BRIJLAL GUPTA J. - This is an income-tax reference. It comes on a requisition by this court on an application under section 66(2). The question for the opinion of the court is :
'Whether, in the circumstances of the case, the sum of Rs. 37,733 paid to the general manager, Shri J.P. Vaish, which has been disallowed by the Income-tax Appellate Tribunal, was an amount laid out or expended wholly and exclusively for the purpose of the business of the assessee ?'
The facts giving rise to the reference are : that the assessee which is a registered firm took on lease a woollen mills called Baijnath Bankebehari Lal Woollen Mills. The terms of the lease appear to have been that a minimum amount of Rs. 24,000 as lease money was payable to Smt. Indramani Singhania, the widow of the proprietor of the mills, and in case the profits of the lessee from the mills exceeded the sum of Rs. 1,00,000 the lease money was to be payable at the rate of 0-7-9 in the rupee.
It appears that the partners of the assessee firm appointed one Sri Shital Prasad by a power of attorney to manage the business of the mills on behalf of the partnership. Sri Shital Prasad, by letter dated September 20, 1944, appointed his own son, Sri J.P. Vaish, to be the general manager of the lessee firm. The terms regarding his remuneration are stated in this letter in paragraph 6 as follows :
'6. Your remuneration and allowances will be as follows :
(a) A fixed salary at the rate of Rs. 1,000 p.m. including the period of probation from 1st May, 1944, up to date.
(b) A commission of 12% on the net profits of the firm payable after the accounts have been ascertained and vouched by the auditors, the certificate of the auditors to be conclusive :
Provided, firstly, that the net profits shall be arrived at after defraying all manufacturing charges, including cost of raw materials, stores, coal, steam power, electric energy consumed, wages, salaries of clerks, supervisors, accountants, mill staff including technical experts, depreciation on machinery employed in the business, interest, taxes, overhead charges and only the minimum sum of Rs. 24,000 per annum payable to Mrs. Indramani Singhania on account of rental of the mills. Any amount found payable to her in excess of Rs. 24,000 in any year shall not be deducted for arriving at net profits for the purposes of this clause :
Provided, secondly, that if in any year the profits calculated above exceed Rs. 1,00,000 the commission payable to you will be 25% of such profits.
(c) You will be allowed Rs. 250 p.m. as car allowance and you will use your own car till the firm is able to purchase one for your use.
(d) You will be entitled to free medical attendance and treatment for yourself and your family.'
It will be noticed that one extraordinary feature of these terms regarding the determination of the remuneration of Sri. J.P. Vaish was that even when the profits exceeded Rs. 1,00,000 only the minimum amount of Rs. 24,000 as lease money was to be deducted in arriving at the figure of profits on which the commission of Sri J.P. Vaish at 25% was to be worked out. The figure of profits for determination of the commission was not to be worked out after the deduction of the entire amount of lease money at 0-7-9 in the rupee which was to be paid to Smt. Indramani Singhania when the profits exceeded one lakh of rupees.
The year in question in this reference is the assessment year 1948-49. In this year the total remuneration paid to Sri J.P. Vaish was as follows :
Salary at Rs. 1,000 p.m. .
Car allowance at Rs. 250 p.m. .
Expenses on medical treatment .
As the profits exceeded Rs. 1,00,000 the commission at 25% .
The commission was worked out in this way :
Less minimum lease money
Commission at 25%
It will be noticed that if the entire lease money of Rs. 1,21,285 had been deducted from the total profits of Rs. 3,25,860 then the net profits would have been only Rs. 2,04,575 and commission at 25% of this amount would have been only Rs. 51,143-12-0.
Apart from the salary, car allowance and expenses on medical treatment which were debited by the assessee to the profit and loss account, the assessee claimed the amount of Rs. 75,465 paid as commission to Shri J.P. Vaish as an allowable deduction under section 10(2). The Income-tax Officer, by notice under section 23(3), called upon the assessee to prove the allowability of this amount. The notice required the assessee to state : 1. the previous employment of Shri J.P. Vaish, 2. the salary drawn by him and 3. the technical and other qualifications by reason of which this amount of Rs. 75,465 became payable to Shri Vaish. The assessee filed a written reply dated June 16, 1949. In this reply regarding point No. 1 viz., previous employment, it was stated as follows :
'He had training in the Aluminium Corporation of India Ltd., Laxmiratan Cotton Mills Ltd. and the Food Products Ltd., Rampur.'
From this it is clear that he was not previously employed anywhere. He was merely a trainee in the three concerns mentioned. None of these concerns was a woollen textile mills. The period of his training was not mentioned. The particular line in which he took training was also not mentioned.
Regarding point No. 2, viz., the salary drawn by him, it was mentioned :
'His salary during the period is not known.'
It is clear that the assessee (sic.) withheld information about his salary, if any. It may be that as he was merely a trainee and not an employee, he may not have been in receipt of any salary at all. It has already been pointed out that the period of his training was not mentioned.
Regarding the third point, viz., his technical and other qualifications by reason of which the commission of Rs. 75,465 was paid to Shri J.P. Vaish, it was stated as follows :
'Mr. Vaish was educated in the Public School, Dehra Dun, and passed the Senior Cambridge from that school. He then joined the Banaras College and passed the Intermediate Examination. He studied for a year in the Engineering College of the Banaras Hindu University for electrical and mechanical engineering and then joined the Commerce College at Delhi. After that he had training in the Aluminium Corporation of India Ltd., Laxmiratan Cotton Mills Ltd. and the Food Products Ltd., Rampur.'
From this it is clear that he had merely a general education but was not even a graduate. He could not possess any qualification, worth speaking of, as an electrical and mechanical engineer, having been in the Engineering College only for a year. The period of his stay at Commerce College is not mentioned. Presumably, the stay at that college was of very short duration. Thereafter, he was apprenticed to the three companies mentioned, none of which was a woollen textile mills. The period of his training or the line in which he took training, were not mentioned.
Upon a consideration of these facts and upon a consideration of the fact that the appointment was made by the father of Shri J.P. Vaish, the Income-tax Officer came to the conclusion that 'the letter of appointment is not solely actuated by business, considerations'. It was also observed by the Income-tax Officer that 'there was no reason why the lease money which increased by 0-7-9 in a rupee if the profits exceeded one lakh of rupees should not be made deductible for calculating the percentage of commission'. He concluded that this clause 'was not dictated by business consideration'. It was also pointed out by him that commission at 25% was 'a very high rate of commission particularly when no maximum has been fixed'. On this last ground the Income-tax Officer did not treat the case of one Shiv Bhagwan, manager of another concern, as a parallel case. Lastly, the Income-tax Officer observed that, having regard to the share of profits of the three partners of the assessee, the remuneration of Shri J.P. Vaish amounting to Rs. 92,465 was 'highly excessive and unreasonable'.
As a matter of law the Income-tax Officer took the view that irrespective of the fact that commission was payable to Shri J.P. Vaish under the letter of appointment, the question of reasonableness or otherwise of the commission paid fell to be determined under section 10(2)(x). He went on to apply tests laid down under that provision and observed that having regard to the salary and allowances of Shri J.P. Vaish and further having regard to the profits of the year the amount of Rs. 75,465 commission was 'very excessive and unreasonable'. He also found that there was 'no general practice of giving commission at 25% of the net profits of business in the assessees line of business'. In the result he allowed a sum of only Rs. 5,000 on account of commission and disallowed the balance of Rs. 70,465.
From the above it will be clear that, even though the Income-tax Officer ultimately determined the question of the allowability of the commission by reference to section 10(2)(x), in the earlier part of his order, he also considered the question on considerations which are relevant only under the provisions of section 10(2)(xv), viz., 1. That the appointment was made by the father, Sri Shital Prasad, of his own son, Sri J.P. Vaish. The reference to the relationship shows that the Income-tax Officer attached some importance to the fact and was possibly of the view that the total remuneration of Sri J.P. Vaish might have been influenced by that consideration and not by purely business consideration. 2. He appears to have derived support for this view from the facts that Sri J.P. Vaish possessed no special qualification and had no particular experience and in reply to the notice under section 23(3) information about his previous salary, if any, was withheld. 3. He concluded that the remuneration was not 'solely actuated by business considerations', from the extraordinary clause in the letter of appointment about working out the net profits for purpose of computation of commission by deducting the minimum amount of lease money of Rs. 24,000 only and not the increased amount of lease money at 0-7-9 in the rupee when the profits exceeded one lakh of rupees. 4. Lastly he considered the general practice in this line of business regarding the percentage of profits allowable as commission to managers and held that there was no practice of allowing commission at 25% and also noticed that in the alleged comparable case of Shiv Bhagwan, manager, there was a maximum fixed but in the present case there was no such maximum fixed.
It is true that he also examined and ultimately determined the question of allowability from the point of view of the considerations under section 10(2)(x) but it is clear from what has been stated above that the considerations which are relevant under section 10(2)(xv) were fully present to his mind and from his view of these considerations, it appears that it would have made no difference to his decision if he had not even referred to section 10(2)(x) and had relied solely upon section 10(2)(xv).
The assessee went up in appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner did not confirm the finding of the Income-tax Officer that the rate of commission was not dictated by business consideration for the reasons that : 1. the annual accounts showing the payment of commission were signed by the proprietors and 2. that Mr. Vaish was not related to the proprietors. It is noticeable that the Appellate Assistant Commissioner did not fully meet the point raised by the Income-tax Officer. The Income-tax Officer had observed that 'the letter of appointment was not solely actuated by business considerations'. An agreement may be entered into for 'business considerations' but it may not be 'solely' for such considerations. Under section 10(2)(xv) unless the expenditure is 'wholly and exclusively' for purposes of business, it is not allowable. From what the Appellate Assistant Commissioner went on to hold it is clear that he was of the view that the whole of the commission was not paid exclusively for business purposes even though has the Appellate Assistant Commissioner considered the payment under section 10(2)(x) he did not specifically use the language which he would have used if he had applied section 10(2)(xv). He was, however, not very much impressed by the qualifications and experience of Sri Vaish and observed that the commission of 25% over and above the salary and allowances of Sri Vaish were 'quite high'. He significantly remarked 'No other businessman is known to have been allowing commission at such high rates.' He also observed that there was no reason why the deduction of only the minimum lease amount of Rs. 24,000 should have been stipulated as being deductible for arriving at the net profits for purposes of computation of a commission at 25%. Lastly, he observed in this connection that having regard to the fact that the net profits were only Rs. 1,29,110 the incidence of commission at Rs. 75,465 worked out to a much higher percentage (nearly 59%) of the net profits rather than 25%. He went on to negative the argument of the assessee that increased profits in this year were due to the skill or the effort of the manager and found that 'the extraordinary profits were due to war conditions and the efforts of the director of this concern rather than to the skill or the effort of the manager'. The Appellate Assistant Commissioner also referred to the practice in similar business and to the alleged comparable case of Shiv Bhagwan where a maximum was fixed even though the commission to be paid was a graded commission and concluded that half of the amount of Rs. 74,465, viz., 37,732, was allowable and not merely Rs. 5,000 nor the entire amount of Rs. 75,465.
The assessee had argued before the Appellate Assistant Commissioner that where commission was payable under an agreement its allowability or otherwise could not be considered under section 10(2)(x). The Appellate Assistant Commissioner negatived this argument and held that the sub-section did, even by implication, exclude cases governed by a contract, but even though the Appellate Assistant Commissioner considered the question under section 10(2)(x), the facts and circumstances relied on by him do not necessarily exclude the facts and circumstances which may be relevant for the decision of the question under section 10(2)(xv). It is clear from the facts relied on by the Appellate Assistant Commissioner that the assessee has no case under section 10(2)(x) judged by the tests laid down in that sub-section. The question for consideration is whether those tests are wholly irrelevant for a consideration of the question under section 10(2)(xv). This will depend upon the fact whether sections 10(2)(x) and 10(2)(xv) are mutually exclusive and self contained or whether there is a certain amount of overlapping in the two sub-sections as regards the tests which might bring an allowance within the one sub-section or the other. These questions shall be examined hereafter.
Against the order of the Appellate Assistant Commissioner the assessee went up in appeal to the Income-tax Appellate Tribunal. The Tribunal started by observing that both the Income-tax Officer and the Appellate Assistant Commissioner had considered the payment of commission under section 10(2)(x) and quoted the provisions of that section but held on the supposed authority of Jethabhai Hirji & Co. v. Commissioner of Income-tax [ 17 I.T.R. 533.], that the allowability of commission in the circumstances could be considered only under section 10(2)(xv) and quoted the provision in that section as it stood at the material time as follows :
'Any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly or exclusively for the purposes of such business, profession or vocation.'
It held that under this provisions it is to be seen whether the 'remuneration paid to an employee by the employer was wholly and exclusively for the purpose of his business'. It held that merely the existence of an agreement and the fact of payment were not sufficient to exclude any discretion on the part of the Income-tax Officer to come to a conclusion that the payment was not made wholly or exclusively for the purpose of business. It observed that although there might be an agreement and although payment might have been made it would still be open to the Income-tax Officer to consider various factors which would go to show whether the payment was made 'wholly and exclusively for purposes of business' and it ended by saying : 'In this particular case the contention of the Income-tax Officer is that the amount paid was not wholly and exclusively for the business.' From this it is quite clear that the real question was squarely present to the mind of the Tribunal. The Tribunal then referred to the letter of the assessee dated June 16, 1949, in which the assessee had attempted to given an explanation 'why such a heavy commission had been paid to the general manager'. Then it quoted from that letter as follows :
'After the death of Mr. Vaish in July, 1947, the firm was converted into a company and the post of general manager was abolished. One of the directors who managed the affairs of the company was paid Rs. 18,000 as remuneration and Rs. 6,000 allowances in the accounting year 1947-48'
and observed :
'This particular fact proves beyond doubt that the post of general manager carries the responsibility equal to that of the director who was given the charge of conduct of business after the death of the general manager. This post carries a remuneration of Rs. 18,000 plus Rs. 6,000 equal to Rs. 24,000 per year. This fact, therefore, proves abundantly that the commission paid in excess of this amount was not really paid wholly for the purpose of carrying on business'
and concluded :
'We, therefore, hold that the amount paid as commission cannot be reasonably taken to be a proper expense under the head 10(2)(xv). The Income-tax Officer and the Appellate Assistant Commissioner were, therefore, justified in disallowing the portion of the commission as not allowable expenditure in the year of account.'
From this it is clear that having put the provision in section 10(2)(xv) clearly before them, the Tribunal asked the question, what would be the expense wholly and exclusively for purposes of business on the person in-charge of the management of the business whether as general manager or as director. On the facts of the case before them they equated the responsibility of the general manager with that of the director. Then, having regard to the remuneration of the director for shouldering that responsibility they came to the conclusion that reasonable or proper business expenditure for getting a person to shoulder that responsibility was Rs. 24,000. Anything, paid over and above that amount was improper and unreasonable business expenditure. In the words of the Tribunal the excess amount paid over Rs. 24,000 was 'not really paid wholly for the purpose of carrying on business'. On this finding as seen above, the Tribunal affirmed the disallowance of the sum of Rs. 37,732 viz., half of the amount of Rs. 75,465.
Thereafter, the assessee asked for the statement of a case of this court but the Tribunal refused the request. The assessee then got the Tribunal to state a case under orders of this court on an application under section 66(2) and thus the reference comes before this court.
The argument in the case has ranged over a wide field and numerous questions have been discussed and debated but the main question which has been argued is that the finding of the Tribunal regarding the disallowance of Rs. 37,732 has been vitiated by the Tribunal applying the tests laid down under section 10(2)(xv) and not the tests under section 10(2)(xv) as the tests under the two provisions are wholly different and mutually exclusive. The various arguments shall now be considered.
The first question for consideration is whether a contractual payment of commission falls for consideration as an allowance or a deduction under section 10(2)(x) or under section 10(2)(xv). It was argued that where the payment of a commission is under a contract or an agreement it can be considered only under section 10(2)(xv) and not under section 10(2)(x) under which only the commission which is non-contractual can be considered. It was argued that under section 7(1) commission was taxable under the head 'salary' and as such it should be taken to partake of the nature of salaries. As salaries were allowable only under section 10(2)(xv), so also commission should be allowable only under that section and not under section 10(2)(x). The other argument was that one of the tests for the allowability of the commission under section 10(2)(x) was that its amount was 'reasonable' by reference to the pay of the employee and the conditions of his service. It was argued that where the payment of commission was contractual its nature was that of pay or salary and, therefore, it could not have been the intention of the legislature that the reasonableness of the payment of such an amount should be determined by reference to another amount of a similar nature or by reference to the conditions of service when the payment of commission is itself a condition of the service of an employee to whom commission is payable under a contract or agreement. It does not appear that there is any substance in these arguments. The inclusion of commission under the head 'salaries' in section 7(1) is for a different purpose altogether and the provision under section 7(1) cannot be pressed into aid for purpose of interpretation of section 10(2)(x). So far as the argument on the basis of the test of reasonableness of the amount by reference to the pay of the employee and the conditions of his service under section 10(2)(x) is concerned, it is not possible to agree with the contention that there is anything absurd or anomalous in that provision in the case of a contractual payment of commission. A commission payable to an employee is different from his pay or salary. The conditions of his service include many other matters and not merely the remuneration payable to him. As such, even if commission payable to an employee under a contract may be considered to be one of the conditions of his service, there is no anomaly or absurdity in requiring the reasonableness of the amount of commission to be determined by reference to all the conditions of his service. In Subodhchandra Popatlal v. Commissioner of Income-tax, Bombay [ 24 I.T.R. 566.], the Bombay High Court took the same view, namely, that whether the payment of the bonus or commission is voluntary or contractual, the question of its admissibility falls for consideration under section 10(2)(x) and not under section 10(2)(xv). With respect this view seems to be the correct view.
If the matter had rested there, the question referred to us might have required reframing and there would have been no difficulty on the facts and circumstances of the case in answering the question referred to us against the assessee under section 10(2)(x) as there is ample material on the record for the conclusion that the entire commission paid to Sri Vaish was not allowable.
The difficulty has however arisen on account of the language of section 10(2)(xv) being different at the material time from the language of that section as modified by subsequent amendment. At the material time the words within brackets in section 10(2)(xv) were only 'not being in the nature of capital expenditure or personal expenses of the assessee', and not the words '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'.
It will at once be seen that whereas in the amended provision every allowance of the nature described in the preceding clauses is expressly excluded from the purview of clause (xv), there was no such express exclusion under that clause at the material time. At that time the exclusion was confined to expenditure of a capital or personal nature. If follows that at the material time even if an amount was held not to be allowable under section 10(2)(x) because it did not satisfy the tests laid down in that case, it might still be considered for an allowance under clause (xv) provided of course that it satisfied the conditions of the latter clause. In this connection reference may once again be made to the ruling of the Bombay High Court in Subodhchandra Popatlal v. Commissioner of Income-tax [ 24 I.T.R. 566.]. In that decision it was laid down that section 10(2)(x) dealt with a special case and section 10(2)(xv) (prior to its amendment) was a general provision and according to well established canons of construction when a statute dealt with a special case it was not permissible to contend that the special case would also fall in the general provision in the statute. Accordingly, it was held that when an expenditure fell under section 10(2)(x), then its validity could be determined only by the tests laid down under section 10(2)(x) and not by the tests laid down in section 10(2)(xv). With great respect it is not possible to agree entirely with the view that whereas section 10(2)(x) dealt with a special case section 10(2)(xv) was a general provision. One may agree that section 10(2)(x) was specific to this extent that it dealt with bonus or commission alone and section 10(2)(xv) dealt with all classes of business expenditure including bonus or commission which are also business expenditure. If the matter had rested there it would have been possible to say that section 10(2)(x), the specific provision, excluded the operation of section 10(2)(xv), the general provision. What seems to have been overlooked in the Bombay decision is the fact that the two provisions lay down different tests and by reason of those tests the two provisions might very well constitute different categories and not merely the one a special category and the other a general category. This may be explained by pointing out that if an amount of commission paid to an employee does not satisfy the tests laid down under section 10(2)(x) it might still fall for consideration under section 10(2)(xv) and may be allowable if it satisfied the test of having been laid out or expended wholly and exclusively for the purpose of the assessees business. It may also be pointed out that a portion of the commission may be allowable under section 10(2)(x) if the finding is that portion is reasonable having regard to the conditions laid down there and so far as the balance is concerned it may also be allowable if it satisfies the conditions in section 10(2)(xv). It appears that it was for this reason that an allowance of the nature provided for in clauses (i) to (xiv) was expressly excluded from the purview of section 10(2)(xv) by amending the section. It follows that thus even though a contractual commission may also be liable to be considered under section 10(2)(x) the whole or a portion of it might not be allowable under that section. It is, therefore, necessary to consider its allowability under section 10(2)(xv).
Before the allowability of the commission is considered under section 10(2)(xv) it might be mentioned that the burden of proving the condition of allowability under that provision is on the assessee. In Commissioner of Income-tax v. Calcutta Agency Ltd. [ 19 I.T.R. 191;  S.C.R. 1008.], it was laid down by the Supreme Court that the burden of proving the necessary facts in connection with a claim for exemption of an amount contended to be an expenditure falling under section 10(2)(xv) was on the assessee. The necessary facts required to be proved by an assessee under that provision may be summarised as follows :
(1) It should be an expenditure,
(2) that expenditure should be laid out or expended,
(3) it should be so laid out or expended wholly and exclusively for a certain purpose, and
(4) the purpose should be the purpose of the assessees business. In this case there is no dispute that the entire amount claimed as a deduction was actually paid. Therefore, it may be taken that the condition about the expenditure having been actually laid out or expended has been satisfied and it only remains to see whether the amount was spent wholly and exclusively for the purpose of business.
The burden being on the assessee the necessary facts to satisfy the above condition were liable to be established by the assessee. The question as to what facts it was necessary for the assessee to have established has given some trouble. Some decided cases may be considered in this connection. In Jethabhai Hirji and Co. v. Commissioner of Income-tax [ 17 I.T.R. 533.], it was laid down by the Bombay High Court as follows :
'...it is erroneous to contend that as soon as an assessee has established these two facts, viz., the existence of an agreement between the employer and the employee and the fact of actual payment, no discretion is left to the Income-tax Officer except to hold that the payment was made wholly and exclusively for the purposes of the business. Although the payment might have been made and although there might be an agreement in existence, it would be open to the Income-tax Officer to take into consideration various factors which would go to show whether the amount was paid as required by the section. For instance, the Income-tax Officer may take into consideration whether the moneys were paid to a near relation of an employer. He may take into consideration the extent of the business and the particular services rendered by the employee which called for a special remuneration at the hands of his employer. He may take into consideration the quantum of the payment made with a view to decide whether the payment was or was not grossly out of proportion to the work done by the employee. If after taking these factors into consideration he comes to the conclusion that the payment was not made wholly and exclusively for the purpose of the business of the assessee, it would be open to him either to disallow the whole sum or a part of the sum paid. The question whether a particular sum was expended wholly and exclusively for the purposes of such business must essentially be a question of fact to be determined by the Income-tax Officer. But it would be open to the assessee to contend,... that the decision arrived at by the Income-tax Officer was based on no evidence at all. If the assessee satisfies the court that apart from the actual payment and existence of the agreement there were no other factors which were taken into consideration by the Income-tax Officer, then perhaps the court would say that the Income-tax Officer was not justified in coming to the conclusion that he did.'
In support of this observation the Bombay High Court relied on the decision of the Privy Council in Aspro Ltd. v. Commissioner of Taxes [ 4 I.T.R. 264.]. This decision is instructive as showing that the entire burden of proving the necessary facts is upon the assessee. If upon taking into consideration the facts and circumstances brought on the record by the assessee, the Income-tax Officer can pick holes in those facts and circumstances, it will be permissible for him to hold that he did not succeed in proving that the expenditure had been laid out wholly and exclusively for the purpose of the business. It was not laid down and it could not be laid down that the Income-tax Officer should himself bring on the record facts and circumstances on the basis of which alone he would be entitled to come to the negative finding that the whole or a part of the expenditure was not laid out or expended wholly or exclusively for the purpose of business. That this is the correct position under the income-tax law is borne out by a decision of this court in Shrimati Indermani Jatia v. Commissioner of Income-tax [ 19 I.T.R. 342, 348.]. It was observed as follows :
'... in order to claim this deduction as expenditure, the assessee had not only to prove that the expense was incidental to the business but to show that the expenses were laid out or expended wholly and exclusively for the purpose of the business.'
And it is observed at page 349 as follows :
'In the case before us, no material appears in the statement of the case by the Tribunal or in the other papers available to us which might lead to the inference that this expense of Rs. 7,512 was incurred wholly and exclusively for the purpose of the business of the assessee.'
From these observations it is clear that the entire burden of proof is on the assessee to clinch the issue that the whole amount of the claim was exclusively laid out or expended for the purpose of business. No part of the burden is on the department. In other words it is the duty of the assessee to justify every piece of the expenditure which he claims as a deduction. If he satisfies the Income-tax Officer not as to the whole but only as to a part, then it is not necessary for the Income-tax Officer before he disallows the part to produce positive evidence to prove the negative fact that portion of the expenditure was not incurred as required by the section. In another decision of this court in Nihori Lal Prabhudayal v. Commissioner of Income-tax [ 19 I.T.R. 240.] it was observed at page 245 as follows :
'Learned counsel for the assessee has... urged with great force that for every finding recorded by the Tribunal there must be some evidence to justify it and if there is no evidence to support the finding, then that finding cannot stand. This may be true to this extent that, where the Tribunal records a positive finding, there must be some material to support that finding, but where the finding amounts to this that a party has failed to prove its case, we fail to see why it should be necessary to have positive material to support that finding in every case. If a party on whom the burden of proof lies produces evidence which is considered to be unsatisfactory and is, therefore, disbelieved the mere fact that there is no evidence to the contrary does not compel the Tribunal to record a finding in favour of the party on whom the burden lies.'
Apart from authority it is clear that it will be impossible for the Income-tax Officer to support his rejection of the assessees case on positive evidence or materials. The assessee would be the last person to place such evidence or material before the Income-tax Officer and the Income-tax Officer would not naturally have such materials in his own possession and cannot therefore be required to do the impossible, namely, to support his negative finding by positive evidence produced by himself.
The question whether the expenditure was laid out or expended wholly or exclusively for purposes of business is essentially a question of fact. It is for the Income-tax Officer to decide upon a consideration on the material produced before him by the assessee whether the assessee has in a particular case succeeded in satisfying that the conditions of the section have been fulfilled. If he does not believe those materials or if he does not believe the materials to the whole extent it is open to him to reject the claim either wholly or in part. For his rejection of those materials it is sufficient for him to say that he does not accept their veracity or sufficiency to prove the assessees case. It is not necessary for him to have material of a positive character for the rejection of the material and consequently for the rejection of the whole or a part of the assessees claim.
In the end one might usefully turn once again to the Bombay case in Jethabhai Hirji & Co. v. Commissioner of Income-tax [ 17 I.T.R. 533.], from which a long quotation has been made above. There the Bombay High Court has pointed out various kinds of materials or circumstances which the Income-tax Officer or the Tribunal might take into consideration in deciding the question of allowability or otherwise of an expenditure under section 10(2)(xv).
Naturally the enumeration of these circumstances neither is nor can be exhaustive. It can only be illustrative. The circumstances cited there are : (1) whether the payment was made to a near relation, (2) the extent of the business, (3) the particulars of service rendered, (4) whether the service was such as to require special remuneration, (5) what was the quantum of payment, (6) whether the payment was or was not grossly out of proportion to the work done by the employee. To this list of circumstances might be added other circumstances, e.g., (7) what was the practice in the trade for payment to an employee in similar circumstances, (8) what were the qualifications of the employee, (9) what was the amount paid to a predecessor or a successor rendering the same service, (10) whether the allowance of a certain percentage was a normal allowance or was extraordinary having regard to the profits and the practice in the trade, (11) whether the method of working out profits for calculating the percentage of commission was the normal method or an abnormal method, and (12) if there was any extraordinariness or abnormality in the arrangement, was there any special reason or circumstances for such extraordinariness or abnormality.
It is not necessary to go into the facts of this case once again. There were materials on the record which were taken note of by the income-tax authorities and the Tribunal and upon a consideration of those materials the authorities came to the conclusion that, out of the claim of Rs. 75,463, roughly only half of that amount was proved by the assessee to have been incurred wholly and exclusively for the purpose of business. The burden being on the assessee what this means is that on the material produced by him he did not succeed in satisfying the authorities that not merely the half but the whole of it was spent wholly and exclusively for business. There were extraordinary and abnormal circumstances present in the case. The conclusion of the authorities below cannot be said to be arbitrary or capricious. It would be a different matter if that was so. From the enumeration of circumstances it is quite clear that in allowing or disallowing a claim under section 10(2)(xv) it cannot be held that the question of reasonableness of the amount paid is entirely foreign to the consideration of the question under that section. The authorities below have not applied any subjective standard of the reasonableness of the expenditure. They have examined the question from the point of view of businessmen, its propriety, its expediency and its reasonableness. They have considered the practice in the trade and what a businessman would consider to be proper expenditure in a case like this. It seems to me that the finding is not vitiated in any manner. The result is that the question referred to this court must be answered in the negative and against the assessee.
The reference should be returned to the Tribunal with this answer and the department should be entitled to its costs assessed at Rs. 200.
M.C. DESAI C.J. - I agree with my brother, Brijlal Gupta, that the question be answered in the negative.
Clause (x) of section 10(2) of the Income-tax Act applies expressly to commissions and is thus a specific provision as against clause (xv), which is a general provision. Clause (xv) has now by a recent amendment been expressly made a residuary clause, but, I think, even without the amendment if a case fell squarely within clause (x), it would not be considered to fall under clause (xv). A specific provision expressly governing a case would govern it in supersession of the general provision.
Clause (x) applies to all commissions alike and makes no distinction between commissions payable under a contract and commissions paid voluntarily. A commission payable under a contract may be like a salary inasmuch as the contract confers upon the party a right to enforce the payment of the commission, but the similarity stops there and is not be carried further so as to make the commission come within clause (xv) merely because a salary comes within it. One has to understand why a salary comes within clause (xv); it does so because it does not come under clause (x) or under any other clause. This reason does not hold good in respect of a commission and, therefore, it cannot be said to fall under clause (xv) merely because it is contractual. There is no justification for saying that only a contractual commission can be said to be an expenditure laid out wholly and exclusively for the purpose of the business. Payment of a voluntary or gratuitous commission also can be such an expenditure. The real question is what was the purpose behind the expenditure and it is not answered sufficiently by saying in the case of a contractual commission that it was performance of the contract. Since the contract itself was entered into for the purpose of the business, the expenditure also was for the purpose of the business. Payment of a gratuitous or voluntary commission also can be for the purpose of the business. If payment of a commission is an expenditure covered by clause (xv), it makes no difference whether the payment was voluntary or in performance of a contract. In the same way, payment of a commission falls within clause (x) whether it is contractual or voluntary. Therefore, the commission paid to Shri J.P. Vaish was not excluded from the scope of clause (x), and was not included within the scope of clause (xv), merely because it was contractual.
It follows that the amount of the commission paid to Shri J.P. Vaish could not be deducted unless it was found to be reasonable. The income-tax authorities have given good reasons for their finding, which is one of fact, that is was not reasonable.
Even if the payment were held to be a case covered by clause (xv); I do not think the assessee would succeed. The criterion for deciding whether an expenditure is deductible under this clause is certainly not whether it is reasonable but is has to be laid out wholly and exclusively for the purpose of the business and it will be difficult to hold that payment of unreasonable commission is an expenditure wholly and exclusively laid out for the purpose of the business. Reasonableness of the payment would be one of the factors to be considered in deciding whether the assessee had not some ulterior purpose for making it. The payment has been made and the fact that it is unreasonable means that some of it has not been made for the purpose of the business and was probably made for some other purpose unconnected with it. The moment one finds material for a finding that some purpose other than that of the business was behind the payment or a part of it, it would be a case of the payment not being wholly and exclusively laid out for the purpose of the business.
As my learned brother has pointed out, the onus is upon the assessee to prove the allowability of the deduction, i.e., to prove that the expenditure was laid out wholly and exclusively for the purpose of business. But the purpose is frequently not capable of direct proof except by bald statement. The income-tax authorities would not, therefore, be justified in refusing to accept a bald statement about the purpose because it is uncorroborated. They must have materials to justify disbelief of the bald statement and to find that a purpose other than that of the business partly accounted for the expenditure. The materials pointed out by my learned brother were sufficient for the income-tax authorities and the Tribunals finding that the payment of the commission was not an expenditure laid out wholly and exclusively for the purpose of the business.
I concur in the order proposed by my learned brother.
Question answered in the negative.