LAXMANDAS SEJRAM Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE question which arises in this reference is whether a certain commission paid by the assessee to an employee is an allowable expenditure in computing the profits of the assessee from business. The assessee is a registered firm carrying on business in cloth at Mahavir Market, Ahmedabad. There were at the material time seven partners in the assessee -firm, two of them being Badarmal and Mithalal. These two were also partners in another firm called Messrs. Badarmal Ishverlal which carried on business in Maskati Market, Ahmedabad. The firm, Messrs. Badarmal Ishverlal, closed down some time towards the end of Samvat year 2014, but at or about this time a new firm called Messrs. Badarmal Mithalal was started in which both Badarmal and Mithalal joined as partners. This firm of Messrs. Badarmal Mithalal, it appears, was in existence during Samvat year 2015, being the accounting year corresponding to the assessment year 1960 -61 with which we are concerned in the present reference. Mithalal was also during this period a partner in another firm called Messrs. Multanmal Mukundchand. These facts about Badarmal and Mithalal being partners in other firms are not very much relevant but they do throw some little light on the determination of the question before us and we have, therefore, stated them. The controversy in the present reference, however, arises in respect of one Kevalchand, who was an employee of the assessee -firm for several years prior to Samvat year 2014. Kevalchand was drawing what the Tribunal has called a 'modest salary' of Rs. 200 per month. Besides being an employee of the assessee -firm, Kevalchand was also a partner in a firm called Messrs. Rasiklal Ranmal. This firm was dissolved in the end of Samvat year 2013 and the share of Kevalchand in the profits of this firm for Samvat year 2013 came to Rs. 13,842 as determined by the revenue authorities in the case of the assessment of Kevalchand. It appears that since the firm of Messrs. Rasiklal Ranmal was dissolved and consequently that source of income of Kevalchand came to an end, Kevalchand approached the partners of the assessee -firm and stated to them that either he should be taken as a partner in the assessee -firm or he should be relieved so that he could join some other person as a partner with whom he had already made some arrangement. The assessee -firm was not in a position to spare the services of Kevalchand and his continuance with the assessee -firm was absolutely essential in connection with out -station sales which were extensive and spread district -wise as also in connection with recovery of outstandings from out -station sales. It was, therefore, not possible for the assessee -firm to relieve Kevalchand and to let him go. The partners of the assessee -firm were at the same time not prepared to take up Kevalchand as a partner. An agreement was, therefore, arrived at between the assessee -firm and Kevalchand which struck a middle path. The agreement was dated Magsar Vadi 11th, Samvat year 2014, that is, 17th December, 1957, and under the agreement Kevalchand agreed to continue to work for the assessee -firm up to the end of Samvat year 2015 and if no other arrangement was made and he desired to be relieved from the commencement of Samvat year 2016, he was to be allowed to b relieved after settling all his responsibilities in connection with the affairs of the assessee -firm and in consideration for this, the assessee -firm agreed to pay to Kevalchand for Samvat year 2014 the salary which he was for Samvat year 2015 not only salary and bonus as is Samvat year 2014 but also, in addition, commission at the rate of three annas per Rs. 100 on out -station sales. Kevalchand accordingly continued with the assessee -firm and for Samvat year 2014 the assessee -firm paid him Rs. 2,400 as salary and an identical amount as bonus. For Samvat year 2015 the assessee -firm paid to Kevalchand Rs. 2,400 as salary and an identical amount as bonus and in addition, the assessee -firm also paid Rs. 16,334 as commission as provided in the agreement. The profit of the assessee -firm for Samvat year 2015 came to Rs. 1,24,712 after deducting interest payable to the partners. The agreement expired on Asovad 30, Samvat year 2015, and on the expiration of the agreement, Kevalchand was taken up as a partner in the assessee -firm with 0 -1 -6 share with effect from Kartak Sudi 1, Samvat year 2016. Now the assessee -firm in its assessment for the assessment year 1960 -61, for which the corresponding accounting year was Samvat year 2015, claimed the entire amount paid to Kevalchand as a permissible deduction in computing its profits from business. The assessee -firm claimed the deduction under section 10(2)(xv) but the Income -tax Officer took the view that the claim for deduction could be considered only under section 10(2)(x) and he proceeded to apply this latter section for the purpose of determining whether the claim for deduction was justified. The Income -tax Officer held that for the purpose of determining whether the commission paid was reasonable or not, the fact that the payment was made under a contractual obligation was immaterial and the question had to be considered with reference to the tests laid down in the proviso to section 10(2)(x). The Income -tax Officer observed that it was certainly not a general practice in the line of business of the assessee -firm to pay such heavy commission to an employee getting a meagre salary of Rs. 200 per month. The Income -tax Officer also pointed out that Kevalchand was attending to the affairs of the assessee -firm in the past without payment of any commission meaning thereby that the work which he was to do after the agreement was the same which he was doing before. The Income -tax Officer also added that no special circumstances appeared in the year of account warranting the payment of such a heavy commission by the assessee -firm. On these facts the Income -tax Officer came to the conclusion that the commission paid to Kevalchand was excessive as compared to his salary and he accordingly disallowed half the commission, namely, Rs. 8,167. The assessee appealed to the Appellate Assistant Commissioner against this disallowance and in the appeal the Appellate Assistant Commissioner set aside the order of the Income -tax Officer and allowed the whole of the commission as a permissible deduction under section 10(2)(x). The Income -tax Officer thereupon carried the matter in appeal before the Tribunal. The Tribunal did not disbelieve the genuineness of the agreement nor did it disbelieve the genuineness of the payment made to Kevalchand but took the view that the payment of such a large commission was unreasonable and the Income -tax Officer was, therefore, justified in disallowing one half of it. The Tribunal held that no special circumstances which justified the payment of such a large commission were established and in taking this view the only circumstance to which the Tribunal adverted was the fact that Kevalchand continued to do the same work after the agreement which he was doing prior to the agreement as if that was the only circumstance on record bearing upon this point. The Tribunal negatived the argument urged before it that because Badarmal and Mithalal, two of the partners of the assessee -firm, joined the firm of Messrs. Badarmal Mithalal and were consequently unable to attend the management of the affairs of the assessee -firm, it was found necessary to continue the services of Kevalchand on the new terms as to payment of bonus and commission. The Tribunal stated that even prior to their joining the firm of Messrs. Badarmal Mithalal they were partners in the firm of Messrs. Badarmal Ishverlal and they could not, therefore, have been giving their wholetime attention to the assessee -firm prior to their joining the firm of Messrs. Badarmal Mithalal. The Tribunal in the end observed that the Income -tax Officer had come to the correct conclusion that in respect of payment of commission to Kevalchand all the conditions laid down in section 10(2)(x) were not satisfied and in this view of the matter the Tribunal set aside the order of the Appellate Assistant Commissioner and restored that of the Income -tax Officer. The correctness of this decision of the Tribunal is challenged before us on the present reference.

(2.) THE first question which Mr. M. M. Thakore, learned advocate appearing on behalf of the assessee, agitated before us was whether the claim for deduction of the amount paid as commission to Kevalchand fell to be governed by section 10(2)(x) or section 10(2)(xv). It was contended on behalf of the assessee that the validity of the claim for deduction was required to be judged by reference to section 10(2)(xv) and not section 10(2)(x) and the reason for this contention was obvious. If the validity of the claim for deduction was required to be tested by reference to section 10(2)(xv), no question of reasonableness of the amount paid as commission would arise and the only question which would be require to be considered would be whether the expenditure was laid out wholly and exclusively for the purpose of business (vide Subodhchandra Popatlal v. Commissioner of Income -tax). Now section 10(2)(x) permits the deduction of :

(3.) THE contention urged by Mr. M. M. Thakore on the construction of section 10(2)(x) was that that provision applied only to those cases where a sum was paid by an employer to an employee as bonus or commission after the services were rendered and where the payment was in the nature of an ex gratia payment. He urged that bonus was an ex gratia payment and commission following as it did after bonus must, therefore, be construed ejusdem generis so as to be confined only to an ex gratia payment. This contention is, in our opinion, wholly devoid of force and is, as a matter of fact, opposed to the plain and grammatical construction of the words used in the section. In the first place there is no scope at all for the application of the doctrine of ejusdem generis. The principle of ejusdem generis can be invoked only when general words follow particular and specific words. The rule of interpretation embodied in this principle is that if the particular and specific words which precede the general words and which constitute the members of the enumeration constitute a class or genus and that class or genus is not exhausted by the enumeration, the general words are construed as confined to that class or genus. It is difficult to see how this rule can be invoked in the present case where the words used are 'bonus' and 'commission'. There is nothing general about the word 'commission' as contrasted to anything particular or specific about the word 'bonus'. Each word denotes a particular and specific concept without the one including the other. Moreover, to invoke the applicability of the doctrine of ejusdem generis it must be possible to find a class or genus to which the matters specifically enumerated belong so that the general words can be confined to that class or genus. Now on class or genus can be constituted by the mention of only one object or specie. It would not, therefore, be right to attempt to cut down the plain and natural connotation of the word 'commission' by reference to the immediately preceding word 'bonus'. Besides it is no longer true to say that bonus is an ex gratia payment. As observed by Chagla C.J., as he then was, in Subodhchandra Popatlal's case 'the expression 'bonus' is not used in the sense in which it was once understood, viz., an ex gratia payment. It is used in the sense in which it is now understood, viz., a certain remuneration or emolument to which an employee becomes entitled on the satisfaction of a certain condition precedent, and if an employer were to agree with his employee that he will be entitled to a certain amount provided the business made profit it would be a bonus, and the employee would be legally entitled to recover that amount.' Bonus can thus be as much a matter of contractual obligation as salary. The word 'commission' cannot, therefore, be read in a narrow and constricted manner as Mr. M. M. Thakore would have us do. The payment of commission may be voluntary or it may be under a contractual obligation. But whatever it is, if it is commission over and above the salary, then the claim for deduction of such commission must be considered with reference to the provisions of section 10(2)(x). Mr. M. M. Thakore relied on a decision of the Allahabad High Court in Raja Ram Kumar Bhargava v. Commissioner of Income -tax. It is no doubt true that in this decision there are observations which seem to suggest that the learned judges of the Allahabad High Court who decided this case regarded bonus and commission mentioned in section 10(2)(x) as in the nature of ex gratia payments. But with the greatest respect to those learned judges we do not think that that view is a correct one. As a matter of fact that view is directly contrary to what has been held by the Bombay High Court in Subodhchandra Popatlal's case. The learned judges of the Allahabad High Court also held that having regard to clause (a) of the proviso to section 10(2)(x) it was clear that 'bonus' or 'commission', the reasonableness of which has to be determined under that section, must be bonus or commission apart from the pay and the conditions of service so that its reasonableness can be tested on the basis of the pay and the conditions of service. This of course is unexceptionable, but from that it does not follow that bonus or commission within the meaning of section 10(2)(x) must be an ex gratia payment. All that would seem to follow from this observation is that bonus or commission to fall within section 10(2)(x) must be over and above the salary of the employee. As a matter of fact Chagla C.J. in Subodhchandra Popatlal's case also says that 'section 10(2)(x) deals with a special case where a sum is paid to an employee over and above is salary as bonus or commission for services rendered'. If, therefore, any bonus or commission is paid to an employee over and above his salary, the claim for deduction in respect of such bonus or commission would have to be tested under section 10(2)(x), but if such bonus or commission represents his salary or is part of his salary, section 10(2)(xv) would apply.