Bombay Motors vs Commissioner of Income Tax

V.K. Singhal, J.—These two Income Tax reference applications have been submitted in respect of the assessment years 1971-72 and 1972-73 and are being disposed of by this common order as the questions raised therein are common and the Income Tax Appellate Tribunal has referred the following questions of law arising out of its order dated December 31, 1975, The questions were referred in accordance with the directions given by this court u/s 256(2) of the Income Tax Act, 1961 :

"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 Das, as allowable expenditure u/s 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 Vs. Commissioner of Income Tax, Patiala,

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 Das could "not be allowed as business expenditure u/s 37 of the Income Tax Act, 1961, even when the claim of the assessee for deduction of the amount of commission was allowable u/s 36(1)(ii) of the Income Tax Act, 1961?"

The brief facts of the case are that the assessee is a partnership-firm carrying on the business of trade in automobiles and their parts. A deduction of Rs. 9,362 was claimed as commission paid to Shri Gopal Das by the assessee at the rate of five per cent, on the sale of automobile accessories and parts. Gopal Das was examined by the Income Tax Officer on -June 14, 1973, and July 18, 1973. He was working since 1967. The Income Tax Officer found that no commission was paid to him or any other person since 1967. Gopal Das failed to name any person or any department to whom the sales were effected. The Income Tax Officer, therefore, came to the conclusion that Gopal Das never met either any official in any department and that no sales were effected through him and the case of the assessee that it paid commission to Shri Gopal Das is completely false and fabricated. The Income Tax Officer was, therefore, of the view that the claim of commission paid to Gopal Das is bogus and his name has been utilised as a helpless employee besides being a distant relation. The commission so paid was disallowed. In appeal, the Appellate Assistant Commissioner found that the payment of commission was genuine and the Income Tax Officer was not justified in making addition of it. The Revenue challenged this matter before the Income Tax Appellate Tribunal who examined the matter in detail and found that there is no evidence on record to show that Gopal Das rendered any extra services and for services which he rendered he was being paid remuneration by way of salary. On this finding that Gopal Das has not rendered any extra service for which extra payment is alleged to have been made, it was found that it is of no legal consequence that the payment of commission has been disbursed to him. The Tribunal has referred to the decision in the case of Shazada Nand and Sons Vs. Commissioner of Income Tax, The assessee, thereafter, made a miscellaneous application on the ground that the said decision has been overruled by the apex court in the case of Shahzada Nand and Sons Vs. Commissioner of Income Tax, Patiala, . The application was disposed of only by deleting the sentence mentioning the name of Shahzada Nand and Sons without affecting the merits of the decision given in appeal.

Learned counsel for the assessee has submitted before us that since the decision of the Punjab and Haryana High Court in the case of Shazada Nand and Sons Vs. Commissioner of Income Tax, has been reversed by the apex court, the Tribunal should have considered the matter afresh. It is submitted that the proof of extra service rendered is not necessary and on the payment having been made to Gopal Das the deduction is allowable.

We have considered the matter. In the case of Shahzada Nand and Sons Vs. Commissioner of Income Tax, Patiala, while interpreting Section 36(1)(ii), it was observed (at page 365) :

"Turning to the provisions of Section 36, Sub-section (1), Clause (ii), we find that the proviso to that clause lays down three factors for the purpose of determining the reasonableness of the commission paid to an employee. The question whether the amount of the commission is a reasonable amount or not has to be determined with reference to these three factors. Sometimes these three factors are loosely described as conditions, but they are not really conditions on the fulfilment of which alone the amount of commission paid to an employee can be regarded as reasonable. They are merely factors to be taken into account by the Revenue authorities in determining the reasonableness of the amount of commission. It may be that one of these factors yields a negative response. To take an example, there may be no general practice in similar business or profession to give commission to an employee, but, yet, having regard to the other circumstances, the amount of commission paid to the employee may he regarded as reasonable. What the proviso requires is merely that the reasonableness of the amount of commission shall be determined with reference to the three factors. But it is well-settled that these factors are to be considered from the point of view of a normal, prudent businessman. The reasonableness of the payment with reference to these factors has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency. Let us see whether the amount of commission paid to Saheb Dayal and Gurditta Mal in the present case can be said to be reasonable from this standpoint. It is clear from the order of the tribunal that reliance was placed by the Tribunal mainly and substantially on the fact that the nature of the work done by Saheb bayal and Gurditta Mal remained unchanged in the relevant accounting year and there was nothing to show that the increase in the turnover during the relevant accounting year was as a result of any extra efforts made by these two employees and hence, it could not be said that there were any special circumstances which warranted the payment of commission to them. But, as already pointed out above, the commission paid to an employee cannot he branded as unreasonable merely because the employee has done in the relevant accounting year the same work which he was doing in the earlier years. Even where the nature of the work has remained the same, commercial expediency may require payment of commission to an employee. Here, Saheb Dayal and Gurditta Mal were each receiving a salary of Rs. 1,000 per month and besides this salary, there were admittedly no other perquisites given to them. They were the persons attending to the business of the assessee and in fact, Gurditta Mal was an experienced and seasoned businessman and it was he who was advising OCM in regard to designs, etc., and he and Saheb Dayal were primarily responsible for the flourishing state of the business. The turnover of the sales of the assessee steadily rose from 1960-61 and in the relevant accounting year, it reached the exciting figure of Rs. 54.28 lakhs. So also the overriding commission which started with the modest figure of Rs. 35,964 in the accounting year relevant to the assessment year 1960-61 went on steadily increasing from year to year until it reached the figure of Rs. 1,13,449 in the relevant accounting year. The assessee, therefore, felt that in view of the tremendous progress in the business which was largely the result of the services rendered by Saheb Dayal and Gurditta Mal, a part of the overriding commission should be paid to them, so that they may carry a sense of satisfaction that their efforts have been suitably rewarded and they may have an added incentive to work and may be spurred to greater efficiency in the future. It may be noted that the overriding commission of the assessee during the relevant accounting year was Rs. 1,13,449 and the total profit was Rs. 3,08,034 and if out of this total profit of Rs. 3,08,034, an aggregate sum of Rs. 45,380 was paid to Saheb Dayal and Gurditta Mal as commission, it is difficult to see how such payment could be regarded as unreasonable. It is true that there was no obligation on the assessee to make payment of this commission to Saheb Dayal and Gurditta Mal, but it is now well-settled that the mere fact that commission is paid ex gratia would not necessarily mean that it is unreasonable. Commercial expediency does not mean that an employer should not make any payment to an employee unless the employee is entitled to it under a contract. Even where there is no contract, an employer may pay commission to an employee if he thinks that it would be in the interest of his business to do so. It is obvious that no business can prosper unless the Employees engaged in it are satisfied and contented and they feel a sense of involvement and identification and this can be best secured by giving them a stake in the business and allowing them to share in the profits. It would indeed be a wise step on the part of an employer to offer incentives to his employees by sharing a part of his profits with them. This would not only be good business but also good ethics. It would be in consonance with the Gandhian concepts as also modern socialistic thought which, with its deeply rooted faith in social and economic democracy, regards the employees as much as the employer as co-sharers in the business. If an employer earns profits to which the employees have necessarily contributed by putting in their labour, there is no reason why the employer should not share a part of these profits with the employees. That is the demand of social justice today and it is high time that the administration of our tax laws recognised it and encouraged sharing of profits by employers with employees by adopting a progressive and liberal approach in the applicability of Section 36, Sub-section (1), Clause (ii). What is the requirement of commercial expediency must be judged not in the light of the 19th century laissez faire doctrine which regarded man as an economic being concerned only to protect and advance his self-interest but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees and where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges such as interest on capital, depreciation, reserves, etc., a part of it should in all fairness go to the employees. We are, therefore, of the view that the sum of Rs. 45,380 paid by the assessee to Saheb Dayal and Gurditta Mal by way of commission during the relevant accounting year was reasonable having regard to all the circumstances of the case and it ought to have been allowed as a deductible expenditure u/s 36, Sub-section (1), Clause (ii)."

The reasonableness of the amount of commission has to be determined with reference to the pay of the employee or the profits of the business, etc. It has to be examined from the point of view of commercial expediency and not on any subjective standard. The genuineness of any transaction can also be looked into and if the payment is bogus or sham, the Income Tax Officer has jurisdiction to disallow the same. The payment must be a real one. If the payment is not real or is not incurred by the assessee, the Income Tax Officer is justified in disallowing the same. The payment has to be examined by applying the test of commercial expediency. The finding has been recorded in the present case that Gopal Das has not rendered any service for which the payment of the commission is alleged to have been made. It was found that it was not for the purpose of business. So far as the question of rendering extra services is concerned, it was. observed in the case of Shahzada Nand and Sons Vs. Commissioner of Income Tax, Patiala, that Section 36(1)(ii) does not postulate that there should be any extra service rendered by an employee before the payment of commission. There must be some service rendered by an employee. It was observed by the apex court that no additional services are required to be rendered by the employee. In view of the observations of the apex court, we are of the view that it was not necessary for the assessee to have proved that the employees have rendered extra services and, therefore, the order of the Tribunal to that extent is not in accordance with law. However, in order to examine the reasonableness of the amount of commission and for the purpose of considering the claim of the assessee in terms of the provisions of Sections 36(1)(ii) and 37, the principles laid down by the apex court in the case of Shahzada Nand and Sons Vs. Commissioner of Income Tax, Patiala, were required to be examined by the Tribunal. Since at the time when the decision was given by the Tribunal, reliance was placed on the decision of the Punjab and Haryana High Court, and it was subsequently, that the said decision was reversed by the apex court, in these circumstances, we feel it proper that the reference is returned unanswered with the direction to the Tribunal to determine the matter afresh in view of the provisions of Section 36(1)(ii) and Section 37 and the decision given by the apex court in the case of Shahzada Nand and Sons Vs. Commissioner of Income Tax, Patiala,

Consequently, the reference is returned unanswered with the above directions.