SHAHZADA NAND Vs. COMMISSIONER OF INCOME TAX PATIALA

JUDGEMENT

(1.) THE short question that arises for determination in this appeal is whether certain commission paid by the assessee to its employees is an allowable expenditure in computing the profits of the assessee from business. THE assessee is a registered firm which at all material times consisted of five partners, namely, Chaman Lal, Madan Lal, Harbans Lal, Raj Mohan and Saheb Dayal representing a trust. Chaman Lal was the son of Saheb Dayal and Raj Mohan was the son of one Gurditta Mal. During the accounting year relevant to the assessment year 1963-64, Chaman Lal and Harbans Lal had their own independent factories and hence they were not attending to the business of the assessee and Raj Mohan too was not actively associated with the conduct of the business of the assessee as he was working with the Oriental Carpet Manufacturers India Pvt. Ltd. (hereinafter referred to as OCM). Thus, from amongst the partners, only Madan Lal was looking after the day-to-day management of the business of the assessee and he was assisted by Saheb Dayal and Gurditta Mal who were engaged as employees of the assessee. Saheb Dayal and Gurditta Mal were looking after the business of the assessee since a long time and they were each paid remuneration of Rs. 1000 per month. THE business of the assessee consisted of sole selling agency of OCM in respect of yarn, cloth and blankets manufactured by OCM and for the sales effected by the assessee as such sole selling agents, commission was paid to the assesse by OCM. THE figures show that the business of the assessee prospered from year to year from 1950-60 onwards and there was a gradual increas in the turnover of the assessee which jumped from the figure of Rs. 39.99 lacs for the assessment year 1962-63 to the figure of Rs. 54.28 lacs for the assessment year 1963-64. Since the assessee showed very satisfactory turnover from year to year, OCM started giving to the assessee, in addition to the usual commission, overriding commission at the rate of 2 1/2 Per Cent on the sales effected by the assessee and the overriding commission thus received by the assessee during the previous years corresponding to the assessment year 1960-61 to 1963-64 was as follows: <FRM>JUDGEMENT_432_3_1977Html1.htm</FRM>

(2.) NOW, before we proceed to consider the question which arises for determination before us, we must make it clear at the outset that in the present case the genuineness of the payment of commission made to Saheb Dayal and Gurditta Mal was at no time doubted by the Revenue authorities. It was not the case of the Revenue that this payment was not made or that it was sham or bogus. If that had been the finding, there would have been an end of the case of the assessee. No question would then have arisen for considering the applicability of S. 36, sub-s. (1), cl. (ii). No payment having been made, no deduction would have been permissible. But here the commission was paid: It was a genuine payment and the only question was whether it was deductible as an allowable expenditure under S. 36, sub-s. (1), cl. (ii) S. 36, sub-s. (1) provides for making of various deductions in computing the income of an assessee under the head: "Profits and Gains of Business or Profession'' and one such deduction is set out in cl. (ii) which, as it stood at the material time during the assessment year 1963-64, read of follows:

(3.) WE accordingly allow the appeal, set aside the judgment of the High Court and answer the question referred by the Tribunal in the affirmative in favour of the assessee. The Commissioner will pay the costs of the appeal as also of the reference to the assessee. Appeal allowed.