A.R. Balakrishnan vs Commr. of Income Tax, Madras

Satyanarayana Rao, J.—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.

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.

Ramaswami filed an application before the Commissioner of Income Tax u/s 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'' "".

The Commissioner of Income Tax, in a short order dated 19-2-1953, declined to interfere. There is no consideration by him of the provisions of

the 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 Constitution of 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 and dispose it of on its merits after proper enquiry.

From a persual of the resolution of the company and the Articles of Association of the company, 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 u/s 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 received by an assessee, the

destination of the profits is material ,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 purposes 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.

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 deduction. A perusal of the orders of the Income Tax Officer and of

the Appellate Assistant Commissioner, read along with the decision of the Appellate Assistant Commissioner regarding the assessment for the year

1948-49, which was confirmed by 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 on the 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.

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.