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Bombay Motors Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtRajasthan High Court
Decided On
Case NumberD.B. Civil Income-tax Case Nos. 106, 107 and 108 of 1981
Judge
Reported in[1986]157ITR623(Raj)
ActsIncome Tax Act, 1961 - Sections 36(1), 37 and 256(2)
AppellantBombay Motors
RespondentCommissioner of Income-tax
Appellant Advocate Rajesh Balia, Adv.
Respondent Advocate J.P. Joshi and; J.L. Daga, Advs.
Cases ReferredIn Parshumm Pottery Works Co. Ltd. v. D.R. Trivedi
Excerpt:
.....the decision of the punjab and haryana high court in shazada nand & sons' case ,but it failed to rectify its earlier order. thus, the legal position is now well-settled that for the purpose of application of section 36(1)(ii) of the act, no additional or extra service need be rendered by the employee to whom commission was paid so long as such employee rendered some service to the assessee during the relevant accounting year. trivedi [1975]100itr651(guj) ,the gujarat high court held that when the law on the subject was settled by the decision of the supreme court, there was clearly an error of law apparant on the face of the record in the assessment order, even though the decision of the supreme court came to be pronounced later......accessories and parts in addition to his salary. the assessee claimed the amount of commission paid to gopal dass during the aforesaid assessment years as business expenditure deductible from its total income. according to the assessee, the amount of commission paid by the assessee-firm to the said employee represented the amount paid to him for the services rendered by the employee and was allowable deduction within the meaning of section 36(1)(ii) of the income-tax act, 1961 ('the act' herein). in the alternative, it was claimed by the assessee that the commission paid to gopal dass was expenditure wholly and exclusively incurred by the assessee-firm for the purpose of its business and was allowable under section 37 of the act. the income-tax officer found that gopal dass did not.....
Judgment:

Dwarka Prasad, J.

1. These three reference applications arise in similar circumstances and raise identical questions. As such, it would be proper to dispose of them by a common order.

2. The assessee is a partnership firm carrying on business in purchase and sale of automobiles and automobile parts. The assessee firm, during the relevant assessment years 1971-72, 1972-73 and 1973-74, allowed one of its employees, Gopal Dass, a commission at the rate of 5% on the sale of automobile accessories and parts in addition to his salary. The assessee claimed the amount of commission paid to Gopal Dass during the aforesaid assessment years as business expenditure deductible from its total income. According to the assessee, the amount of commission paid by the assessee-firm to the said employee represented the amount paid to him for the services rendered by the employee and was allowable deduction within the meaning of Section 36(1)(ii) of the Income-tax Act, 1961 ('the Act' herein). In the alternative, it was claimed by the assessee that the commission paid to Gopal Dass was expenditure wholly and exclusively incurred by the assessee-firm for the purpose of its business and was allowable under Section 37 of the Act. The Income-tax Officer found that Gopal Dass did not render any extra service so as to entitle him for payment of commission and that there was no nexus between the services rendered by the employee and the payment made to him. As such, the claim made under Section 36(l)(ii) and alternatively under Section 37 of the Act was disallowed by the assessing authority.

3. On appeal, the Appellate Assistant Commissioner held that the payment of commission to Gopal Dass was deductible as business expenditure as it represented genuine payment for good and valid reasons. The Department filed an appeal before the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur ('the Tribunal ' herein), which was allowed and it was held that the payment of the amount by way of commission to Gopal Dass could not be allowed as business expenditure to the assessee-firm under Section 36(l)(ii) as there was no evidence whatsoever on record to show that Gopal Dass rendered any extra services which could be remunerated by making extra payment to him. It was also held that for the services which he had been rendering all along to the assessee, he was remunerated by way of salary and thus the payment of commission was not made for the services rendered by Gopal Dass. It was further held not to be allowable as deductible expenditure under Section 37 as it could not be held to have been expended wholly or exclusively for the purpose of the business of the assessee-firm. The learned members of the Tribunal held that the facts of the case were on all fours with those in Shazada Nand & Sons v. CIT and held as under (at p. 93):

' 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.'

4. After the decision of the Tribunal in these cases, the decision of the Punjab and Haryana High Court in Shazada Nand & Sons' case , was reversed by the Supreme Court in Shahzada Nand & Sons v. CIT : [1977]108ITR358(SC) , wherein it was clearly laid down that Section 36(1)(ii) of the Act does not postulate that any extra service should be rendered by an employee before payment of commission to him can be justified as an allowable expenditure. The Supreme Court observed as under (at p. 364):

' What it requires is only this, namely, that commission paid to an employee should be for services rendered by him. For example, if an employee has not rendered any services at all during the relevant accounting year, no commission can be paid to him which would be an allowable expenditure. There must be some services rendered by an employee and where commission is paid for the services so rendered, Section 36, Sub-section (1), Clause (ii), would apply and the commission to the extent to which it is found reasonable would be an allowable expenditure under that provision. It is not necessary that the commission should be paid under a contractual obligation. It may be purely voluntary. But it must be for services rendered and here services were in fact rendered by Saheb Dayal and Gurditta Mal during the relevant accounting year. It is true that the services rendered by these two employees during the relevant accounting year were in no way greater or more onerous than the services rendered by them in the earlier years, but that is immaterial. There is no such requirement and the argument based on it cannot be sustained. It is not justified by the language of Section 36, Sub-section (1), Clause (ii), and, indeed, if it were pushed to its logical extreme, it would be difficult to support even payment of bonus as a permissible deduction under that provision. Of course, the circumstances that no additional services are rendered by an employee would undoubtedly be of some relevance in determining the reasonableness of the amount of commission but it would have to be considered along with other circumstances and the question whether commercial expediency justified the payment of commission would have to be judged in the light of all the circumstances existing at the material time. '

5. On the strength of the decision of their Lordships of the Supreme Court in Shahzada Nand & Sons' case : [1977]108ITR358(SC) , the assessee made an application under Section 254(2) of the Act before the Tribunal and it was urged that as the law has been declared by the Supreme Court, the rectification should follow the decision declaring the law which was in force at the time when the Tribunal decided the appeal filed by the Department. The rectification application was decided by the Tribunal by its order dated April 22, 1978, and it was held that although in view of the reversal of the decision of the Punjab and Haryana High Court in Shahzada Nand & Sons' case : [1977]108ITR358(SC) , by their Lordships of the Supreme Court, the order of the Tribunal did not require rectificacation under Section 254(2), yet the Tribunal proceeded to delete only those portions of the appellate order which made a reference to the decision of the Punjab and Haryana High Court in Shazada Nand & Sons' case , but it failed to rectify its earlier order. The Tribunal still continued to hold that the extra amounts paid by the assessee to its employee by way of commission was not allowable as a deduction by adopting the reasoning that even after the reversal of the Punjab and Haryana High Court judgment in Shazada Nand & Sons' case , by the Supreme Court, the Tribunal's view relating to the rejection of the claim of the assessee under Section 37 of the Act still stood valid because of the finding arrived at by the Tribunal that the payment of commission was not wholly and exclusively made for the purpose of the business of the assessee.

6. The assessee, therefore, submitted three identical applications before the Tribunal under Section 256(1) of the Act seeking reference to this court in respect of common questions of law arising out of the Tribunal's order on the rectification application. The Tribunal rejected the reference applications on the ground that neither of the questions sought to be referred by the assessee arose out of the Tribunal's order nor were they fit to be referred to the High Court, because the Tribunal had held that the amount of commission paid by the assessee-firm to its employee, Gopal Dass, could not be allowed as business expenditure not only under Section 36(l)(ii) but also under Section 37 of the Act. It was pointed out that the assessee did not question at any stage the disallowance by the Tribunal of the said amount of commission under Section 37 of the Act. It was also observed by the Tribunal that it had disallowed the deduction claimed by the assessee-firm under Section 36(l)(ii) not only on the basis of the High Court decision in Shazada Nand & Sons' case , but also upon the finding of the fact that no extra work was performed by the employee, Gopal Dass, and thus there was no nexus between the payment of commission and the services rendered by Gopal Dass.

7. It was urged by the learned counsel for the assesee before us in these applications under Section 256(2) of the Act that the assessee had claimed that the amount of commission paid by the assessee-firm to its employee, Gopal Dass, was deductible as business expenditure under Section 36(1)(ii) of the Act and that the assessee also claimed in the alternative that if the said amount of commission is not held to be deductible as business expenditure under Section 36(1)(ii), then it should be allowed as an expenditure made wholly and exclusively for the purpose of the business of the assessee-firm under the general provision contained in Section 37 of the Act. It was urged that as held by the Supreme Court in Shahzada Nand and Sons v. CIT : [1977]108ITR358(SC) , the amount paid by the assessee-firm to its employee, Gopal Dass, was deductible as business expenditure under Section 36(l)(ii) as the same was paid to the employee by way of commission for the services rendered and that no extra service was required to be rendered by the employee, Gopal Dass, so as to entitle him for payment of such commission.

8. Learned counsel appearing for the Department tried to support the order passed by the Tribunal rejecting the applications under Section 256(1) of the Act and it was submitted that so far as the disallowance of the amount of commission under Section 36(l)(ii) of the Act was concerned, it was based on a finding of fact recorded by the Tribunal that the amount paid to the employee, Gopal Dass, by way of commission could not be deducted as business expenditure by the assessee as Gopal Dass did not render any extra service requiring payment of commission. It cannot be denied that the view taken by the Tribunal, while deciding the appeal of the Department, in respect of the interpretation of the provisions of Section 36(1)(ii) was based on the decision of the Punjab and Haryana High Court in Shazada Nand and Sons v. CIT and the same was reversed by the Supreme Court. Thus, the legal position is now well-settled that for the purpose of application of Section 36(1)(ii) of the Act, no additional or extra service need be rendered by the employee to whom commission was paid so long as such employee rendered some service to the assessee during the relevant accounting year. Of course, the rendering of extra service by the employee would be relevant in determining the reasonableness of the amount of commission. Their Lordships of the Supreme Court have observed in the aforesaid case that the mere fact that the commission was paid ex gratia to the employee would not necessarily mean that it was unreasonable. As such, the rectification under Section 254(2) of the Act was permissible in view of the declaration of the law on the subject by their Lordships of the Supreme Court in Shahzada Nand's case : [1977]108ITR358(SC) . In Parshumm Pottery Works Co. Ltd. v. D.R. Trivedi : [1975]100ITR651(Guj) , the Gujarat High Court held that when the law on the subject was settled by the decision of the Supreme Court, there was clearly an error of law apparant on the face of the record in the assessment order, even though the decision of the Supreme Court came to be pronounced later.

9. It may be observed that the assessee claimed deduction under Section 37 in respect of the amount paid by him to the employee by way of commission, only in the alternative, if the claim for deduction of the said amount under Section 36(1)(ii) was not allowable under the law and the rejection of the claim of the assessee under Section 37 could not entail rejection of the rectification applications in so far as the claim for deduction was allowable under Section 36(l)(ii) of the Act.

10. In this view of the matter, it appears to us that questions of law do arise out of the order passed by the Tribunal on the rectification applications of the assessee. The assessee has prayed that the Tribunal may be directed to refer six questions to this court which have been mentioned in the applications under Section 256(1) and have also been repeated in the applications filed under Section 256(2) of the Act before this court. In our opinion, the questions sought to be referred by the assessee are overlapping and repetitive and only two questions of law, mentioned below, arise out of the order of the Tribunal passed on the rectification applications :

' (1) Whether, on the facts and in the circumstances of the case, the Income-tax' Appellate Tribunal, Jaipur Bench, Jaipur, was justified in refusing to rectify its earlier order even when the claim for deduction, in respect of the commission paid by the assessee to its employee, Gopal Dass, as allowable expenditure under Section 36(1)(ii) of the Income-tax Act, 1961, was based upon the decision of their Lordships of the Supreme Court on the subject (Shahzada Nand and Sons v. CIT : [1977]108ITR358(SC) ) ?

(2) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, was justified in refusing to rectify its earlier order passed on appeal on the ground that the amount of commission paid to Gopal Dass could not be allowed as business expenditure under Section 37 of the Income-tax Act, 1961, even when the claim of the assesses for deduction of the amount of commission was allowable under Section 36(l)(ii) of the Income-tax Act, 1961 '

11. We, therefore, allow all the three applications fded by the assessee-firm under Section 256(2) of the Act and direct the Income-tax Appellate Tribunal, Jaipur Bench, Jaipur, to state the case and refer the aforesaid two questions of law, arising out of its order on the rectification applications of the assessee, to this court for its opinion. The parties shall bear their own costs of these proceedings.


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