B.J. Divan, C.J.
1. In this reference made at the instance of the revenue, the following question has been referred to us for our opinion by the Tribunal :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the payment of commission paid to the employees of the respondent is allowable under section 37 of the Income-tax Act, 1961 ?'
2. The assessee is a registered firm and the relevant assessment years are 1963-64 and 1964-65. The assessee-firm carries on business in Bombay and Ahmedabad in the textile chemicals, dyestuffs and auxiliaries and supplies these materials to the textile mills at Ahmedabad and Bombay. During the course of the assessment proceedings the Income-tax Officer noticed that the following commission was paid by the assessee-firm to its employees in assessment years 1963-64 and 1964-65 :
Name Amount Amountof commission of salary1963-64Rs. Rs.p.m.1. Shri N.J. Trivedi 25,320 3252. Shri B.K. Gutta 18,465 500---------43,785---------1964-651. Shri N.J. Trivedi 28,675 4002. Shri B.K. Gutta 25,094 5153. Shri K.G. Nayak 24,929 315----------78,698----------
3. In 1963-64, the assessee-firm had two employees, namely, N. J. Trivedi and B. K. Gutta, whereas in 1964-65 one more employee was taken up in service, namely, K. G. Nayak, and he joined the assessee-firm's service as a probationer some time in August, 1962 and with the commencement of the calendar year 1963 which is the previous year relevant to the assessment year 1964-65, K. G. Nayak was appointed as a regular employee under a proper agreement of service.
4. The Income-tax Officer doubted the genuineness of these payments of commission to the assessee's employees and caused various inquiries to be made. He asked the assessee to prove the genuineness of the claim made. The assessee relied upon four factors in support of its contention before the Income-tax Officer : (1) the agreements entered into with the employees at the beginning of the year; (2) statements of the employees as also statement of one of the partners of the assessee-firm and replies by the assessee to the letters issued by the Income-tax Officer regarding this deduction of commission; (3) account books of the assessee-firm; and (4) past history indicating that similar commission was being allowed in the past. The Income-tax Officer brought on record of the case, letters from various mills to which the assessee-firm supplied goods. The letters generally indicated that the dealings were directly made with the assessee-firm and not through any agency. The Income-tax Officer held that though there was substantial increase in turnover year after year it was not due to the services rendered by any of the employees and that the employees were not independent men but were employees drawing meagre salaries of Rs. 300 and odd per month. He further held that there was no commercial expediency proved by the assessee-firm and he also held that the commission in fact was not paid to the employees but was paid to some unknown persons and the details of such payments were not given either by the assessee or its employees in their statements when asked for. He came to the conclusion that the agreements between the assessee-firm and its employees were sham and not genuine agreements and the entries made in the books of account showing payments of commission and withdrawals by the employees were fictitious. The Income-tax Officer also held that the replies of the various mills also showed that the assessee was directly dealing with the mills and there was no agency for the purpose of soliciting orders from the textile mills. The Income-tax Officer came to the conclusion that neither the quantum of the commission nor its direction had been proved by the assessee and he, therefore, disallowed the claim in respect of this commission amount. The payment of th so-called secret commission was substantial and where principles of public policy were involved, deduction of secret commission was entirely wrong and unjustifiable. These findings were recorded by the Income-tax Officer in the assessment proceedings for 1963-64 and for the assessment year 1964-65, the Income-tax Officer observed that the reasons and findings given in the assessment for 1963-64 would equally apply for the assessment year 1964-65 and he further held that there was no general practice to pay any commission to the employees in the trade which was similar to that of the assessee.
5. For the two assessment years, the assessee-firm filed appeals before the Appellate Assistant Commissioner and urged the same contentions as had been urged before the Income-tax officer. The Appellate Assistant Commissioner confirmed all the findings of the Income-tax Officer and he further observed that there was no necessity for paying such commission to the employees, inasmuch as no canvassing was absolutely necessary for selling the products of the assessee-firm which was a very old concern. According to the Appellate Assistant Commissioner the products of the assessee needed no introduction and there was no necessity of any sales representative. He also held that the employees were not such qualified persons having any special skill or ability for canvassing the goods of the assessee. Before the Appellate Assistant Commissioner, the Income-tax Officer who represented the department urged that the claim could not be allowed in terms of section 36(1)(ii)(a), inasmuch as the entire payment which was the subject matter of dispute was claimed to have been paid to the employees. The Appellate Assistant Commissioner summed up the findings as follows : that he had reasonable ground to infer that the so-called commission to employees was nothing but a camouflage for the assessee's payment of secret commission to employees of the mills who are the assessee's customers.
6. Against the decision of the Appellate Assistant Commissioner, the assessee-firm filed appeals before the Tribunal and challenged the findings of the revenue authorities. On behalf of the assessee-firm it was contended that the findings that all the agreements entered into by the assessee with the employees were sham and not genuine, was not based on any evidence, nor the material on record would support such a finding. The assessee contended that it was not the case of the revenue that the amount of commission paid was not reasonable and, therefore, should not be allowed and so the agreements were genuine and if they were held so, the entire commission paid by the assessee-firm to its employees must be allowed. It was also urged that the payment of commission, which is known as secret and private commission paid to the employees at various mill such as dyeing masters, printing masters, etc., was well-known and actually the Bombay High Court had taken note of that in Ciba Dyes Ltd. v. Commissioner of Income-tax : 25ITR102(Bom) , where a similar question arose for consideration. The revenue supported the order of the Appellate Assistant Commissioner in all aspects. It may be pointed out that in order to support its contention that in this trade there was no general practice of payment of secret commission, the revenue relied on the report of the Income-tax Officer to the Appellate Assistant Commissioner in the course of the hearing of the appeal citing cases where no such commission was said to have been claimed. The assessee at the stage of hearing before the Tribunal objected to this course having been adopted by the Appellate Assistant Commissioner and contended that these cases were not brought to the notice of the assessee in spite of the assessee's request to the Appellate Assistant Commissioner by the assessee's letter dated February 3, 1970, that this report should be made available to it. On behalf of the assessee it was further pointed out that these cases cited by the Income-tax Officer might be altogether different and unless the assessee had all the facts of those cases, it was not possible to make any comments.
7. The Tribunal examined all contentions urged before it and held that the report made by the Income-tax Officer to the Appellate Assistant Commissioner should not be taken into consideration inasmuch as the assessee was never given an opportunity of looking into the report. The Tribunal found that the purchases were made from the companies producing dye-stuffs at Bombay and other places and it appeared to the Tribunal that in the sale of dye-stuffs there was always a question payment of some commission to employees of the mills to whom the dealers supplied dye-stuffs and colours and the assessee had also to incur expenditure of that nature. In assessment proceedings of this very assessee for assessment years 1956-57 and 1957-58, the Tribunal held that the payments made cannot be said to be unusual or extraordinary. Taking all the relevant facts into account, the pay of the employees, the nature of the business, and profits made and the practice prevalent in the said business, the Tribunal on the earlier occasion considered that the payment of remuneration by way of commission in the manner done in that particular case was not liable to be disallowed to any extent. The Tribunal found that the payments of such commission to Trivedi and Gutta, two of the employees, was a payment of commission. Gutta, in the instant case, had joined the assessee's service during the calendar year 1958, and payments of such commission to these two employees were allowed for the assessment years 1959-60, 1960-61, 1961-62 and 1962-63. The Tribunal held that the agreements were quite natural and so were genuine and not sham. The Tribunal also observed that the payment of secret commission has been the feature by the assessee in the past and also it appeared that it was common in the dye-stuff trade. The Tribunal sought reliance from the decision in Ciba Dyes Ltd. v. Commissioner of Income-tax : 25ITR102(Bom) and held that there was nothing to doubt the genuineness of the agreements and, therefore, it was held that the agreements entered into by the assessee with the employees were genuine and it was known that in the trade of dye-stuffs, colours, etc., a payment of secret commission was a must for the purpose of carrying on business and the assessee would be entitled to claim that commission as a deduction. The Tribunal held that the contention of the revenue that there was no evidence as to the general practice in the trade was considerd not relevant in the circumstances of the case. The Tribunal considered as to whether the payment of commission in the circumstances to the employees could be allowed under section 37 and held that the payment of commission to the employees was not a payment to themselves but was reimbursement of the expenses necessary to be incurred for the purpose of business which the assessee was carrying on and it held that the claim was allowable under section 37 of the Income-tax Act, 1961. The Tribunal also observed that the question of general practice was neveraised by the revenue authorities and on the other hand the findings indicated that the payment of such secret commission to the employees of the mills appeared to be prevalent in dye-stuffs and colour trade. The revenue contended before the Tribunal that the agreements with different employees were not acted upon but the Tribunal negatived this contention after considering the evidence on record and held that the agreements had in fact been acted upon by the assessee-firm. The Tribunal further held that there was no difference between the commission actually paid and the commission stipulated in the different agreements with the respective employees. The Tribunal came to the conclusion that the employees were in fact going about for the purposes of obtaining the orders and for this purpose the Tribunal relied upon letters written by some of the mills to the effect that the employees of the assessee went to the mills on various occasions for the purpose of securing business. The Tribunal observed at several place that the commission to the employees was paid under the agreements and was made substantially to cover the expenditure that the employees in turn had to incure for paying to printing masters, dyeing masters, etc., of the various mills. The Tribunal considerd the depositions of all the employees and came to the conclusion that the revenue authorities misunderstood the scope of the claim made by the assessee. The Tribunal concluded that it was not a case of specific service rendered by the employees; it was a question of reimbursement of certain expenditure which was required to be incurred in this type of business. The Tribunal observed that apart from the fact that the assessee was not concerned with that, a small portion of the amount being left with the employees, the small portion so left could be construed as a reasonable amount of commission paid to the employees and there could not be any objection for such payment and such a payment could be allowed under section 36(1)(ii) of the Act of 1961. The Tribunal made it absolutely clear that the provisions of section 36(1)(ii) might apply only in respect of that portion which was left with the employees after spending substantial portion of commission for the purpose of meeting the expenditure like payment of secret commission to the employees of the mills through whom goods were sold. The Tribunal examined the trend of business and held that the employees of the assessee were visiting the premises of the various mills with whom the assessee had dealing and that the payment of commission stipulated in the agreement was necessary for the purpose of carrying on the business by the assessee. Ultimately, the Tribunal held that the assessee was entitled to deduction of the commission paid to the employees under the relevant agreements. The Tribunal held that it was not necessary that the names of the persons to whom the secret commission was paid should have been disclosed to the revenue authorities and applying the test of commercial expediency to the facts and circumstances of the case, the Tribunal held that the case fell under section 37 of the Act of 1961. In the light of the conclusions arrived at, the Tribunal summed up its findings as follows :
(i) the agreements entered into by the assessee with the two employees, Shri N. J. Trivedi and Shri Gutta, during the calendar year 1962, and the agreements entered into with the aforesaid two persons as also Shri K. G. Nayak in calendar year 1963 were genuine and binding agreements between the parties;
(ii) the agreements were acted upon substantially and entries in the account books made in regard to the payment of commission were genuine an not fictitions;
(iii) the payment of commission under the agreements was necessary in the interest of the assessee's business;
(iv) the commission paid was also reasonable in the facts and circumstances of the case; and
(v) the claim was allowable under section 37 of the Income-tax Act 1961.
8. Thereafter, at the instance of the revenue, the question hereinabove set out has been referred to us for our opinion.
9. before proceeding with the consideration of the main points, we may point out that the agreements with theses three different employees, N. G. Trivedi, Gutta and K. G. Nayak, are on the record of this case. Each of these three agreements is on the footing that each of the three employees is entitled to a certain amount of salary, Rs. 325 per month in the case of N. J. Trivedi, Rs. 500 in the case of B. K. Gutta and Rs. 315 per month in the case of K. G. Nayak. Over and above these fixed amounts of salaries, the relevant agreement s provided for payment of commission at various rates of percentage depending upon the different types of dye-stuffs and colour chemicals sold through the efforts of the employee concerned and it is the common feature of all the agreements entered into with each of the three employees that the figure of commission payable to each of the employees was to be worked out at the end of the quarter of three months in each calendar year and it has been found that in each of the two assessment years under consideration, the amounts of commission were so worked out and credited in the respective accounts of the three employees and there were withdrawals by the three employees from their respective accounts against such amounts of commission credited to them.
10. We may also point out that from the order passed by the Appellate Assistant Commissioner at the appellate stage it appears that there was a substantial increase year after year in the business of the assessee-firm and correspondingly year after year there was also increase in the amount of commission paid by the assessee-firm to its employees. The figures set out by the Appellate Assistant Commissioner go to show that whereas the turnover, that is, sales of the assessee-firm increased from Rs. 10,66,694 in assessment year 1962-63 to Rs. 38,40,551 in assessment year 1968-69, the amount of commission paid by the assessee-firm increased from Rs. 59,940 in 1963-64 to Rs. 2,28,076 in assessment year 1968-69. Thus, though the amount of commission paid has increased from year to year, so has the quantum of sales effected by the assessee-firm increased from year to year and both have been increasing year after year side by side.
11. It is in the light of theses facts and these agreements and in the light of the findings reached by the Tribunal that we have to consider whether the deductions in respect of these commissions are allowable to the assessee-firm. Mr. Kaji for the revenue has rightly contended that when any sum is paid to an employee as commission for services rendered, the case would fall under section 36(1)(ii) of the Act of 1961 and not under section 37 since section 37 is a residuary section which deals with cases not specifically dealt with, inter alia, in section 36 of the Act. Section 36(1)(ii) is in these terms :
'36. (1) The deduction provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 - ....
(ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission :
Provided that the amount of the bonus or commission is reasonable with reference to -
(a) the pay of the employee and the conditions of his service;
(b) the profits of the business or profession for the previous year in question; and
(c) the general practice in similar business or profession.'
12. Section 28 deals with income chargeable to income-tax under the head 'profits and gains of business or profession'. We may point out that under the Indian Income-tax Act, 1922, identical provisions comparable to section 36(1)(ii) and the proviso to that clause were set out in section 10(2) (x) and there also the bonus or commission paid to an employee could be claimed as deduction if the requirements of section 10(2) (x) of the Act of 1922 were satisfied.
13. The provisions of section 10(2) (x) came up for consideration before this High Court in Laxmandas Sejram v. Commissioner of Income-tax : 54ITR763(Guj) . There a Division Bench of this High Court consisting of Shelat C.J. and Bhagwati J. held that bonus and commission referred to in section 10(2) (x) of the Indian Income-tax Act, 1922, referred not only to ex gratia payment but also to amounts payable under contract. It further held that the bonus or commission, to fall within section 10(2) (x), must be over and above the salary of the employee. If any bonus or commission is paid to an employee over and above his salary, the claim for deduction in respect of such bonus or commission would have t be tested under section 10(2) (x), but if such bonus or commission represented his salary or its part of his salary, section 10(2) (xv) would apply. With reference to the test of reasonableness, the Division Bench held that the reasonableness of the payment with reference to the factors mentioned in section 10(2) (x) had to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency. The Division Bench further held that the commission agreed to be paid to an employee could not be held to be unreasonable merely because the employee had to do the same work which he was doing prior to the agreement to pay a commission. This circumstance would have some relevance but it must be considered along with other circumstances and the question whether commercial expediency justified the payment of the commission must be judged in the light of all the circumstances which existed at the time when the agreement was made. The High Court in Laxmandas Sejram's case : 54ITR763(Guj) reversed the finding of the Tribunal and held that considering all the facts and circumstances of the case the commission agreed to be paid to the employee on the facts of that particular case was not unreasonable. At page 776 Bhagwati J., as he then was, delivering the judgment the High Court, observed :
'These were the circumstances on record which the Tribunal should have taken into account in deciding whether from the point of view of commercial expediency, the payment of the full amount of commission to Kevalchand was justified. The Tribunal unfortunately failed to take these circumstances into account and proceeded only on one circumstance, namely, that the work to be done by Kevalchand continued to be the same as before. This was clearly a wrong approach and it vitiated the finding of the Tribunal that the amount of commission paid to Kevalchand was to the extent of one-half unreasonable. The learned Advocate-General contended that this finding of the Tribunal was a finding of fact and since the Tribunal had taken into account all the three tests laid down in the proviso to section 10(2) (x) in reaching the finding, it was not open to us to reappreciate the evidence and to substitute our own determination as regards the reasonableness of the amount. This contention, however, suffers from a two-fold infirmity. In the first instance, it is not correct to say that the Tribunal took into account all the three tests set out in the proviso to section 10(2) (x). One of the factors required to be taken into account was the profit of the assessee-firm and this the Tribunal clearly failed to take into account. The profit of the assessee-firm in Samvat year 2015 was Rs. 1,24,712 and having regard to this profit we do not see how the commission of Rs. 16,334 can be said to be unreasonable. It is no doubt true that Tribunal in confirming the order of the Income-tax Officer took into account the factor of pay and conditions of service but that factor was wrongly interpreted by the Tribunal. The Tribunal appeared to take the view that such a large commission would not be paid to an employee with such a meagre salary as Rs. 200 per month. Now, this would certainly be true if the commission was paid ex gratia in reward of the services rendered but whereas in the present case the remuneration under the contract of service consists of two parts, namely, salary and commission, and as commission is paid as part of remuneration, this would be a totally wrong approach. In such a cases, if the salary is low, the commission would have to be large in order to make up adequate total remuneration and to say in that case that the commission is unduly large compared to the meagre salary would be to misapply the test. Moreover, it is now well settled that, though a finding of fact reached by the Tribunal cannot be discarded by the court if there is some evidence to support it, the finding cannot be regarded as immune from the scrutiny of the court if it appears that the Tribunal has not considered evidence covering all essential matters : vide Commissioner of Income-tax v. Indian Woollen Textiles Mills : 51ITR291(SC) . In such a case the Tribunal having misdirected itself in law in arriving at the finding, the court can certainly set aside the finding on a reference under section 66. When we find that in considering the three tests laid down in the proviso to section 10(2) (x), the Tribunal has ignored various circumstances on record which were extremely relevant in considering whether from the point of view of commercial expediency, which is the only point of view from which the matter must be looked at, these three tests were satisfied, we are certainly entitled to interfere with the decision of the Tribunal.'
14. We respectfully agree with the observations of the Division Bench in the passage just now cited and in the instant case we propose to examine the material before us in the light of the findings arrived at by the Tribunal. In the instant case that Tribunal has found as a matter of fact that the agreements entered into by the assessee-firm with the three employees were genuine transactions and were genuine agreements and not sham or bogus ones. It is also found that the amounts of commission respectively shown to have been paid to the three employees were in fact paid and as has been pointed out be the Gujarat High Court in Laxmandas Sejram's case : 54ITR763(Guj) if the amount of the salary is low and the commission is part of the remuneration and not an ex gratia payment for services rendered, the amount of the commission will have to be large in order to equalise the total amount and ensure a fairly high remuneration to these employees. The Tribunal has further held that in this particular trade of dye-stuffs and colour chemicals which are being sold to the textile mills it is the usual practice to pay secret commission to dyeing masters, printing masters, etc., in order to secure orders and in order to see that the supplier concerned increases his sales. The Tribunal has also held that the three employees of the assessee-firm were visiting the various mills with whom the assessee had dealings and were securing business from those different mills for the assessee-firm. In view of those conclusions of the Tribunal and particularly in view of the conclusions of the Tribunal that the payment of commission under the tree agreements was necessary in the interest of the assessee's business, in our opinion, applying the correct test require to be applied for ascertaining the reasonableness of the commission paid in the light of the provisions of section 36(1)(ii), namely, the test of commercial expediency as has been laid down by the Division Bench of our court in Laxmandas Sejram's case : 54ITR763(Guj) , the question that we have to ask ourselves is, in view of these findings of fact reached by the Tribunal, can it be said that the payment of commission to the employees in the light of the peculiar facts and circumstances of this particular case was not reasonable We have already pointed out that the amount of commission paid by the assessee-firm to its employees increased from year to year. So did the quantum of sales effected by the assessee-firm. Further, the finding of the Tribunal is that in this particular trade in order to maintain the level of business and in order to secure larger business, such secret commissions have to be paid. The real case of the assessee is that the assessee has paid these amounts of commission to its employees but the employees in their turn had to part with some amount of the commission coming to them in order to secure business or in order to continue the business with these different textile mills and, if one may say so, that is the fact of life with which this particular trade is faced. In view of these conclusions of the Tribunal in the light of the test of commercial expediency we can say that all the amounts of the commission paid by the assessee-firm to its employees were reasonable because these amounts of commission were, as found by the Tribunal, paid by the assessee-firm to its employees in the interest of the assessee's business and the payment of commission under the circumstances was necessary in the interest of the assessee's business. In our opinion, this satisfies the test of commercial expediency laid down this High Court and once that test is applied in the light of the findings of the Tribunal which we have summarized above, it must be held that the case of the assessee-firm falls fairly and squarely within section 36(1)(ii) of the Income-tax Act, 1961.
15. It is true that the Tribunal held that the amount of commission paid by the assessee-firm to its employees was allowable under section 37 of the Income-tax Act, 1961. But the High Court on a reference made to it under the Income-tax Act is not precluded from arriving at its own finding as to whether the deduction allowed by the Tribunal is allowable under any other section of the Act or not. In Commissioner of Income-tax v. Breach Candy Swimming Bath Trust : 27ITR279(Bom) , in assessment proceedings of the trust the claim was that its income was exempt from tax on the ground that it was a charitable trust. This claim was put forward only before the Appellate Tribunal at the time of the hearing of the appeal. The Tribunal permitted the point to be raised and held that the income of the trust was exempt under section 4(3) (ia) of the Act of 1922. In the reference to the High Court the question reframed was whether the income was 'exempt under section 4(3) (ia) of the Act or on the ground raised by the assessee'. The Bombay High Court in that case held that it was not necessary for the assessee to suggest under which particular section of the Act the income was exempt and the proper question the Tribunal should have framed was whether the income was exempt from tax. The Tribunal might point out under which section in its opinion the income was exempt but the high Court was not bound necessarily to take the same view. It was open to the High Court to decide that the income was exempt from taxation under some other provision. The jurisdiction of the High Court was not confined only to deciding whether the exemption fell under section 4(3) (ia) or not. If the High Court came to the conclusion that the relevant provision of the Income-tax Act was section 4(3) (i) and not section 4(3) (ia) it was open to the court to so decide under its advisory jurisdiction. Applying the test laid down by the Bombay High Court in the case of Commissioner of Income-tax v. Breach Candy Swimming Bath Trust : 27ITR279(Bom) to the instant case, we also can hold that though the tribunal has come to the conclusion that the amount of commission paid by the assessee-firm to its employees was allowable as a deduction under section 37, if we come to the conclusion that it fell fairly and squarely within the deduction under section 36(1)(ii) and that it was a reasonable payment applying the test of commercial expediency and of the tests of the proviso as explained in Laxmandas Sejram's case : 54ITR763(Guj) , it is open to us to so decide under the advisory jurisdiction conferred upon us by the Income-tax Act, 1961. We, therefore, hold that though the Tribunal has come to the conclusion that the amount of commission was allowable as a deduction under section 37, in fact and in law it was allowable under section 36(1)(ii) and that all the requirements of law including the test of commercial expediency regarding the reasonableness of the payment of the commission are satisfied in the light of the findings of fact recorded by the Tribunal.
16. We, therefore, answer the question referred to us as follows. On the facts and circumstances of the case the Tribunal were right in holding that the amount of commission paid to the employees was allowable as a deduction but we hold that it was allowable under section 36(1)(ii) of the Income-tax Act, 1961, and not under section 37 of the Income-tax Act, 1961. We, therefore, answer the question in favour of the assessee but holding at the same time that it was allowable not under the specific section referred to by the Tribunal but under another provision of the same Act. The Commissioner will pay the costs of this reference to the assessee.