# J. K. WOOLLEN MANUFACTURERS v. COMMISSIONER OF INCOME-TAX, U.P

- **Citation:** [1969] 1 S.C.R. 525
- **Court:** Supreme Court of India
- **Decided:** 1968-08-02
- **Bench:** J. C. Shah, V. R.Amaswami, A. N. Grover
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/j-k-woollen-manufacturers-v-commissioner-of-income-tax-u-p-4434
- **Pages:** 6

## Headnote

c
D
E
F
G
H
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 incorne.
The assessee-a Mill, appointed V, as its General Manager, on a salary
of Rs. 1000/- p.m., and car allowance df Rs. 250/- p.m., plus commission
of 12±% on the net profifu of the furn 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 12t%
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 df 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. 5,0001- as reasonable amonnt
payable.
Against the amonnt disallowed, the assessee appealed to the
Appellate Assistant Comm;ssioner, who allowed
payment of commission
at 12!% as in its view that rate was reasonable considering the practice
in similar 'business concerns. The assessee a,ppealed to the Appellate Tribunal and the appeal was dismissed. The Tribnnal took the view that the
General Manager carried responsibility equal to that of the Director, so
the commission paid to V, in excess of Rs. 24,000/- per annum, i.e., the
aIIX)unt 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 a.ssessee.
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
amonnt paid to V, was an amount laid out or expended wholly and exclusively for the purpose df 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 df 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 df the assessee.
An
employer in fixing the remuneration of his employees is entitled to con~
sider 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
SUPREME COt:RT REPORTS
f 1969) I S.C.R.
the bu~incs.-. and " host of other rc1'1tcJ circun1st:incL~. The question as
A
to whether an amoun1 claimed as expenditure was laid out or expended
wholly or exclusively for the purpose of busint.>Ss, profession or vocatjoo
<tS required under s. 10(2) (xv) of lhL Income-tax Act ha~ to he decided
on the facts and in the li)'?:nt of the circumstances of each particular case.
But the final conclusion on the
;idmissihilily
of an allov1ancc is one of
law. 1529 D; 52911-530 CJ
C.l.T. /Jv111/)(n· v. Walcluu1cl & Co. Privl1t£' I.rd. 65
I.pr.R.
_;s1,
B
applied to.
·
Swndcshi Co11011 Mills Co. I.rd. v. C.1.1'.,
U.F'.
63
!. T. R.
57,
rc.

## Text

A
J. K. WOOLLEN MANUFACTURERS
v.
COMMISSIONER OF INCOME-TAX, U.P.
August 2, 1968
B
[J. C. SHAH, V. R.AMASWAMI AND A. N. GROVER, JJ.J
c
D
E
F
G
H
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 incorne.
The assessee-a Mill, appointed V, as its General Manager, on a salary
of Rs. 1000/- p.m., and car allowance df Rs. 250/- p.m., plus commission
of 12±% on the net profifu of the furn 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 12t%
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 df 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. 5,0001- as reasonable amonnt
payable.
Against the amonnt disallowed, the assessee appealed to the
Appellate Assistant Comm;ssioner, who allowed
payment of commission
at 12!% as in its view that rate was reasonable considering the practice
in similar 'business concerns. The assessee a,ppealed to the Appellate Tribunal and the appeal was dismissed. The Tribnnal took the view that the
General Manager carried responsibility equal to that of the Director, so
the commission paid to V, in excess of Rs. 24,000/- per annum, i.e., the
aIIX)unt 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 a.ssessee.
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
amonnt paid to V, was an amount laid out or expended wholly and exclusively for the purpose df 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 df 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 df the assessee.
An
employer in fixing the remuneration of his employees is entitled to con~
sider 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
SUPREME COt:RT REPORTS
f 1969) I S.C.R.
the bu~incs.-. and " host of other rc1'1tcJ circun1st:incL~. The question as
A
to whether an amoun1 claimed as expenditure was laid out or expended
wholly or exclusively for the purpose of busint.>Ss, profession or vocatjoo
<tS required under s. 10(2) (xv) of lhL Income-tax Act ha~ to he decided
on the facts and in the li)'?:nt of the circumstances of each particular case.
But the final conclusion on the
;idmissihilily
of an allov1ancc is one of
law. 1529 D; 52911-530 CJ
C.l.T. /Jv111/)(n· v. Walcluu1cl & Co. Privl1t£' I.rd. 65
I.pr.R.
_;s1,
B
applied to.
·
Swndcshi Co11011 Mills Co. I.rd. v. C.1.1'.,
U.F'.
63
!. T. R.
57,
rc.:fcrrccl to.
CivIL APPEi.LAH JuRJsDICTION: Civil Appeal No. 591 of
1967.
Appeal by special leave from the judgment ~nd order, dated
C
May 22, 1962 of the Allahabad High (ourt in Income-tax Reference No. 424 of 1958.
M. C. Chag/a and B. P. Malrcs/11rnri, for the appellant.
B. Sen, B. D. Sharma and R. N. Sachrhe,Y, for the respondent.
The Judgmen.t of the Court was delivered by
Ramaswami,
J_
The
appellant
(hereinafter
called
the
'chses.cc') carried on the business of manufacture and sale of
blankets and other woollen cloth. For the assessment year 1948-49
the asscssce claimed a deduction of Rs. 75,465 as commission paid
to 1hc General Manager Shri. J. P. Yaish. According to the 1em1s
of appointment Shri J. P. Yaish was to draw J fixed salary' of
R.s. 1,000 p.m., commission of 12 l % on the net profits of the firm
payable after the accounts had hcen ascertained fully
by
the
auditors and a car allowance of Rs. 250 p.m.
It was one of the
terms of the appoinlment !hat in case the profits exceeded Rs. l
lakh, the commission payable to Shri J. P. Yaish was 25%. Shri
J. P. Yaish was also given free medical facility for himself and the
members of his family.
In terms of the letter of appointment
Shri Yaish μot no commission in the first year as the mill suffered
a loss.
In the next year the profit being less than Rs. I lakh.
Shri Yaish received a sum of Rs. 4,063 as commission.
For the
asse>;sment year 1948-49. the assessec paid a stun of Rs. 75,465
as commission to Shri J. P. Yaish calculated at the rate llf 25%
on the profits. TI1e asscssee claimed deductton of the said amount
from the assessable income.
By his a"e"ment order. dated June
10, 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 Yaish. He also found that no general practice
of giving commission at the rate of 25 % existed in the assessce's
line of hu,ine.<s.
Takini; into account the circumstances of the
case. the Income Tax Officer determined a sum of Rs. 5,000 as a
reasonable amount pavahle as
comm1ss1on.
Against
the
dis-
·allowance of Rs. 70.465 paid as
commission · to the
General
D
E
F
G
H
-
A
B
c
D
E
-
F
G
H
J. K. WOOLLEN v. C.I.T, (Ramaswami, !.)
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
re;sonable to allow the payment of commission at the rate
of
12!%. He according\y 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.
Yaish, 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 1employee and the conditions
of his service;
(b) the profits of the business, profession or vocation for the year in question; and
( c) 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
SuPREME COURT REPORTS
(1969] 1 S.C.R.
Yaish was an amount laid out or expended wholly or exclusively
for the purpose of the business of the assessce and was wrongly
disallowed by the Income Tax Appellate Tribunal.
It
~as
pointed out that Shri J. P. Yaish 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. Yaish in the running
of the mil! which was "old and unbalanced" and had never worked
continuously or satisfactorily before it was taken over by the
ass=. During the first 14 months the mills made no profit
and Shri J. P. Yaish was paid nothing beyond his salary and
car allowance. In tjle 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 1946-4 7 was made due to new design of civilian rugs
Shri Yaish introduced for the first tima in the mill after studying
public tastes and the qualities and designs
prevailing in
the
market.
It was also said that Shri Yaish 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 finn
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 Yaish, the General Manager.
This 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 Yaish in excess of thiS amount was
not really paid wholly for the purpose of carrying on busines<.
But it was pointed out on behalf of the assessce that Shri J. P.
Yaish 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 Yaish was paid nothing beyond the salary and car allowance.
In the succeeding year he was able to secure an order from the
Government on account of which the inill made some profit. Shri
Yaish introduced for the first time a new design of civilian rugs
in the year 1946-47 during which a large profit was made.
Jt
was therefore contended on behalf of the assessce that the position of Shri Yaish who worked in the mill at the initial stage and
of the Managing-Director was ncit comparable and the Appellate
Tribunal was wrong in taking this circumstance into consideration.
Counsel for tl!e assessce also pojnted out that Shri Yaish
w·a~
educated in a Public School at Dehra Dun and thereafter studied
at the Benara~ College and at the Engineering College of the
Benaras Hindu University for Electrical and Mechanical EngiA
B
c
D
E
F
....
G
II
..
•
J. K. WOOLLEN v. C.I.T. (Ramaswami, J.)
529
A
neering and then joined the Co=erce College at Delhi. After
that he had training in the Aluminium Corporation of India Ltd.,
Lakshmi Rattan Cotton Mills Ltd. and the Road Products Ltd.,
Rampur. In 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 Yaish was an amount laid out wholly and exclusively
B for the purpose of the business of the assessee within the meaning
of s. 10(2)(xv) of the Income Tax Act, 1922.
c
D
E
F
G
H
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. Yaish 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) (__xv)
of the Income Tax Act has to be decided on the facts and in the
light of the circumstances of each particular case. B'ut; as
observed by this Court in Swadeshi Cotton Mills Co. Ltd. v.
C.l.T., U.P. ('), 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 co=ission paid
to Shri Yaish 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 12-!:% co=ission
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 co=ission of 25% was fixed for Shri J. P.
Yaish 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 Trbiunal has
applied the proper legal test in this case. As pointed out by this
Court in C.l.T., Bombay v. Walchand & Co. Private Ltd.,(2 )
in applying the test of co=ercial expediency for determining
whether an expenditure was wholly and exclusively laid out for
the purpose of the busniess, reasonableness of the expenditure has
to be adjudged from the point of view of the businessman and not
(!) 63 J.T.R. 57.
(2)
65 J.T.R. 381.
530
SUPREME COURT REPORTS
[1969) J S.CR.
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 asscsscc 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
asscssce. 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 perfonncd
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 tn
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. Yaish was an
amount laid out or expended wholly and
exclusively
for
the
purpose of the business of the assessee.
A
II .
c
For tl1c reasons expressed we hold that the question of bw
D
referred to the High Court must be answered in the manner indicated and this appeal is accordingly allowed with costs.
Y. P.
Appeal a/1011.·,·d.
•
•••
..
I