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Addl. First Income-tax Officer Vs. J.M. Shah - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1983)4ITD303(Mum.)
AppellantAddl. First Income-tax Officer
RespondentJ.M. Shah
Excerpt:
1. this appeal by the revenue objects to the order of the commissioner (appeals) directing the ito to assess the commission received by the assessee from its employer not as salary but as income from business and in further allowing deduction of expenses of rs. 4,500 on account of travelling and rs. 5,894 on account of car expenses out of the commission income received from the employer. the assessee has also filed a cross objection objecting to the order of the commissioner (appeals) on the ground that he had omitted to consider and dispose of certain other grounds relating to deduction of other expenditure claimed by him and on other points decided against him.2. shri j. m. shah, the assessee herein, is a salesman in the service of voltas ltd. this appeal relates to his assessment year.....
Judgment:
1. This appeal by the revenue objects to the order of the Commissioner (Appeals) directing the ITO to assess the commission received by the assessee from its employer not as salary but as income from business and in further allowing deduction of expenses of Rs. 4,500 on account of travelling and Rs. 5,894 on account of car expenses out of the commission income received from the employer. The assessee has also filed a cross objection objecting to the order of the Commissioner (Appeals) on the ground that he had omitted to consider and dispose of certain other grounds relating to deduction of other expenditure claimed by him and on other points decided against him.

2. Shri J. M. Shah, the assessee herein, is a salesman in the service of Voltas Ltd. This appeal relates to his assessment year 1977-78 for the previous year ended 31-3-1977. The assessee declared a total income of Rs. 73,300. He also filed a salary certificate from his employer Voltas Ltd., regarding the salary paid to him which showed that the assessee was in receipt of commission amounting to Rs. 61,605 in addition to the salary and that tax had been deducted at source from this amount by the employer. The assessee had claimed expenses amounting to Rs. 14,730 from the said commission and declared a sum of Rs. 46,875 as the net commission received by him.

3. The ITO held that in view of the fact that the assessee was getting salary and commission from the same employer and tax had been deducted at source by the employer from the said receipts, the commission was to be considered as income taxable under the head 'salary' and that, therefore, the assessee was not eligible for deduction of expenses amounting to Rs. 14,730 claimed by him. Accordingly, he rejected the assessee's claim for deduction of expenses. The ITO determined the total income of the appellant at Rs. 1,15,000.

4. The matter went before the Commissioner (Appeals). Elaborate arguments were addressed before him about the head of income under which the commission receipts were chargeable in the hands of the assessee. After examining the materials placed before him by the assessee, the Commissioner (Appeals) held in paragraph 6 of his order that there was no doubt that the sum of Rs. 150 per month paid to the assessee along with dearness allowance, etc., fell to be assessed under the head 'Salary'. So far as the commission earnings are concerned the Commissioner (Appeals) pointed out that the assessee was free to conduct his business in the manner best suited to him, that his attendance in the office was not compulsory, that he did not sign the muster roll, and that in fact, he conducted the business mostly from his residence and very often from clubs and hotels where he entertained his customers. The Commissioner further held that though there were certain clauses in the agreement between the assessee and Voltas Ltd. which specified the quantum of commission and also that in case other employees were also responsible for the sale, the commission has to be divided between the assessee and such employees, this could not be interpreted to mean that so far as commission earning was concerned the relationship between the assessee and Voltas Ltd. was that of master and servant. He pointed out that if the assessee in collaboration with some other person an outsider to Voltas Ltd. sold certain goods produced by Voltas Ltd., he had to share commission earning with such person also. On a reading of the terms and conditions of the assessee's agreement with Voltas Ltd. as a whole and with reference to several documents referred to in the other, the Commissioner concluded that so far as the commission earning was concerned, the assessee was free to conduct his business in the manner he thought it fit and, therefore, the relationship between the assessee and Voltas Ltd. for purposes of commission earning was not that of master and servant. He, therefore, agreed with the contentions of the assessee that earnings of commission could not be assessed under the head 'Salaries' but that should be properly assessed either under the head 'Business' or under the head 'Other sources'. In this view of the matter, the Commissioner directed the allowance of Rs. 4,500 out of the assessee's claim of Rs. 6,663 being travelling expenses as wholly and exclusively for the purposes of earning commission. Similarly, he directed the allowance of Rs. 5,894 out of car expenses as spent for earning the commission. Thus, the assessee's appeal was partly allowed. Both the revenue and the assessee felt aggrieved by the order of the Commissioner (Appeals) and hence, the present appeal by the revenue and the gross objection by the assessee.

5. Shri Makhija, the learned departmental representative, took us through the relevant documents starting from the appointment of the assessee on 5-1-1950 as a salesman in the engineering department of Volkart Brothers and ending with the terms and conditions of commission payable to the assessee as embodied in the letter dated 21-6-1975 written by the assessee's present employer Voltas Ltd., to the assessee. The learned departmental representative laid stress on the letter written by Voltas Ltd. on 21-6-1955, which shows that the commission payable to the assessee was also deemed to be part and parcel of the assessee's current terms of the service with Voltas Ltd. with retrospective effect from 1-9-1954. He then referred to the letter dated 18-4-1980 written by Voltas Ltd. to the assessee regarding the reimbursement of conveyance expenses by paying him the conveyance allowance of Rs. 3,600. The departmental representative relied on para 3 of this letter to show that the assessee was only an employee of Voltas Ltd. and was not carrying on any business as held by the Commissioner (Appeals). Shri Makhija argued that the commission in question was paid by Voltas Ltd. to the assessee for the services rendered by him as a salesman in its engineering department as part of his service under them. He further pointed out that travelling expenses of the assessee were also reimbursed by the company by paying him conveyance allowance as the assessee was a travelling salesman. Shri Makhija relied on Section 17(7)(iv) of the Income-tax Act, 1961 ('the Act'), and contended that commission formed part of the salary of the assessee and that there was no warrant or justification for treating the commission received as part of salary in a different manner and taking and assessing it under a different head, viz., 'Business' or 'Other sources' as held by the Commissioner (Appeals). He further pointed out that the assessee has made this claim that the commission income should be assessed under the head 'Business' for the first time in the assessment year 1974-75 and that the assessee's appeal for that year was still pending before the AAC. The learned departmental representative contended that the decision of the Allahabad High Court in the case of K.P. Bhargava v. CIT [1954] 26 ITR 489 relied on by the assessee was distinguishable on facts as it was a case of bank treasurer and guarantee commission agent which was different from the case of the present assessee who was only a salesman working in the employment and service of Voltas Ltd. The learned departmental representative relied on the decision of the Supreme Court in Piyare Lal Adishwar Lal v. CIT [1960] 40 ITR 17 wherein the decision of the Allahabad High Court in K.P. Bhargava's case (supra), was distinguished by the Supreme Court. He further relied on the decision of the Supreme Court in the case of Ram Prashad v. CIT [1972] 86 ITR 122, at page 127 and submitted that the assessee worked under the direct control and supervision of Voltas and that, therefore, he is only an employee of Voltas Ltd. The learned departmental representative relied on the terms of the agreement at pages 13, 14 and 15 of the paper book to contend that it was only a case of service agreement that the assessee was not his own master as contended by him before the Commissioner (Appeals) but was only an employee who is to carry on the work entrusted to him in the manner directed by the employer, viz., Voltas Ltd. He, therefore, argued that the Commissioner (Appeals) was not justified in treating the commission income as not forming part of the assessee's salary but was assessable under the head 'Business' or 'Other sources'.

The learned departmental representative further submitted that Ground No. 2 relating to the allowance as deduction amounting to Rs. 10,394 was only consequential to Ground No. 1.

6, Shri Trivedi, the learned counsel for the assessee, put forward three propositions in support of the assessee's case. Firstly, he contended that the assessee had two separate agreements with Voltas Ltd., the first one was between the assessee and Voltas Ltd., as an employee and employer under which the assessee was getting salary. The other agreement was between the assessee and Voltas Ltd., as an independent contractor for which the assessee received commission from Voltas Ltd. The second proposition of Mr. Trivedi though alternatively is that even if the commission is held to be assessable under the head 'Salary' for the purpose of arriving at the real income of salary received by the assessee, expenses incurred for the purpose of earning such salary would be deductible. The third proposition put forward by the learned counsel was that Rs. 3,600 which was in reimbursement of expenses was at any rate not taxable as it was exempt under Section 10(74) of the Act. The learned counsel submitted that up to 1974-75 assessment, it did not make any difference to the assessee whether the commission income was charged under the head 'Salary' or under the head 'Business' as all such expenses claimed by the assessee were allowed from salary income under Section 16(iv) of the Act, which was deleted by the Finance Act, 1974 with effect from 1-4-1975.

7. The learned counsel then took us through the various papers under which the assessee was appointed as a salesman from the years 1950 to 1971. The learned counsel particularly laid stress on para 3 of the letter dated 9-7-1971 under which commission was payable to the assessee only on receipt of full sale price which according to the learned counsel was a typical term of agreement between a principal and agent. The learned counsel argued that the agreement of service dated 5-1-1950 was separate from the agreement dated 9-6-1971 and that Clause (5) ot the later agreement could not alter the earlier agreement entered into on 5-1-1950. He further argued that Clause (5) of the agreement dated 9-6-1971 does not make it a contract of services. The learned counsel next relied on a note submitted by the assessee to the departmental officers about the assessee's manner of conducting his business for earning the commission (his daily routine) and pointed out that except the amount of Rs. 3,600 which was paid as reimbursement of car expenses, no other expenses were reimbursed to the assessee by the company. The learned counsel relied on the assessee's submission before the Commissioner (Appeals) to show that all the travelling done by the assessee was for business purpose only.

8. Shri Trivedi then submitted that the decision of the Supreme Court in Ram Prashad (supra) recognises the dual capacity of an employee. He next relied on the decision of the Calcutta High Court in Stya Paul v.CIT [1979] 116 ITR 335 wherein the assessee was allowed a lot of freedom in carrying on business to earn his commission as in the present case.

9. He also referred to the decision of the Assam High Court in the case of Dwijendra Chandra Chowdhury v. CIT [1966] 61 ITR 97. On the basis of this decision, the learned counsel argued that the assessee's position was that of selling agent and that the agency could be terminated by Voltas Ltd. at any time.

10. Shri Trivedi then relied on the language of Section 14 of the Act and also on the discussion at pages 89 and 352 of the book Law of Income-tax by Kanga & Palkhivala, 7th Edition, Vol. 1, to contend that the tax was on the net income and not on gross receipts. In other words, the tax was on the real income. He argued that the theory of real income was not confined to business alone but was applicable to other types of income also including income from salary. In support of this plea, the learned counsel relied on the decision of the Supreme Court in the case of CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 and the Madras High Court in the case of CIT v. Motor Credit Co, (P.) Ltd. [1981] 127 ITR 572.

11. On the third proposition put forward by him, the learned counsel relied on Section 10(14) and contended that the amount of Rs. 3,600 paid to the assessee was exempt from tax if it is held that the commission income was liable to charge under the head 'Salary'.

12. In reply to the above submissions of the learned counsel, Shri Makhija relied on the decision of the Supreme Court in Silver Jubilee Tailoring House v. Chief Inspector of Shops & Establishments AIR 1974 SC 37, to contend that a servant need not be under the exclusive control of one master and that he can be employed by more than one employer. He further pointed out that even a part-time employee would be a servant only and for that reason it cannot be contended that the agreement between him and his master was not that of a contract of service. He then submitted that the assessee's assertion that even after ceasing to be an employee of Voltas Ltd., he could effect sales, was totally unsupported. Shri Makhija next submitted that the decision of the Supreme Court in Ram Prashad's case (supra) provided the answer to the real income theory put forward by the learned counsel. He further relied on the decision in the case of Prince v. Mapp (Inspector of Taxes) [1971] 79 ITR 671 (CD). Finally the learned departmental representative submitted that Section 10(74) did not apply to the facts of the present case as no conveyance allowance was allowed to the assessee and that if at all Section 10(14) could apply it would apply only to Rs. 3,600 and nothing more.

13. We have carefully considered the submissions urged on both sides in the light of the materials placed before us and the decisions relied on by the parties.

14. The assessee was appointed as a salesman in the engineering department of Volkart Brothers on 21-1-1950 on a monthly salary of Rs. 125. He was on probation for a period of six months till 1-7-1950. This would be clear from the letter dated 5-1-1950 written by Volkart Brothers to the assessee and the assessee's letter of acceptance of the same date, addressed to his employer Volkart Brothers. On 1-7-1950, the assessee was confirmed and in accordance with clause 4 of the terms of the engagement, the assessee was asked to join the Firm's Provident Fund from 1-8-1950 but his salary continued to remain as Rs. 125 per month plus dearness allowance.

15. The assessee's services were taken over from Volkart Brothers by Voltas Ltd.--the present employer of the assessee as from 1-9-1954 on the same terms and conditions of service applicable to the assessee as on 31-8-1954 which Volkart Brothers and with continuity of his previous service with them. This is clear from the letter dated 5-10-1954 written by Voltas Ltd., to the assessee. This letter further states that the assessee would be credited with his service prjor to 31-8-1954 with Volkart Brothers to the extent it was admissible with them for the purpose of Provident Fund, Gratuity, Leave and other benefits. Voltas Ltd. states that they have undertaken the responsibility for payments that may become due to the assessee in respect of those benefits in case of cessation of his employment with Voltas Ltd. in future. They attached a staff sheet which was handed over to them by Volkart Brothers indicating the details regarding the assessee's service with them and requested the assessee to sign and return the duplicate of that letter in token of his agreement and acceptance of the agreement by 9-10-1954. It was explained before us that the staff sheet represented the service book of the assessee. There is no dispute that the assessee signed his acceptance as required in this letter.

16. Voltas Ltd. wrote on 21-6-1955 to the assessee Volkart Brothers had drawn their attention to the fact that in addition to the emoluments mentioned under item 3(B) of the staff sheet the assessee was also entitled to commission on terms specified in the enclosure to that letter. This letter further states that such commission would, therefore, be deemed to be part and parcel of current terms of service of the assessee with Voltas Ltd. with retrospective effect from 1-9-1954. Voltas Ltd. attached a copy of the terms and conditions of the commission payable to the assessee to this letter. According to the terms and conditions, the assessee was entitled to get commission on sales effected by him as salesman posted at their engineering showroom at Apollo Street, Bombay, at the rate of one per cent of the turnover based on the net selling price. The commission due to the assessee would be paid monthly on such transactions only which was completely settled, i.e., in respect of which the entire quantity of goods had been delivered and the full invoice amount received. It was also noted that if any other salesman of the company was involved in a sale effected by the assessee either with or without his knowledge the commission might have to be shared, the final decision in this regard resting with the management.

17. The letter dated 27-4-1959 written by Voltas Ltd. to the assessee shows that the assessee's basic salary was raised to Rs. 150 per month.

18. On 9-6-1971, Voltas Ltd. revised the terms of commission payable to the salesman--the assessee herein, as indicated in that letter. This letter indicates that the assessee was entitled to get one per cent commission on selling price of standard products in the electrical division and AIP division, if enquiries brought by the assessee, resulted in firm orders. However, the management had reserved its right to reduce the commission in specific cases where its gross margin was lower than the normal in the products in the electrical division. The arrangement under this letter was effective from 8-4-1971 and the assessee was to be paid on the above basis on all orders booked by him from that date, on the basis of enquiries followed up by him earlier.

According to Clause (3) commission would become due for payment only on completion of the respective sale and after receipt of full payment from the customers. We set out below paras 4 to 7 of this letter since they are relevant for our purpose: 4. It is also understood that if any salesman of the company should be involved in a sale affected by you either with or without your knowledge, commission may have to be shared, the final decision resting with the Management.

5. We reserve the right to alter the above terms and conditions and the equipment on which the same is payable at any time without giving notice and without assigning any reasons.

6. Where commission is payable on percentage basis, it will be calculated on the net invoice value of goods sold after deduction of all discounts, railway freight, sales tax etc.

7. This arrangement replaces all the previous practices expressed or implied. In case of any doubts regarding the quantum of rate of commission or the products on which the same is payable, Management's decision will be final.

There is no dispute that the assessee has been working with Voltas Ltd. on the above terms and conditions in respect of his salary and commission received from them.

19. We would refer to one more letter dated 18-4-1980 written by Voltas Ltd. to the assessee. This letter shows that the assessee had agreed to use his personal car for travelling in the course of his official duties. Therefore, the company reimbursed an amount of Rs. 3,600 during the period 1-4-1976 to 31-3-1977. In para 3 of this letter, it is stated that the above amount of Rs. 3,600 was determined taking into account the nature of the assessee's duties, the travel would be necessary in the course of the performance of his duties, the level of expenditure necessary for the maintenance of car, etc. It is further stated that the fixed amount every month was reimbursed mainly to reduce the administrative work involved in the company's processing the claims of the assessee. We may mention here that the assessee is described as salesman in this letter as well as the letter dated 9-6-1971 as also the earlier letter dated 1-7-1950.

20. Based on these materials, the Commissioner (Appeals) has held that the commission income received by the assessee from Voltas Ltd, in the year of account is assessable under the head 'Business' or 'Other sources' which is being contested by the revenue. A perusal of the terms and conditions of service between the assessee and Volkart Brothers and later on with the present employer Voltas Ltd. clearly establishes that the relationship between them was that of a master and servant only and not that of a Principal and an Independent Contractor as claimed by the assessee. This conclusion of ours is irresistible whether we read the agreement either separately as contended by the learned counsel for the assessee or together as contended for the revenue by the learned departmental representative. The assessee is a salesman whose field of operation is not merely confined to the four walls of the showroom at Apollo Street, but extends to the whole country. The nature of duties entrusted to the assessee by his employer is such that they require his going out into the field to contact customers, ascertain their requirements of first hand and canvass business and book orders for the products of the employer. The mere fact that his attendance in the office was not compulsory, that he did not sign the muster roll and that he conducted his work mostly from his residence and very often from clubs and hotels would in no way militate against the assessee continuing to be an employee of Voltas Ltd. As explained earlier the nature of his duties does not require his constant presence or attendance in the office but at the places where the business could be canvassed on behalf of the employer company.

Truly the assessee is a travelling or rowing salesman as could be seen from the nature of his activities described in his daily routine and also the written submissions filed before the Commissioner (Appeals).

Unfortunately, the Commissioner has assumed that the assessee was carrying on a business, that he was conducting his business from his house and on that basis, has proceeded to decide the issue without proper and correct appreciation of the nature of duties entrusted to the assessee by his employer and the nature and method of the work to be done by him. The revised terms of commission contained in paras 4 to 7 clearly establish that the assessee is only an employee and that he is to conduct his work according to the directions and under the control of the management only. The above clauses establish beyond doubt that the management had the final say in regard to the commission payable to the assessee and that the management can unilaterally reduce the rate of commission and decide all matters as described in paras 4 to 7 which was binding on the assessee. These clauses militate against the theory put forward on behalf of the assessee that he is an independent contractor or a selling agent carrying on an agency business on commission on behalf of Voltas Ltd. This is further reinforced by the letter dated 18-4-1980 by which the assessee was paid Rs. 3,600 for conveyance expenses for the period 1-4-1976 to 31-3-1977.

We are unable to agree with the Commissioner that the relationship between the assessee and Voltas Ltd. was not that of master and servant even though Voltas Ltd. can decide the commission payable to the assessee and to another employee was responsible for a particular sale.

The Commissioner had further observed that if the assessee in collaboration with an outsider sold such goods produced by Voltas Ltd. he had to share his commission with such person also. We are unable to appreciate on what basis or material the Commissioner has made these observations, because, it is not the case of the assessee that he had parted with any portion of his commission receipts to a third party who is not an employee of the company for the purposes of effecting sales.

In fact, no such case has been put up by the assessee at any stage either before the ITO or even before us. We are therefore, unable to agree with the reasoning and conclusion of the Commissioner (Appeals) that the assessee was conducting a business for the purpose of earning the commission from Voltas Ltd. We do not find any material which would support such a conclusion. On the contrary, the nature of the duties entrusted to the ussessee by his employer is such that it allows a good amount of freedom to the assessee to work for the company not only in the office when he attends the office but also outside the office, i.e., in the field as they call it. This does not mean that the assessee is carrying on a business. He is only discharging his duties as an employee at the behest of his master, viz., Voltas Ltd. ... A person who is engaged to manage a business may be a servant or an agent according to the nature of his service and the authority of his employment. Generally it may be possible to say that the greater the amount of direct control over the person employed, the stronger the conclusion in favour of his being a servant. Similarly the greater the degree of independence the greater the possibility of the services rendered being in the nature of principal and agent. It is not possible to lay down any precise rule of law to distinguish one kind of employment from the other. The nature of the particular business and the nature of the duties of the employee will require to be considered in each case in order to arrive at a conclusion as to whether the person employed is a servant or an agent. In each case the principle for ascertainment remains the same." (p. 126) That was a case of a managing director and the point for consideration before the Supreme Court was whether the remuneration paid to him as a percentage of gross profits in addition to monthly remuneration was taxable as salary or business income. A page 127 of the report, the Supreme Court held that whether or not a managing director is a servant of the company, apart from his being a director can only be determined by articles of association and terms of the employment. After discussing in detail the various authorities cited before them, Their Lordships of the Supreme Court held as follows: A detailed consideration of all the cases cited and the passages from text books referred to before us do not assist us in coming to the conclusion that the test for determining whether the person employed by a company is a servant or agent is solely dependent on the extent of supervision and control exercised on him. The real question in this case is one of construction of the articles of association and the relevant agreement which was entered into between the company and the assessee. If the company is itself carrying on the business and the assessee is employed to manage its affairs in terms of its articles and the agreement, he could be dismissed or his employment can be terminated by the company if his work is not satisfactory, it could hardly be said that he is not a servant of the company..." (p. 130) When we examine the evidence placed before us in the shape of letters from 5-1-1950 to 18-4-1980 referred to above in the light of the ratio of the Supreme Court decision referred to above, we have to hold that the assessee is only an employee of Voltas Ltd. who was paid for his services as a salesman in two ways, viz., a monthly payment plus by commission on net sales which fructified through his efforts. The revised terms of commission dated 9-6-1971 would form part and parcel of the current terms of services of the assessee with Voltas Ltd. as conveyed in the letter dated 5-1-1950 between the assessee and Volkart Brothers at page 14 of the paper book. This would show that the assessee's service can be terminated by Volkart Brothers and also the present employer Voltas Ltd. We would, therefore, respectfully follow the said decision of the Supreme Court and hold that the commission received by the assessee from Voltas Ltd.--his employer--is only part and parcel of his salary income and should be assessed under the head 'Salary' only under Section 17(1)(iv). This commission is not assessable either under the head 'Business' as the assessee is not carrying on any business nor under the head 'Other sources' as it is directly earned by the assessee by his services as an employee of Voltas Ltd.--his employer.

22. It is common ground that the principles to be followed in case of this type are those laid down by the Supreme Court in Ram Prashad's case (supra), which we have already followed above. In view of this decision of the Supreme Court it is not necessary to refer to or discuss the other decisions cited at the Bar as they only follow the guidelines laid down by the Supreme Court.

23. This takes us to the second ground in the revenue's appeal, viz., that the Commissioner (Appeals) was not justified in allowing the two deductions amounting to Rs. 10,394 out of commission income of the assessee. Here the argument of the revenue is that no further deduction apart from those specified in Section 16 is admissible while the learned counsel for the assessee put forward the proposition that for arriving at the real income of the assessee from his salary, the expenses incurred by the assessee for the purpose of earning such salary should also be deducted. In support of this plea, reliance was placed by the learned counsel on the decisions in the cases of Shoorji Vallabhdas & Co. (supra) and Motor Credit Co. (P.) Ltd. (supra). In our opinion these two decisions relied on by the learned counsel are of no assistance since the facts of the said cases were entirely different and the question considered in them was whether any income accrued to the assessee or was received by the assessee. In the present case, there is no dispute that the assessee has received the amount of commission of Rs. 61,605 from its employer. The only question is whether the assessee is entitled to any deduction of expenses claimed by him from this receipt of commission.

24. However, it cannot be disputed that the amount of Rs. 61,605 received by the assessee from his employer represents the gross amount of commission and that the employer had not reimbursed any of the other expenses incurred by the assessee for the purpose of earning this commission in the course of his employment except to the extent of Rs. 3,600 towards his conveyance expenses.

It is also not disputed that the several expenses incurred by the assessee in the earlier year were allowed to him out of his salary income under Section 16(1)(iv), which has now been deleted by the Finance Act, 1974 with effect from 1-4-1975. The question for our consideration is whether the assessee is entitled to the deduction claimed by him out of his salary income in the absence of a provision similar to Section 16(1)(v) of the Act during the year under appeal.

According to the revenue, the deduction permissible from salary are those specified in Section 16 only and no further deductions are permissible in law. But the argument on behalf of the assessee is that the deduction is claimed by him not under Section 16 but under Section 15 of the Act. According to him, the tax is upon income, profits and gains and it is not a tax on gross receipts. This contention of the learned counsel for the assessee derives support from the following quotation from the judgment of the Privy Council case in CIT v.Chitnavis 59 IA 290 at page 297, while allowing the claim of bad debt as an admissible deduction even though there was no special allowance for bad debts in the 1922 Act as it then stood: Although the Act nowhere in terms authorises the deduction of bad debts of a business, such a deduction is necessarily allowable. What are chargeable to income-tax in respect of a business are the profits and gains of a year ; and in assessing the amount of the profits and gains of a year account must necessarily be taken of all losses incurred, otherwise you would not arrive at the true profits and gains.

The above observations of the Privy Council were quoted with approval and expanded further by the Supreme Court to apply to the losses arising out of embezzlement as in the case of Badridas Daga (supra). If such losses could be allowed without any specific provisions in pre-1939 Indian Income-tax Act, we are unable to see any reason way the same principles should not be extended to allow legitimate expenses incurred by an assessee for the purposes of earning the salary income as in the present case. We would like to emphasise that there is no dispute before us that the assessee had incurred the expenses amounting to Rs. 14,730 claimed by him in the course of his employment and that he was required to spend out of his remuneration the said amount wholly, necessarily and exclusively for the purpose of his duties as a salesman. We, therefore, hold that in computing the income of the assessee from his commission receipts, only the net income of the assessee from his commission earnings would form part of his salary and would be taxable in his hands under Section 15 and not the gross amount of commission receipts namely Rs. 61,605. The deduction in the present case is allowable under Section 15 under which only the net salary income is chargeable to income-tax and not the gross salary income.

This is on the basis of the analogy that only the net income, profits and gains of a business or a profession is chargeable to tax under Section 28 of the Act. We would, therefore, hold that the Commissioner (Appeals) was justified in allowing the two deductions of Rs. 4,500 on account of travelling expenses and Rs. 5,894 on account of car expenses from out of salary income of the assessee. Accordingly, Ground No. 2 in the revenue's appeal has to be rejected. This disposed of the revenue's appeal.

25. In the assessee's cross objection in Ground No. 1 the assessee contends that he is entitled to the deduction of the following amount of expenses from out of his commission income which were not considered by the Commissioner (Appeals): Telephone Rs. 4,859, Business expenses Rs. 3,208, Depreciation on motor Rs. 1,024.

In view of our finding that the assessee is entitled to the deduction of expenses incurred by him for the purpose of earning the commission income in the departmental appeal in Ground No. 2, the assessee's claim to the deduction of the three amounts of expenditure require examination. Since the Commissioner (Appeals) has not examined the assessee's claim we consider it just and proper to restore the matter to the file of the Commissioner (Appeals) for fresh disposal after examining the claim of the assessee in accordance with law.

26. In Ground No. 2 the assessee's claims that the amount of Rs. 3,600 paid to him by Voltas Ltd. by way of reimbursement of car expenses, would be exempt under Section 10(14) as they were incurred wholly and exclusively for the performance of his duties and that even if the same is treated as an allowance it would be exempt under Section 10(14).

27. The argument of the learned counsel was that this amount was not a conveyance allowance but by way of reimbursement of a portion of the actual expenses as explained in the letter of the company dated 18-4-1980. The learned departmental representative, however, contended that the payment was only by way of a conveyance allowance and was not merely in reimbursement of actual conveyance expenses. He also relied on the letter dated 18-4-1980 of the company to argue that it was only a conveyance allowance that was paid to the assessee. He relied on the decision in the case of Prince (supra) and submitted that in view of this decision, it cannot be stated that this amount of Rs. 3,600 was paid towards expenses incurred for earning the commission income by the assessee.

28. Actually, this point calls for a consideration of the third proposition put forward by the learned counsel Shri Trivedi in the course of his arguments in the revenue's appeal. We have already referred to a letter of Voltas Ltd., dated 18-4-1980 in paragraph 19 (supra). In our view though this letter says that the amount of Rs. 3,600 was paid by way of reimbursement of expenses on conveyance, it actually establishes that an amount of Rs. 300 per month was paid to the assessee as conveyance allowance. The letter only explains the reasons and the basis for fixing this conveyance allowance paid to the assessee. It does not mean that what the assessee received was not conveyance allowance but by way of reimbursement of actual expenses incurred by the assessee. If what the assessee's claim is correct then the assessee would be entitled to the reimbursement of entire amount of expenses claimed by him on the maintenance of his car amounting to Rs. 7,367. The fact that the company decided to pay him a fixed amount of Rs. 300 per month shows that it was only by way of a conveyance allowance and not by way of reimbursement of the actual expenses incurred by the assessee. This conveyance allowance of Rs. 300 per month is paid to the assessee irrespective of the expenditure incurred by him on conveyance. We are, therefore, unable to agree with the learned counsel for the assessee that the amount of Rs. 3,600 was by way of reimbursement of conveyance expenses by the employer to the assessee.

29. However, we find considerable force in the submission of the learned counsel that this conveyance allowance of Rs. 3,600 is exempt under Section 10(74) as it satisfies the requirements of the said provisions. This allowance was paid by the employer to meet the assessee's expenses incurred wholly, necessarily and exclusively for the purpose of his duties as a salesman on his conveyance. We are unable to accept the contention of the revenue that the assessee is not entitled to the exemption under Section 10(14). The decision of the Chancery Division in Prince (supra) is distinguishable on facts and is not applicable to the facts of the present case. In that case, a taxpayer claimed medical expenses for an operation of his finger to enable him to play guitar both as a hobby and as a part-time profession. It was held that the taxpayer would not be entitled to deduction of such medical expenses from his professional income as it was stated that the operation was to enable him to continue to play guitar not solely as a profession but also as an hobby. In the present case the conveyance allowance was paid by the company solely to meet the expenses of the assessee on his conveyance incurred wholly, necessarily and exclusively in performance of his duties as a salesman of his employer. We, therefore, accept the contention of the learned counsel and hold that the amount of Rs. 3,600 is exempt under Section 10(14) and allow this ground in the assessee's cross objection.

30. In Ground No. 3 the assessee's objection is to the restriction of the standard deduction allowed from his salary to Rs. 1,000 instead of Rs. 3,500 as claimed by him. This ground has to be rejected in view of our finding on Ground No. 2 above holding that the assessee is in receipt of conveyance of Rs. 3,600 from his employer. Accordingly, this ground is rejected.

31. In Ground No. 4 the assessee objects to the directions given by the Commissioner (Appeals) to the ITO regarding the interest of Rs. 2,184 of Public Provident Fund. Apart from the fact that no arguments were addressed on this point before us, we find that the directions given by the Commissioner (Appeals) are perfectly in order and the assessee can have no grievance against the same, since they are in his favour.

32. In the last ground the assessee contends that the amount of salary was to be taxed after deducting the expenditure incurred by him. This contention has already been considered and disposed of by us while disposing of the revenue's appeal and it is not, therefore, necessary to deal with it separately again here.

33. In the result, the revenue's appeal is to be treated as partly allowed since we have accepted the revenue's main ground that the commission income is taxable only as salary and not as business income or income from other source. The assessee's cross objection shall also be treated as partly allowed since we have restored Ground No. 1 to the file of the Commissioner (Appeals) for fresh disposal.


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