J.K. Woollen Manufacturers Vs.
Commissioner of Income-Tax, U.P [1968] INSC 173 (2 August 1968)
02/08/1968 RAMASWAMI, V.
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 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.
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 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
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 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 manner
indicated and this appeal is accordingly allowed with costs.
y.p.
Appeal allowed.
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