Full Judgment Text
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PETITIONER:
J.K. WOOLLEN MANUFACTURERS
Vs.
RESPONDENT:
COMMISSIONER OF INCOME-TAX, U.P.
DATE OF JUDGMENT:
02/08/1968
BENCH:
RAMASWAMI, V.
BENCH:
RAMASWAMI, V.
SHAH, J.C.
GROVER, A.N.
CITATION:
1969 AIR 609 1969 SCR (1) 525
CITATOR INFO :
RF 1970 SC1076 (8)
R 1973 SC 520 (9)
D 1976 SC 640 (11)
ACT:
Income-tax Act (11 of 1922), s. 10(2)(xv)---Commission to
employee higher when profits exceed a lakh--Whether
deductable from employer’s assessable income.
HEADNOTE:
The assessee--a Mill, appointed V, as its General
Manager, on a salary of Rs. 1000/- p.m., and car allowance
of Rs. 250/- p.m., plus commission of 121/2-% on the net
profits of the firm and in case the profits exceeded Rs. 1
lakh, the commission payable was 25%. In the first year of
the appointment the mill suffered loss, next year commission
was paid at of the profits, and the next year commission
paid was 25% as the profits exceeded the figure stipulated.
After the death of V, one of the Directors was appointed to
manage its affairs and given a total remuneration of Rs.
24,000/- per annum and the post of General Manager was
abolished.. The assessee claimed deduction from its
assessable income the amount paid to V at the rate of 25% of
the profits. The Income-tax Officer disallowed the claim
and determined Rs. 5,000/- as reasonable amount payable.
Against the amount disallowed, the assessee appealed to the.
Appellate Assistant Commissioner, who allowed payment of
commission at 121/2% as in its view that rate was reasonable
considering the practice in similar ’business concerns. The
assessee appealed to the Appellate Tribunal and the appeal
was dismissed. The Tribunal took the view that the’ General
Manager carried ’responsibility equal to that of the
Director, the commission paid to V, in excess of Rs.
24,000/- per annum, i.e., the. amount paid as total
remuneration to the Director, was not really paid. wholly
for the purpose of carrying on business. On reference, the
High Court answered the question against the assesaee. The
assessee in appeal to this Court contended that the higher
rate of commission on profits was inserted to create the
interest of V, who had special aptitude and experience in
the line and the mill was running at a loss and it was only
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after sometime of V’s taking over that the mill made large
profits, so the amount paid to V, was an amount laid out or
expended wholly or exclusively for the purpose of the
business of the assessee, and it was wrongly disallowed.
HELD: In the circumstances established by the assessee,
the entire amount paid to V, was an amount laid out or
expended wholly and exclusively for the purpose Of the
assessee.
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 Income-
tax Department. It is, of course, open to the Appellate
Tribunal tO come to a conclusion either that the alleged
payment is not real or that it is not incurred by the
assessee in the character of a trader or it is not laid out
wholly and exclusively for the purpose of the business of
the assessee and to disallow it. But it is not 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
526
the business and a host of other related circumstances. The
question as to whether an amount claimed as expenditure was
laid out or expended wholly or exclusively for the purpose
of business, profession or vocation as required under s.
10(2) (xv) of the Income-tax Act has to be decided on the
facts and in the light of the circumstances of each
particular case. But the final conclusion on the
admissibility of an allowance is one of law. [529 D; 529H-
530 C]
C.I.T. Bombay v. Walchand & Co. Private Ltd. 65 I.T.R.
381, applied to..
Swadeshi Cotton Mills Co. Ltd. v.C.I.T., U.P. 63
I.T.R. 57, referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 591 of 1967.
Appeal by special leave from the judgment and order,
dated May 22, 1962 of the Allahabad High Court in Income-tax
Reference No. 424 of 1958.
M.C. Chagla and B.P. Maheshwari, for the appellant.
B. Sen, B.D. Sharma and R.N. Sachthey, for the respondent.
The Judgment of the Court was delivered by
Ramaswami, J. The appellant (hereinafter called
the ’assessee’) carried on the business of manufacture and
sale of blankets and other woollen cloth. For the assessment
year 1948-49 the assessee claimed a deduction of Rs. 75,465
as commission paid to the General Manager Shri J.P. Vaish.
According to the terms of appointment Shri J.P. Vaish was to
draw a fixed salary of Rs. 1,000 p.m., commission of 12-1/2%
on the net profits of the firm payable after the accounts
had been ascertained fully by the’ auditors and a car
allowance of Rs. 250 p.m. It was one of the terms of the
appointment that in case the profits exceeded Rs. 1 lakh,
the commission payable to Shri J.P. Vaish was 25%. Shri J.P.
Vaish was also given free medical facility for himself and
the members of his family. In terms of the letter of
appointment Shri Vaish got no commission in the first year
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as the mill suffered a loss. In the next year the profit
being less than Rs. 1 lakh, Shri Vaish received a sum of Rs.
4,063 as commission. For the. assessment year 1948-49, the
assessee paid a sum of Rs. 75,465 as commission to Shri J.P.
Vaish calculated at the rate of 25% on the profits. The
assessee claimed deduction of the said amount from the
assessable income. By his assessment order, dated June 30,
1949, the Income Tax Officer disallowed the claim on the
ground that it was excessive and quite unreasonable looking
to the salary paid to Shri Vaish. He also found that no
general practice of giving commission at the rate of 25 %
existed in the assessee’s line of business. Taking into
account the circumstances of the case, the Income Tax
Officer determined a sum of Rs. 5,000 as a reasonable amount
payable as commission. Against the disallowance of Rs.
70,465 paid as commission to the General
527
Manager, the assessee preferred an appeal to the Appellate
Assistant Commissioner of Income Tax who by his order, dated
October 31, 1949 found that Rs. 5,000 was not sufficient
and it was reasonable to allow the payment of commission
at the rate of 121/2%. He accordingly increased the
commission payable from Rs. 5,000 to Rs. 37,732 in that
year. The assessee took the matter in appeal to the Income
Tax Appellate Tribunal which by its order, dated July 10,
1950 dismissed the appeal. As directed by the High Court,
the Appellate Tribunal submitted a statement of case under
s. 66(2) of the Income Tax Act, 1922 on the following
question of law :--
"Whether in the circumstances of the
case, the sum of Rs. 37,733 paid to the
General Manager Shri J.P. Vaish, which has
been disallowed by the income-tax Appellate
Tribunal was an amount laid out or expended
wholly or exclusively for the purpose of the
business of the assessee ?"
By its judgment, dated May 22, 1962, the High Court answered
the question against the assessee. Against the judgment of
the High Court the present appeal is brought by special
leave.
Section 10(2)(x) and 10(2)(xv) of the Income Tax Act.
1922 at the relevant time read as follows:
"10(2) (x): 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
(e) the general practice in similar
business profession.or vocations;
10(2)(xv): Any expenditure (not being in the nature
of capital expenditure or personal expenses of the assessee
laid out or expended wholly or exclusively for the purpose
of such business, profession or vocation."
It was contended on behalf of the assessee that in the
circumstances of this case the amount of Rs. 37,733 paid to
Shri J. P.
528
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Vaish was an amount laid out or expended wholly or
exclusively for the purpose of the business of the assessee
and was wrongly disallowed by the Income Tax Appellate
Tribunal. It was pointed out that Shri J.P. Vaish was in
no way related to the proprietors of the firm and the
commission on profits clause was inserted to create the
interest of Shri J.P. Vaish in the running of the mill which
was "old and unbalanced" and had never worked continuously
or satisfactorily before it was taken over by the
assessee. During the first 14 months the mills made no
profit and Shri J.P. Vaish was paid nothing beyond his
salary and car allowance. In the next 12 months he
succeeded in securing an order for Lohis from Government and
so the mill made some profit and the amount of the Manager’s
commission was proportionately very small in terms of the
agreement. The large profit in 1946-47 was made due to new
design of civilian rugs Shri Vaish introduced for the first
time in the mill after studying public tastes and the
qualifies and designs prevailing in the market. It was
also said that Shri Vaish had a special aptitude to show in
his work so far as the marketability of the goods was
concerned. After the death of Shri Vaish in July 1947, the
firm was converted into a company and the post of the
General Manager was abolished and one of the Directors who
managed the affairs of the company was given Rs. 18,000 per
annum as remuneration and Rs. 6,000 per annum as allowance
for the .accounting year 1947-48. The Appellate Tribunal
took the view that the post of General Manager carried the
responsibility equal to that of the Director who was given
the charge of the conduct of business after the death of
Shri Vaish, the General Manager. Tiffs post carried a
remuneration of Rs. 18,000 plus Rs. 6,000, i.e., a total
remuneration of Rs. 24,000 per annum and therefore the
commission paid to Shri Vaish in excess of tiffs amount Was
not really paid wholly for the purpose of carrying on
business. But it was pointed out on behalf of the assessee
that Shri J.P. Vaish had taken over the mill at a time when
it was old and dilapidated and in the first 14 months the
mill made no profit and Shri Vaish was paid nothing beyond
the salary and car allowance. the succeeding year he was
able to secure an order from the account of ,which the mill
made some profit. Shri Vaish introduced for the first time a
new design of civilian rugs in the year 1946-47 during which
a large profit was made. It was therefore contended on
behalf of the assessee that the position of Shri Vaish who
worked in the mill at the initial stage and of the Managing-
Director was not comparable and the Appellate Tribunal was
wrong in taking this circumstance into consideration.
Counsel for the assessee also pOinted out that Shri Vaish
Was educated in a Public School at Dehra Dun and thereafter
studied at the Benaras College and at the Engineering
COllege of the Benaras Hindu University for Electrical and
Mechanical Engi-
529
neering and then joined the Commerce College at Delhi.
After hat he had training in the Aluminium Corporation of
India Ltd. Lakshmi Rattan Cotton Mills Ltd. and the Road
Products Ltd.,Ramput. ln view of the circumstances of the
case it was urged on behalf of the assessee that the entire
amount of Rs. 75,465 paid to Shri Vaish was an amount laid
out wholly and exclusively for the purpose of the business
of the assessee within the meaning of s. 10(2)(xv) of the
Income Tax Act, 1922.
We should make it clear that in this case we are not called
upon to decide whether the Income Tax Officer could exercise
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the power he exercised under s. 10(2) (x) of the Income Tax
Act. The question referred by the Tribunal and answered by
the High Court only deals with the claim of deduction of the
amount paid to Shri J.P. Vaish under S. 10(2)(xv) and not
under. s. 10(2) (x) of the Act.
The question as to whether an amount claimed as expenditure
was laid out or expended wholly or exclusively for the
purpoSe of business, profession or vocation as required
under s. 10(2)(X.v) of the Income Tax Act has to be decided
on the facts and in the light of the circumstances of each
particular case. But, as observed by this Court in
Swadeshi Cotton Mills Co. Ltd. v. C.I.T., U.P.(1), the final
conclusion on the admissibility of an allowance is one of
law. In the present case, both the Appellate Assistant
Commissioner and the Appellate Tribunal rejected the view of
the Income Tax Officer that the rate of commission .paid to
Shri Vaish was not fixed on account of business
considerations but there was some collateral reason. But
considering the practice in similar business concerns, the
Appellate Assistant Commissioner expressed the view that the
rate of 121/2 % commission was reasonable and the allowance
was therefore restricted to half of the amount claimed by
the assessee. The view of the Appellate Assistant
Commissioner has been affirmed by the Income Tax Appellate
Tribunal. The case of the assessee, however, is that a
higher rate of commission of 25% was fixed for Shri J.P.
Vaish because the mill was old and dilapidated and it never
made profit of even a lakh of rupees in the past and that
the rate of 25% was fixed in order to create special
interest of the General Manager for accomplishment of the
task entrusted to him. In our opinion, neither the High
Court nor the Appellate Tribunal has applied the
proper legal test in this case. As pointed out by this
Court in C.I.T. Bombay v. Walchand & Co. Private Ltd., (2)
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
(1) 63 I.T.R. 57.
(2) 65 I.T.R. 381.
530
of the Income Tax Department. It is, of course, open to
the Appellate Tribunal to come to a conclusion either that
the alleged .. payment is not real or that it is not
incurred by the assessee in the , character of a trader or
it is not laid out wholly and exclusively for the purpose of
the business of the assessee and to disallow it. But it is
not the function of the Tribunal to determine the
remuneration which in their view should be paid to an
employee of the assessee. It was also pointed out in that
case that 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. In our opinion, the principle of this
decision applies to the present case and it must accordingly
be held that in the circumstances established by the
assessee the entire amount of Rs. 75,465 paid to the
General Manager Shri J.P. Vaish was an amount laid out or
expended wholly and exclusively for the purpose of the
business of the assessee.
For the reasons expressed we hold that the question of
law referred to the High Court must be answered in the
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manner indicated and this appeal is accordingly allowed with
costs.
y.p.
Appeal allowed.
531