1. The assessee in this case is a dealer in paper. During the assessment year 1960-61 he paid a bonus of Rs. 39,541 to his employees and claimed it as allowance under Section 10(2)(x) of the Income-tax Act, 1922. The Income-tax Officer took the view that the bonus paid by the assessee which is equivalent to 13 months' salary was excessive and not justified by the profits derived by him in the assessment year, and disallowed a sum of Rs. 19,000 from and out of the total claim of the assesseeon the ground that the bonus equivalent to six months' salary can alone be justified.
2. The assessee preferred an appeal before the Appellate Assistant Commissioner against the disallowance of a portion of his claim. The Appellate Assistant Commissioner, however, confirmed the disallowance of Rs. 19,000 from the assessee's total claim. There was a further appeal by the assessee to the Tribunal, and the Tribunal held that the claim of deduction for Rs. 39,541 which is equivalent to about 13 months' salary was excessive and that the bonus could be allowed at 10 months' salary. At the instance of the assessee the Tribunal has referred the following question for our decision:
' Whether, on the facts and in the circumstances of the case, the disallowance of the claim for deduction of bonus paid to the employees to the extent of three months' salary is lawful '
3. In the preceding two years and the assessment year in question, the profits as well as the salaries and bonus paid by the assessee to the employees were as under:
Assessment yearProfits as assessedSalary paidBonus paid
4. Though the net profit as assessed for the year 1960-61 was only Rs. 1,06,719, the assessee stated that the fall in the profits was due to the valuation of the closing stock at the controlled prices unlike in the preceding years when the market value of the closing stock was taken, and that the real profits earned by him during that assessment year would come to Rs. 2,06,719 if the stock had been valued at the proper rates. He also urged that his turnover had increased to Rs. 39,90,312 during the assessment year as against Rs. 33,61,721 in the prior year, that this had resulted in more work for the staff and that, therefore, the payment of 13 months' salary by way of bonus is justified by business expediency. He also pointed out that in all the earlier years he had consistently paid bonus amounting to 12 months' salary, as most of his employees are getting a salary of less than Rs. 100 and that he had to pay 13 months' salary as bonus during the assessment year in view of the increased work turned out by his staff as a result of the increased business turnover.
5. The Income-tax Officer, the Appellate Assistant Commissioner as well as the Tribunal have not doubted the genuineness of the payment by the assessee of a sum of Rs. 39,541 as bonus to his employees during theassessment year. But, what they have stated is that the payment of bonus is excessive having regard to the lesser profits earned by the assessee as compared with the earlier years. The Tribunal had observed as follows :
' No doubt, for a long time, bonus equal to 12 months' pay had been paid and allowed by the department. But, there is no res judicata or estoppel in income-tax law. We cannot ignore the fact that in the year of account, the profits were low compared to the previous years, which has formed the basis for the assessee giving the bonus as before. The idea of justice inevitably suggests the notion of certain equality. This equality is lacking so far as the profits are concerned, even though there is some valid reasons for the fall in profits......So whatever might be the yard-stick bywhich the assessee measures the bonus which he has got to pay, it has to confirm to certain standards laid down in the law obtaining in the business and in the locality. By these standards, it seems to us the claim for 13 months' salary is excessive and we would allow ten months.'
6. The fact that the assessee paid a bonus of 12 months' salary to his employees for a long time and successfully claimed it as allowance under Section 10(2)(x) is not disputed. We are, therefore, at a loss to know how the Income-tax Officer fixed six months' salary as the proper bonus for the assesssee's employees. We are equally at a loss to know how the Tribunal came to the conclusion that a bonus equivalent to 10 months' salary is allowable. The Tribunal has not set out the ' standards laid down in the law obtaining in the business and in the locality' on the basis of which it has purported to fix the bonus of 10 months' salary as allowable. Presumably, the Tribunal was of the view that as the profits during the assessment year were low compared to the previous years, when he paid bonus equivalent to 12 months' salary, the assessee would be justified in paying bonus equivalent to not more than 10 months' salary. The question is whether the Tribunal is right in comparing the profits earned in the assessment year with those of the prior years and reducing the bonus allowable under Section 10(2)(x) to 10 months' salary on such comparison.
7. The assessee's contention is that the resonableness of the bonus paid by him has to be tested only with reference to the factors mentioned in Section 10(2)(x), that it is only the profit of the year in question that has to be taken into account and that the profits during the assessment year cannot be compared with those of the prior years for finding out the reasonableness of the amount paid as bonus. According to the assessee, though the profit as assessed to income-tax for the assessment year is Rs. 1 lakh odd, the actual profit earned by him is more than Rs. 2 lakhs, and he is, therefore, justified in paying the bonus at 13 months' salary amounting to Rs. 39,541 to his employees out of the profits earned by him, and thereasonableness of the bonus cannot be tested with the state of affairs that prevailed in the preceding years. The revenue, on the other hand, contends that though payments of Rs. 39,541 as bonus may be true, the assessee in this case has shown over-generosity in payment of the bonus to his employees, and that such over-generosity cannot be at the cost of the exchequer. According to the learned counsel for the revenue the assessee has to keep in mind the tax effect at the time of payment of the bonus and that the assessee cannot be allowed to reduce his tax liability by making liberal payments of bonus to his employees.
8. It is in the light of these rival contentions we have to decide the question as to whether the payment of bonus of 13 months' salary by the assessee is reasonable so as to enable him to claim deduction under Section 10(2)(x) of the Act which is as follows :
' 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 of a reasonable amount with reference to--
(a) the pay of the employee and the conditions of his service ;
(b) the profits of the business, profession or vocation for the year in question; and
(c) the general practice in similar businesses, professions or vocations.'
9. The scope of Section 10(2)(x) has been considered by the various High Courts and the Supreme Court in several cases. In Subodhchandra Popatlal v. Commissioner of Income-tax, : 24ITR566(Bom) the Bombay High Court laid down that whether the payment of the bonus or commission is voluntary or contractual, if an employee is remunerated in the manner laid down in Section 10(2)(x) then such an emolument is a permissible deduction only if the emolument is of a reasonable amount, that in determining the reasonableness of the bonus or commission all the three factors mentioned in Clauses (a), (b) and (c) of the proviso to Section 10(2)(x) should, at the same time, be taken into consideration and that it is not sufficient to take one or two of these factors alone into consideration. In Mysore Fertiliser Co. v. Commissioner of Income-tax, : 30ITR734(Mad) this court had expressed the view that it is settled law that the reasonableness of the payment has to be judged not on the subjective standard of the assessing authorities but from the point of view of commercial expediency, and that in deciding whether remuneration paid to an employee by way of commission constitutes a reasonable expenditure, all the circumstances specifically referred to in the proviso to Section 10(2)(x), judged from the view of a normal prudentbusinessman, must be taken into account. In Madura Knitting Company v. Commissioner of Income-tax, : 30ITR764(Mad) this court again reiterated that under Section 10(2)(x) of the Indian Income-tax Act, 1922, the reasonableness or otherwise of the payment to an employee of a bonus or commission is to be judged not with reference to any subjective standards of the assessing authority but with reference to commercial expediency and with specific reference to the factors listed in Clauses (a), (b) and (c) of the proviso to that section, and that as the legislature has in Section 10(2)(x)(b) co-related such payments to the profits of the business and prescribed that as one of the tests to decide whether the payments afe reasonable, payment of a commission at a certain percentage on the net profits of the assessee cannot be disallowed on the ground that the net profits depend upon several factors other than the efforts of the employees. Laxmandas Sejram v. Commissioner of Income-tax, : 54ITR763(Guj) was a case where a portion of the commission paid by the assessee to his employees was disallowed by the revenue on the ground that it was excessive compared to the salary paid to them. The Gujarat High Court held in that case that if any commission or bonus is paid to an, employee over and above his salary, the claim for deduction in respact of such bonus or commission under Section 10(2)(x), and the reasonableness of the payment with reference to the factors mentioned therein has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency. According to the learned judges in that case the commission agreed to be paid to an employee over and above his salary cannot 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, 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. In Commissioner of Income-tax v. Walchand & Co. Private Ltd., : 65ITR381(SC) their Lordships of the Supreme Court, while dealing with a claim of business expenditure falling under Section 10(2)(xv), expressed thus :
' In applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue...... But it isnot the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee.
An employer in fixing the remuneration of his employees is entitled to consider the extent of his business, the nature of the duties to be performed,and the special aptitude of the employee, future prospects of. extension by the business and a host of other related circumstances. It is erroneous to think that increased remuneration can only be justified if there is a corresponding increase in the profits of the employer. '
10. In Commissioner of Income-tax v. Raman and Raman Ltd. : 71ITR345(Mad) , this court, while dealing with the s'cope of Section 10(2)(x), laid down the principle that for eligibility of an allowance under that section there should be a nexus between the expenditure and the purpose of the business, and the expenditure should have been wholly and exclusively laid out for that purpose, that once it is established factually that the expenditure has been incurred for the purpose of the business, the revenue or the court cannot justifiably claim to put itself in the arm-chair of a businessman and assume the role of ascertaining how much is a reasonable remuneration having regard to all the circumstances, provided the quantum of remuneration claimed is not so excessive as to throw doubt at the honesty and purpose of the outgoing, as that is a matter of business expediency which should be wisely left to the businessmen concerned. According to the learned judges in that case, under Section 10(2)(xv) once it is shown that a certain amount is wholly and exclusively laid out for the purpose of the business, there is no option to the department but to grant the allowance.
11. From the principle laid down in the above decision it is clear that once the genuineness of the payment of bonus by the assessee is not disputed, the reasonableness or otherwise of such payment has to be decided with reference to the three factors mentioned in the proviso to Section 10(2)(x), and that it is not open to the taxing authorities to decide as to what is the proper quantum of bonus payable to the employee. In this case, the genuineness of the payment of bonus to the extent of Rs. 39,541 had not been challenged at any time, and the only ground on which the revenue authorities disallowed part of the bonus was that the assessee has earned comparatively lesser profit than the preceding years, and, as such, he was not justified in paying the bonus equivalent to 13 months' salary. It is not claimed fry the revenue that all the employees to whom the bonus was paid were related to or personally connected with the assessee. It is, therefore, difficult to believe that the assessee would part with a sum of Rs. 39,541 as bonus to the workers unless he found that it was absolutely necessary to do so in the interest of his business. The fact that the payment has been genuinely made to the employees, who are not in any way related to or personally connected with the assessee, would, prima facie, show that the payment has been made because the assessee considered that it was necessary to do so from the point of view of commercial expediency.
12. The learned counsel for the revenue would, however, contend that ^this court cannot set aside the findings of the Tribunal and reappraise the evidence with reference to the question of reasonableness of the quantum of the bonus paid and rely on the decision of the Supreme Court in Commissioner of Excess Profits Tax v. N. M. Rayaloo Iyer & Sons, : 41ITR671(SC) .
13. It has been expressed in that case that, in considering whether the deduction claimed under Section 10(2)(x) of the Income-tax Act and Clause 12 of Schedule I of the Excess Profits Tax Act was proper, the primary duty was vested by the legislature in the Excess Profits Tax Officer and it was for him, subject to review by the Tribunal, to decide whether the deduction was reasonable and necessary having regard to the requirements of the business, that the jurisdiction which the High Court exercised on questions referred to it under the Excess Profits Tax Act was merely advisory, and that if the taxing authorities, having regard to the circumstances, had come to a conclusion that expenditure claimed as a deduction was not reasonable and necessary, it was not open to the High Court to substitute its own view as to what might be regarded as reasonable and necessary. It is said that even if the High Court was of the view that the taxing authorities had committed an error in law by misconceiving the evidence, or by applying erroneous tests, or otherwise by acting perversely, it might, in answering the questions submitted, lay down the true principles applicable to the ascertainment of the permissible deductions but should leave it to the taxing authorities to adjudicate upon the reasonableness and necessity of the expenses in the light of the requirements of the business. However, we are of the view that the said decision which was rendered with reference to Clause 12 of Schedule I to the Excess Profits Tax Act may not apply to the case on hand where we are concerned with the application of only Section 10(2)(x) of the Income-tax Act, 1922. Clause 12 of Schedule I to the Excess Profits Tax Act specifically states that in computing the profits of any chargeable accounting period no deduction shall be allowed in respect of expenses in excess of the amount which the Excess Profits Tax Officer considers reasonable and necessary having regard to the requirements of the business. But, Section 10(2)(x) does not vest in the Income-tax Officer the exclusive duty of finding out the reasonableness of the expenditure incurred with reference to the criteria laid down in the proviso. It cannot, therefore, be said that the High Court has to merely accept the view of the revenue authorities or that of the Tribunal on the question of reasonableness of the amount of the bonus paid in the light of the proviso to Section 10(2)(x) of the Act. As pointed out by the Supreme Court in Commissioner of Income-tax v. Walchand & Co. Private Ltd., though the Tribunal is not a court, it isvested with the judicial power to be exercised in a manner similar to that exercised by an appellate court acting under the Code of Civil Procedure and the nature of its jurisdiction predicates that the Tribunal will approach and decide the case which conies before it in a judicial spirit, and for that purpose it must indicate the disputed questions before it with evidence pro and con and record its reasons in support of the decision. We are, therefore, of the view that the order of the Tribunal holding payment of bonus equivalent to 10 months' salary as reasonable, without assigning any reasons and disallowing a part of the bonus paid, cannot be sustained as it was not supported by any evidence on record. The view of the revenue authorities that the shortfall in the profit of the assessee as compared to the previous years did not justify the payment of bonus equivalent to 13 months' salary appears to us to be erroneous as they proceeded on the basis that payment of increased bonus can only be justified if there was a corresponding increase in the profits of the assessee. In deciding the quantum of bonus to be paid to the employees the assessee is entitled to consider the extent and turnover of his business, the nature of duties to be performed, and the future prospects of expansion of his business. Besides, there is, however, this circumstance that the Tribunal has not given any specific reason as to why it considered the bonus equivalent to 10 months' salary to be reasonable nor is the decision of the Income-tax Officer which fixed the bonus equivalent to six months' salary as reasonable supported by any reasoning. We feel that neither the revenue authorities nor the Tribunal had considered the question of reasonableness and various related circumstances. It is not the case of the revenue that the profits earned in the assessment year were not sufficient to pay the bonus in question. We have to, therefore, answer the question in the negative and against the revenue. The assessee will have his costs. Counsel's fee Rs. 250.