessee-company, no particulars or details were furnished by the assessee-company so as to enable the taxing authorities or the Tribunal to come to a conclusion that the purpose for which the payments were made was satisfactorily established; in other words, the inquiry about details or particulars was not for determining the reasonableness or otherwise of the expenditure but for satisfying itself that the expenditure itself was for the purposes indicated in the resolutions and the taxing authorities and the Tribunal held that the assessee-company had failed to establish the same. As regards half of the expenditure allowed in the case of two directors, it appears that the Tribunal has taken a lenient view that Rs. 3,500 in the case of each should be allowed as that part could be 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.

16. 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 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 business, professions or vocations.'

17. The contention of Mr. Kolah in regard to these amounts was that unnecessary stress was laid by the Tribunal as well as the taxing authorities on the aspect that the resolution sanctioning the payment of commission was passed at the fag end of the year and that the timing of the resolution suggested that it was an after-thought. He contended that payment to these employees had also to be judged from the point of commercial expediency and that no extra-commercial consideration was there in this case. He strongly criticised the view of the Tribunal as well as of the taxing authorities that the amounts of commission paid to these employees were disproportionately high as compared to the low salaries that were being paid to them by the assessee-company. In that behalf he invited our attention to certain observations that have been made by the Gujarat High Court in its judgment in I. T. Ref. No. 47 of 1972 [Addl. Commissioner of Income-tax v. Moolchand Jaikishandas and Co. : [1977]108ITR500(Guj) ]. where, following its earlier decision in Laxmandas Sejram v. Commissioner of Income-tax : [1964]54ITR763(Guj) . the Gujarat High Court observed that if the amount of the salary was low and the commission was part of the remuneration, the amount of the commission will have to be large in order to equalise the total amount and ensure a fairly high remuneration to these employees. In our view, none of the submissions of Mr. Kolah impresses us. In the first place, the deduction that was claimed by the assessee-company in regard to these two payments made to Sarvashri Kamat and Shah was not under section 10(2)(xv) but under section 10(2)(x) and it is, therefore, not possible to accept Mr. Kolah's general submission that this expenditure had to be judged from the point of commercial expediency. In our view, the expenditure could be allowed only if the requirements of the provision of section 10(2)(x) are satisfied and not otherwise. Similarly, Mr. Kolah's criticism of the view taken by the taxing authorities and by the Tribunal that the amounts which represented commission paid to these employees were disproportionately high as compared to their salaries and, therefore, were disallowable is 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]108ITR500(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 then 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 rumination 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 almost at the fag end of the year of account that the resolution was passed by the board of directors to pay the amount to the two employees concerned 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'. In other words, the commission paid by the assessee to these two employees was never part of the remuneration which was payable under an agreement by the assessee-company to them. It was in these circumstances that the taxing authorities as well as the Tribunal recorded their view that it was significant that the resolution in question was passed at the fag end of the year of account and the timing thereof suggested that it was an after-though. But, apart from these aspects of the matter, the crux of the question is whether the payment of commission to these two employees satisfied the requirements of the provision contained in section 10(2)(x) of the Act. In terms, the proviso to clause (x) of sub-section (2) of section 10 states that the amount of commission should be reasonable amount with reference to the pay of the employee and the conditions of his service. Admittedly, Shri Kamat's other emoluments in year of account amounted to Rs. 11,975 which included bonus of Rs. 2,405. In other words, without the bonus his yearly remuneration by way of salary was Rs. 9,570 and Shri Shah's other emoluments amounted to Rs. 5,975 which was by was of salary. In the context of these two figures, which represented the regular emoluments of the two employees, it is difficult to say that the amount of Rs. 16,894 and Rs. 12,410 paid respectively to the two employees could be said to be reasonable. These amounts in terms of the resolution represented commission 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 and the payment of such commission to these two employees had been made in the year of account in which the sales had dwindled to Rs. 1,17,22,145 from Rs. 1,58,15,289 which obtained in the immediately proceeding year. It is true,, as was pointed but by Mr. Kolah, that despite fall in the total turnover of the assessee's business in the year of account, the profits had gone up in the year of account as compared to the profits earned in the immediately preceding year. But, apart from that aspect of the matter, which is one of the aspects to be considered under the proviso, the two aspects mentioned in the proviso are clearly against the assessee-company. In the first place, the payment of commission is disproportionately high as compared to their salaries and, secondly, no trade practice had been pointed out by the assessee-company in support of the commission paid. In other words, the expenditure incurred cannot be said to have satisfied the requirements of the proviso to clause (x) of sub-section (2) of section 10. In this view of the matter, it is clear that the assessee-company could not be allowed the deduction claimed in respect of these payments made to Shri Kamat and Shri Shah.

18. Having regard to the above discussion, all the three questions referred to us are answered in the affirmative and against the assessee.

19. Assessee will pay the costs of the reference to the revenue.


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