COMMISSIONER OF INCOME TAX Vs. FRANCESCANTO E

JUDGEMENT

(1.) THIS is a reference under Sub -S. (1) of S. 66 of the IT Act. We are here concerned with the assessment year 1949 -50, the account year ending 31st March, 1949. The assessee was appoint as manager as from 1st June, 1948, by one S. P. Gallini, proprietor of Rayon Yarns Import Company. We would hereinafter refer to Mr. Gallini as the employer. The terms agreed to between the assessee and the employer were evidenced by a document dated 30th May, 1948. In the said agreement, the employer had agreed to pay to the assessee a salary of Rs. 1,600 per month as also commission of half percent. on all the sales of the employer effected after 1st June, 1948. The relevant year of account of the employer was the year ending 31st Jan., 1949. Up to 31st Jan., 1949, the commission found payable to the assessee amounted to Rs. 2,45,557. In the assessment of the employer for the asst. year 1949 -50, for the account year ending 31st Jan., 1949, the employer, inter alia, claimed the aforesaid payment of commission as revenue deduction.

(2.) THE claim of the employer was rejected by the ITO on the ground that "the payment of commission is only a way to reduce his income and his tax liability." As the employer did not carry the matter any further to the Appellate Asstt. CIT or the Tribunal, the aforesaid order of the ITO was the final order in the assessment of the employer for that year. The assessee in his assessment claimed that inasmuch as the payment of the said commission was disallowed to the employer in his assessment on the ground that it was only a ways to reduce his income and his tax liability and inasmuch as the said amount had been charged to tax in the hands of his employer, he was entitled to exemption from payment of tax on the said amount of commission of Rs. 2,45,557. The claim was made on the strength of the Notification No. 878 -F, dated 21st March, 1922, as amended by the Notification No. 8 dated 24th March, 1928. We would hereafter refers to this notification as the "notification". This claim of the assessee was rejected both by the ITO and the AAC, the AAC taking the view that the commission paid to the assessee was not paid out of profits, but it was actually a prior charge before the employer's profit were arrived at. He further held that it also could not be said that it was disallowed in the employer's case on the ground that it was a division of profits. The assessee took a second appeal to the Tribunal, and reiterated his contentions in this respect. Following the decision of this Court in M.K. Kirtikar vs. CIT (1955) 28 ITR 908, the Tribunal allowed the appeal and accepted the aforesaid claim made by the assessee. At the instance of the CIT, the Tribunal has drawn up the statement of the case and referred to us the following question of law :

(3.) IT is not in dispute that the third condition has been fulfilled in this case. On the said amount of commission of Rs. 2,45,557 disallowed in the computation for the profits of the business of the employer, income -tax has been assessed and charged under the head "bsiness" in the hands of the employer. The dispute between the Department and the assessee is confined as to whether the first and the second conditions have been fulfilled.