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A.R. Balakrishnan Vs. Commr. of Income-tax, Madras - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberWrit Petn. No. 801 of 1953
Judge
Reported inAIR1954Mad1118; [1954]26ITR367(Mad)
ActsIncome Tax Act, 1922 - Sections 10 and 10(2); Constitution of India - Article 226
AppellantA.R. Balakrishnan
RespondentCommr. of Income-tax, Madras
Appellant AdvocateG.R. Jagadisa Iyer and ;T.V. Balakrishnan, Advs.
Respondent AdvocateC.S. Rama Rao Sahib, Special Counsel
DispositionApplication allowed
Excerpt:
direct taxation - exemption - sections 10 and 10 (2) of income tax act, 1922 and article 226 of constitution of india - appellant claimed exemption for monthly salary and commission from taxation - department rejected claim on ground that it was distribution of profit - in order to avail exemption amount should neither be from profits nor be dividend - amount given was neither dividend nor from profits - appellant entitled to exemption on monthly salary and commission. - .....laid out for the purpose of the business. the salary and the commission were included in the income of ramaswami during the relevant assessment years and were assessed to tax.2. against the order of the income-tax officer disallowing the claim on behalf of the company, there was an appeal to the appellate assistant commissioner, who followed the order of the appellate assistant commissioner, which was confirmed by the appellate tribunal, in respect of the assessment year 1948-1949, in which the same question was decided adversely to the assessee, that is, the company. the basis on which the appellate assistant commissioner confirmed the assessment order in respect of the year 1948-1949 was that the commission was practically a distribution of the profits to the managing director.....
Judgment:

Satyanarayana Rao, J.

1. The petitioner, A. R. Balkrishnan, is the son of one A. H. s. Ramaswami, who was a shareholder and also the Managing Director of a private limited company, styled the Balakrishna Mills Ltd., East Gate, Madurai. As per the Articles of Association of the company, and the resolution of the directors dated 29-6-1946 and which was approved by the General Body at its meeting on 14-4-1947, Ramaswami was entitled to a monthly salary of Rs. 1500 besides a commission calculated at 10 per cent of the net profits. For the assessment years 1949-1950 and 1950-51, with which we are now concerned, the company was assessed to income-tax and in respect of those years, the company claimed that they were entitled to deduct the salary and commission paid to Ramaswami as per the resolution of the company referred to above.

The Income-tax Officer disallowed the claim for the commission on the ground that it was a distribution to the Managing Director of the profits of the company, that is, it was practically sharing the profits between the Managing Director and the company and that, therefore, it was not a permissible deduction. He also added that, in any event, as the salary was allotted as a permissible deduction, the commission was excessive and was not wholly and exclusively laid out for the purpose of the business. The salary and the commission were included in the income of Ramaswami during the relevant assessment years and were assessed to tax.

2. Against the order of the Income-tax Officer disallowing the claim on behalf of the company, there was an appeal to the Appellate Assistant Commissioner, who followed the order of the Appellate Assistant Commissioner, which was confirmed by the Appellate Tribunal, in respect of the assessment year 1948-1949, in which the same question was decided adversely to the assessee, that is, the company. The basis on which the Appellate Assistant Commissioner confirmed the assessment order in respect of the year 1948-1949 was that the commission was practically a distribution of the profits to the Managing Director under the guise of commission on profits, and this view was confirmed by the Appellate Tribunal. Against the orders of the Appellate Assistant Commissioner for the assessment years 1949-1950 and 1950-51, there was apparently no appeal to the Appellate Tribunal. So, from the orders of the department it is clear that the disallowance of the commission claimed as deduction on behalf of the company throughout has been on the footing, that it was really a distribution of the profits by the company to the Managing Director, and, there? fore, was not a permissible deduction.

3. Ramaswami filed an application before the Commissioner of Income-tax under Section 33-A, Income-tax Act, to revise the order of the assessment and to exempt the payment of tax on the commission paid to Ramaswami, which was included in the assessment years 1949-1950 and 1950-51. The ground on which the exemption was claimed was that the case was within the purview of the Notification 878-P Income-tax, dated 21-3-1922, as amended from time to time. The relevant part of the Notification is as follows:

'The following classes of income shall be exempt from the tax payable under the said Act, but shall be taken into account in determining the total income of an assessee for the purposes of the said Act:

(1) sums received by an assessee on account of salary, bonus, commission or other remuneration for services rendered or in lieu of Interest on money advanced, to a person for the purposes of his business.

Where such sums have been paid out of, or determined with reference to, the profits of such business,and by reason of such mode of payment or determination, have not been allowed as a deduction but have been included in the profits of the business on which Income-tax has been assessed and charged under the head 'business' '.

4. The Commissioner of Income-tax, in a shortorder dated 19-2-1953, declined to interfere. There is no consideration by him of the provisions ofthe Notification, and except what we could gather from the fact that he declined to interfere, there is no indication in that order whether he thought that the case was within the exemption laid down in the Notification or not. Ramaswami having died, his son Balakrishnan filed this application in which he claimed that this Court should issue a writ of mandamus or other appropriate writ under Art. 226 of the Constitutionof India and direct the Commissioner of Income-tax, Madras, to give relief to the petitioner in accordance with the provisions of the Notification, or, in the alternative, direct the Commissioner to restore the said petition to his file anddispose it of on its merits after proper enquiry.

5. From a persual of the resolution of the company and the Articles of Association of the com-pany, which have been placed before us, we are satisfied that the commission payable to Ramaswami was paid out of the profits of the company, and the quantum was also determined with reference to the profits of such business. But the real question is whether the disallowance by the Department of the deduction was 'by reason of such payment or determination' in which case alone the assessee would be entitled to relief under the Notification. It is a well-established principle that, if there is a mere sharing of the profits, a share in the profits given to a person cannot be deducted as expenditure laid out or expended wholly or exclusively for the purpose of such business; and it could not be allowed as a permissible deduction even under Section 10 (2) (x), Income-tax Act, unless the sum paid as commission would not have been payable to him as pro-its or dividend. If once the profits are receivedby an assessee, the destination of the profits is mmaterial, as the profits are to be taxed at the joint of receipt by the assessee, whatever may be their destination after they are received by the assessee. If they are applied for various pur-poses or are distributed to other persons under arrangements or agreements entered into between them, it is of no consequence, and they cannot be deducted under any provision of the Income-tax Act. The entire profits, ignoring the distribution or the diversion or application of the profits for other purposes or for other objects, could be assessed at the point of receipt by the assessee.

6. In order, however, to invoke the provision under the Notification and to claim the exemption under it, apart from the condition that it should have been a distribution of the profits, it has also to be established that the deduction which was claimed was disallowed on the ground that it was a division of the profits, and, therefore, the assesses was not entitled to claim deduc-tion. A perusal of the orders of the Income-tax Officer and of the Appellate Assistant Commls-sioner, read along with the decision of the Appellate Assistant Commissioner regarding the assessment for the year 1948-49, which was confirmedby the Appellate Tribunal, leaves no room, in our opinion, to doubt that the disallowance of the claim made on behalf of the company to deduct the commission paid to Ramaswami was only onthe ground that it was a division of the profits. We, therefore, think that the assessee is undoubtedly within the purview of the Notification granting exemption, and the Commissioner of Income-tax had misdirected himself and failed to exercise the jurisdiction vested in him by law. Further, there is an error apparent on the face of the record, as, on the facts found, the rejection by the Commissioner of the petition by Ramaswami was not justified in law.

7. For these reasons we think that the application must be allowed and the Commissioner of Income-tax directed to restore the petition to his file and dispose it of according to law. As the petitioner has succeeded in this Court, he is entitled to his costs, which we fix at Rs. 250.


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