1. The Income-tax Appellate Tribunal, Chandigarh Bench, has referred the following question of law for our opinion:
' Whether, on the facts and circumstances of the case, the sum of Rs. 45,380 paid' to L. Gurandittamal and L. Sahibdiyal, employees of the applicant firm, is permissible deduction in computing the business income of the applicant '
2. In order to answer the question, it is necessary to advert to the relevant facts. The assessee is a partnership firm. It holds the sole selling agency of Messrs. Oriental Carpet . in respect of sale of yarn, cloth and blankets manufactured by the said company. The assessee was receiving commission as selling agent and over and above that commission, it started receiving overriding commission at 2 1/2 per cent, on the total sales effected. The overriding commission thus received by the assessee is as follows:
3. The turnover of the assessee increased from Rs. 39.99 lakhs during the year relevant to the assessment year 1962-63 to Rs. 54.28 lakhs during the year under consideration, namely, 1963-64. The assessee-firm paid during the previous year relevant to the assessment year 1963-64 to each of its employees, Gurandittamal and Sahibdiyal, commission @ 1/2 per cent, on thesales effected out of the overriding commission received by it from Messrs. Oriental Carpet . It may be mentioned that these two employees were receiving salary at Rs. 1,000 per month from the assessee-firm. The Income-tax Officer, for the assessment year in question, computed the total income of the firm at Rs. 3,08,034 and while computing the said income by his order dated 24th August, 1967, disallowed an amount of Rs. 45,380 representing 1/2 per cent, commission paid by it to the said two employees.
4. Against the disallowance of this amount, the firm appealed to the Appellate Assistant Commissioner, but without success. A further appeal was taken to the Tribunal by the assessee-firm and the Tribunal has also concurred with the decision of the Appellate Assistant Commissioner. The reasons which prevailed with the Tribunal in concurring with the Appellate Assistant Commissioner may be stated in its own words. After quoting Section 36(1) (i) and (ii) of the Income-tax Act, 1961, it was observed :
'It will be seen that this section authorised the payment of any commission or bonus to an employee subject to the satisfaction of the conditions laid down in Sub-clauses (a), (b) and (c) above. This section no doubt says that the amount of bonus or commission paid should be reasonable with reference to the pay of the employee, the profits of the business and the general practice in similar business or profession. But, when this section says that any sum paid to an employee as bonus or commission for services rendered is to be allowed it means that before the claim is allowed there should be proof to show that some services were rendered for which the payment is made. If there is no proof to show that services were rendered, it appears to us that this section becomes inapplicable. In this connection the Income-tax Officer had pointed out that there was no proof of any services being rendered by these two employees. In view of that finding the bonus or commission paid cannot be said to be for the purpose of business. Further, Clause (ii) of Sub-section (1) says: ' where such sum would not have been payable to him as profit or dividend if it had not been paid as bonus or commission', the bonus or commission should be allowed as an expenditure. It, therefore, means that if the sum was payable to him as part of profits but described as bonus or commission the amount is not to be allowed as deduction. In this case we found that the two employees were no other than the partners of the assessee-firm. In other words the sons were taken as partners and fathers as employees. The possibility of diversion of profit cannot entirely be ruled out particularly when it is borne in mind that there was no proof to show that any services were rendered by the employees to justify the payment of commission of 1/2%. No such commission was ever paid in the earlier years. It is argued that the turnover in the year of account had gone up by about Rs. 15,00,000and that the increase in turnover was due to extra efforts of the two employees and that should be taken as proof of extra services rendered. From a chart filed before us it is seen that in the assessment year 1962-63 the turnover was Rs. 39.99 lakhs and the commission received, Rs. 2'62 lakhs. In the year of account the turnover had gone up to Rs. 54.28 lakhs and the commission to Rs. 3'SO lakhs. There is absolutely nothing to show that the increase in the turnover was as a result of the extra efforts rendered by these two employee?. Therefore, the presumption should be that the turnover had increased on its own accord on account of intrinsic strength, of the fabrics sold and the goodwill of the company. Furthermore, a study of the trend of the turnovers in the earlier years would show that in the assessment year 1961-62 the turnover was Rs. 28.15 lakhs and the turnover in 1962-63 had gone up to Rs. 39.99 lakhs, i.e., an increase of about Rs. 11 1/2 lakhs; still no commission was paid. Similarly, there was an increase of about Rs. 12 lakhs in the turnover for the assessment years 1960-61 and 1961-62 and there also no commission was paid. Similarly, the turnover from the assessment years 1959-60 to 1960-61 had increased by about Rs. 15 lakhs and still no commission was paid. Even though there was an increase in the turnover in the earlier years no commission was paid. It cannot be said that the increase in the turnover in the year under appeal was due to the extra efforts put in by these two employees or that the employees had worked in the hope of receiving the extra commission. Besides commission in the year under appeal, these two employees were paid bonus at the rate of Rs. 1,000 p.m. for three months. Any extra service rendered by the employees, if any, should be deemed to have been covered by the payment of this bonus. Having due regard to these facts we are unable to hold that there was any proof to show that any services were rendered and as no services were rendered the payment of commission this year cannot be justified as incurred for purpose of business or out of commercial expediency. As there was no proof for the services rendered, Section 36(1)(ii) had no application in this case. In the circumstances we are unable to subscribe to the view that the Income-tax Officer had got to allow some commission but is not entitled to disallow the whole commission. In the circumstances the payment of commission is held to be not for business purposes and the disallowance is confirmed.'
5. The assessee being dissatisfied with the order of the Tribunal made an application under Section 256(1) of the Income-tax Act, 1961, and the question of law already set out in the opening part of this opinion has been referred by the Tribunal.
6. The contention of the learned counsel for the assessee is that it was not incumbent on the assessee to show that any extra work was put in by the employees for which they were allowed 1/2 per cent. commission. In fact theemployees were in the service of the assessee and thus were working. In that sense they had rendered their services. It is also maintained that, from the circumstances of the case, it should have been held that the commission in dispute was a permissible deduction under Section 36(1)(ii). Learned counsel relies in support of his contention on the decision of the Madras High Court in Mysore Fertiliser Company v. Commissioner of Income-tax,  30 I.T.R. 734 (Mad.) and of the Gujarat High Court in Laxmandas Sejram v. Commissioner of Income-tax,  54 I.T.R. 763, 773 (Guj.). In fact, the decision in Mysore Fertiliser Company's case was noticed by the learned judges of the Gujarat High Court. In particular, the learned counsel placed his reliance on the following observations in Laxmandas Sejram's case:
'Turning now to Section 10(2)(x) it is apparent that three tests are laid down in the section for the purpose of determining the reasonableness of the commission paid to an employee. The question whether the amount of the commission is a reasonable amount or not has to be determined with reference to three factors. But, it is now well-settled that these factors have to be considered from the point of view of a normal prudent businessman. The reasonableness of the payment with reference to these factors has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency (vide Mysore Fertiliser Co. v. Commissioner of Income-tax). Now, let us see whether this approach has been adopted by the Tribunal in the present case. It is clear from the order of the Tribunal that the Tribunal relied mainly and substantially on the fact that the nature of the work done by Kevalchand remained unchanged even after the agreement and concluded that since the work which Kevalchand was required to do after the agreement was the same which he was doing prior to the agreement, it could not be said that there were any special circumstances which warranted the payment of such a large commission to Kevalchand. Now, it is undoubtedly true that the work which Kevalchand was required to do under the agreement was in no way greater or more onerous than that which he was doing before, but there are, as observed by the Madras High Court in Mysore Fertiliser Co. v. Commissioner of Income-tax, 'obvious limits to the exaltation of this plea to a rigid and inflexible principle in deciding on the basis of commercial expediency of what constitutes reasonable expenditure.... .under Section 10(2)(x)'. If this argument were pushed to its logical extreme, even payment of bonus or any commission at all would have been unreasonable which the revenue authorities obviously did not so regard. Of course this circumstance would undoubtedly have some relevance but it must be considered along with other circumstances and the question whether commercial expediency justified the payment of this commission to Kevalchand must be judged inthe light of all the circumstances which existed at the time when the agreement was made. Now what were those circumstances
They clearly appear from the record of the case.'
7. It may be mentioned that the question whether services were rendered or not is a question of fact and there is the concurrent decision of the Income-tax Officer, the Appellate Assistant Commissioner and the Appellate Tribunal that no services were rendered. However, the approach of the Tribunal that some extra services had to be rendered is incorrect. All that Section 36(1)(ii) requires is that services should have been rendered. Therefore, if the firm had led no evidence to the effect that services were rendered by these two employees, there would be no getting away from the fact that the deduction claimed would (sic) be a permissible one under Section 36(1)(ii). It is the common case that a deduction could only be allowed under Section 36(1)(ii) provided the requirements of the said section are satisfied. The principal requirement of the section is that services should have been rendered, or to use the phraseology of the statute, for services rendered. There is no evidence as to what was the work and its nature that was carried on by these two employees vis-a-vis the assessee. This was a matter which was fully within the knowledge of the assessee. Evidence could have been led by the assessee to show what was the nature of services rendered by these two employees. Only a bald statement was made before the Income-tax Officer that these employees were rendering services and the commission had increased by reason of the extra services rendered by them. The department took the view that the increase should be in the normal course of events and unless the increase was inter-related with the services rendered by the employees, no case would be made out under Section 36(1)(ii). In any event, on the material on the record two views are possible. One is that the increase may have been because of the services rendered by the two employees and equally possible is the view that it may have been in the normal course of business, that is, in the course of business by reason of the increase of the population of the country or by reason of the enlargement of the export trade. Therefore, if two views are possible on a question of fact, the view taken by the Tribunal binds us in these proceedings.
8. Apart from this, the decision of the Gujarat High Court in Laxmandas Sejram's case does not support the learned counsel. All that the learned judges observed was that the question whether the services were rendered would undoubtedly have some relevance, but it must be considered along with other circumstances and the question whether commercial expediency justified the payment of this commission in that case must be judged inthe light of all the circumstances which existed at the time when the agreement was made.
9. In Laxmandas Sejram's case there was an agreement whereby a provision was made for commission, a fact which is lacking in the present case. In the second place, a number of circumstances were proved, particularly the circumstance that the employee was indispensable. He could have, if not retained, gone to a rival firm, which would have affected the business of the firm. In order to retain him, it was thought expedient in the interest of business to give the employee a larger commission. All these facts are lacking in the present case and, therefore, it is idle to suggest that the matter is concluded by the decision of the Gujarat High Court or in any way it advances the case of the assessee. So far as the Madras High Court's decision is concerned, it is again a case of agreement, but it might be said that in both these cases the real dispute was whether the commission allowed was reasonable or not. In fact there was no dispute as to the fact of the services having been rendered or being rendered.
10. In our opinion the Tribunal has given a correct decision and we must, therefore, answer the question referred to us in the negative, that is, against the assessee and in favour of the department. In the circumstances of the case, we make no order as to costs.