# ) •• , SHAHZADA NAND & SONS v. THE COMMISSIONER OF INCOME TAX, PATIALA

- **Citation:** [1977] 3 S.C.R. 529
- **Court:** Supreme Court of India
- **Decided:** 1977-04-12
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/shahzada-nand-sons-v-the-commissioner-of-income-tax-patiala-7194
- **Pages:** 9

## Headnote

)
••
..
,
SHAHZADA NAND & SONS
v.
THE COMMISSIONER OF INCOME TAX, PATIALA
April 12, 1977
f P. N. BHAGWATI, N. L. UNIWALIA AND S. MuRIAzA FAzAL ALI, JJ.J
1-llowable expenditure in
computing the profits of the assessee
from
busuzess-Whether the commission paid by the assessee to its employees an
allolvable expenditure u/s. 36(1) (ii) of Income Tax Act.
The appellants were the sole ·selling agents of the Oriental Carpet- 1'.fanu- .
facturers India Pvt. Ltd. in respect of yarn, cloth and blankets manufactured by
·them ~n-;J. for the s~es effected by the appell~nts, as such sole selling agenrs
co~m1ss1on was paid to them by OC]i.f. Since the appellants showed \'ery
~at1sfactory turnover from year to year, OCA-1 started giving to them, in addi11on to the usual commissio~ over-riding commission·@ 2t per cent on the
sales effected by the appellants. Since the turnover of the sales reached the
figure of Rs. 54.28 lacs and over-riding commission ·increased to Rs. 1,13,449/-
<luring the previous year corresponding to the assessment year 1963-64, the
appellants paid out of the over-riding commission received by them a sum of
Rs. 22,690/- (i.e. at the rate of !% of the sales) each to two of their employees
viz» Saheb Dayal and Gurditta ]I.fall since they were primarily responsible for
the i.ncreased prosperity of the appellants. The commission so paid viz. Rs.
45,380/- was claimed by the appellants as -a deductible expenditure in .their
assessment to income tax for the assessment year 1963-64. The Income Tax
Officer disallowed· the claim on- the ground that there was no evidence to show
that the increase in sales during the relev·ant accounting year was due to the
efforts of Saheb Dayal and Gurditta Mal. The Appellate Assistant Comm.is-_
sioner rejected the appeal preferred to him and held that since no evidence had
been produced by the assessee to prove that the activities -of Saheb Dayal and
Gurditta 1-fal in the relevant account year were of a nature different from those
in th: earlier years so that they put in any extra time or energy in the conduct
of _the business of the assessee so as to justify the payment of the commission,
it could not be said that the commission was paid for services rendered by them.
The Tribunal, in further appeal took the same view and held that since there
was no proof to show that any extra services were rendered by Saheb Dayal
and Gurditta l\.Ial for which payment of commission in addition to salary and
bonus could be justified, commission could not be said to have been paid for
services rendered so as to attract the applicability of s. 36(1) (ii) of the Act •
. The High Court was also of the same view and answered the reference made
to it, in favour of the Revenue.
Allowing the appeal by .special leave, the C.ourt;-
. HELD : (!) The sum of Rs. 45,380/- paid by the assessee to Saheb Dayal
and Gurditta 1-Ial by way of commission ·during the relevant accounting year
was reasonable, having regard to all the circumstances of the case and it ought
to have been allowed as a deductible expenditure u/s. 36(1) (ii) of the Income
Tax Act. [537 BJ
.
· (2) Section 36, sub-section. (1)
clause (ii) does not postulate that there
should be any extra services rendered by an employee before payment of commission to him can b'! justified as an aUowable expenditure. What it requires,
ls only this, namely, that com.mission paid to an employee. sl!onld be for son:ie
se"ices rendered by him. It is not necessary that the commISSton should be paid
under a contractual obligation. It may be purely- voluntary.
(3) It is immaterial that the services rendered during the r~levant accou~t·
ing year ·were in no way greater or mor~ onerous than the sef!tces ren~e~ed tn
the earlier years. There is no such reau1rement under the section and it ts not
justified by the language of s. 36, sub-section(!), clause (ii) and indeed if it
were pushed to its logical extreme, even payment of bot1US cannot be treated
as permissible deduction under that p

## Text

)
••
..
,
SHAHZADA NAND & SONS
v.
THE COMMISSIONER OF INCOME TAX, PATIALA
April 12, 1977
f P. N. BHAGWATI, N. L. UNIWALIA AND S. MuRIAzA FAzAL ALI, JJ.J
1-llowable expenditure in
computing the profits of the assessee
from
busuzess-Whether the commission paid by the assessee to its employees an
allolvable expenditure u/s. 36(1) (ii) of Income Tax Act.
The appellants were the sole ·selling agents of the Oriental Carpet- 1'.fanu- .
facturers India Pvt. Ltd. in respect of yarn, cloth and blankets manufactured by
·them ~n-;J. for the s~es effected by the appell~nts, as such sole selling agenrs
co~m1ss1on was paid to them by OC]i.f. Since the appellants showed \'ery
~at1sfactory turnover from year to year, OCA-1 started giving to them, in addi11on to the usual commissio~ over-riding commission·@ 2t per cent on the
sales effected by the appellants. Since the turnover of the sales reached the
figure of Rs. 54.28 lacs and over-riding commission ·increased to Rs. 1,13,449/-
<luring the previous year corresponding to the assessment year 1963-64, the
appellants paid out of the over-riding commission received by them a sum of
Rs. 22,690/- (i.e. at the rate of !% of the sales) each to two of their employees
viz» Saheb Dayal and Gurditta ]I.fall since they were primarily responsible for
the i.ncreased prosperity of the appellants. The commission so paid viz. Rs.
45,380/- was claimed by the appellants as -a deductible expenditure in .their
assessment to income tax for the assessment year 1963-64. The Income Tax
Officer disallowed· the claim on- the ground that there was no evidence to show
that the increase in sales during the relev·ant accounting year was due to the
efforts of Saheb Dayal and Gurditta Mal. The Appellate Assistant Comm.is-_
sioner rejected the appeal preferred to him and held that since no evidence had
been produced by the assessee to prove that the activities -of Saheb Dayal and
Gurditta 1-fal in the relevant account year were of a nature different from those
in th: earlier years so that they put in any extra time or energy in the conduct
of _the business of the assessee so as to justify the payment of the commission,
it could not be said that the commission was paid for services rendered by them.
The Tribunal, in further appeal took the same view and held that since there
was no proof to show that any extra services were rendered by Saheb Dayal
and Gurditta l\.Ial for which payment of commission in addition to salary and
bonus could be justified, commission could not be said to have been paid for
services rendered so as to attract the applicability of s. 36(1) (ii) of the Act •
. The High Court was also of the same view and answered the reference made
to it, in favour of the Revenue.
Allowing the appeal by .special leave, the C.ourt;-
. HELD : (!) The sum of Rs. 45,380/- paid by the assessee to Saheb Dayal
and Gurditta 1-Ial by way of commission ·during the relevant accounting year
was reasonable, having regard to all the circumstances of the case and it ought
to have been allowed as a deductible expenditure u/s. 36(1) (ii) of the Income
Tax Act. [537 BJ
.
· (2) Section 36, sub-section. (1)
clause (ii) does not postulate that there
should be any extra services rendered by an employee before payment of commission to him can b'! justified as an aUowable expenditure. What it requires,
ls only this, namely, that com.mission paid to an employee. sl!onld be for son:ie
se"ices rendered by him. It is not necessary that the commISSton should be paid
under a contractual obligation. It may be purely- voluntary.
(3) It is immaterial that the services rendered during the r~levant accou~t·
ing year ·were in no way greater or mor~ onerous than the sef!tces ren~e~ed tn
the earlier years. There is no such reau1rement under the section and it ts not
justified by the language of s. 36, sub-section(!), clause (ii) and indeed if it
were pushed to its logical extreme, even payment of bot1US cannot be treated
as permissible deduction under that provision.
[534. G-H]
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530
SUPREME COURT REPORTS
[1977] 3 s.c.R.
(4) It is n<>w well-settled that the mere fact that commission is paid exgratla would not necessarily mean that it is unreasonable. Commercial ex4
pediency does not mean that an employer should not make any payment to an
employee unless the employee is entitled to it under a contract. What is the
requirement of commercial expediency must be judged not in the light of the
19th Century latssez faire doctrine which regarded man as an economic being
concerned only to protect and advance his self-interest but in the context of
current socio-economic thinking which places the general interest of the com~
munity above the personal interest of the individual and believes that a business
or undertaking is the product of the combined efforts of the employer and the
employees and wliere there is sufficiently large profit. after providing for the
salary or remuneration of the employer and the employees and other prior
charges such as interest on capital depreciation, reserves etc., as part of it should
in alt fairness go to the employees. [536 E-GJ
(5) The question whether commercial expediency justified the payment of
commission would have to be judged in the light of all the circumstances existing at the material time.
In the instant case, the assessee felt, on grounds of
commercial expediency that a part of the over-riding commission should be paid
besides salary aad bonus to its two employees who had worked so well and
contributed to the prosperity of the assessee and did make the
payment.
[525 AB]
Laxmandas Seiram v. C.l.T. Guiarat 50 ITR 789 (Gujarat) approved.
(6) The question whether the amount of the commission is a reasonable
amount or not has to be determined with reference to the three factors laid
down in s. 36(1)(ii). Though described loosely as conditions, they are not
really conditions on the fulfilment of which alone the amount of commi!JSion
paid to an employee can be. regarded as reasonable.
The reasonableness of the
amount of commission has to be considered from the point of view of a nor~
mal, prudent businessman, and not on any subjecting standard of the . assessing
authority.
[525 C·D]
Observation :
It is high time that the administration of our tax la\v recognised the demand
of social justice today viz., profit-sharing by the employees and encourag~ it by
-adopting a progressive and liberal approach in the applicability of s. 36, subsection (!), clause (ii). [536 HJ
ClvIL APPELLATE JURISDICTION : Civil Appeal No. 1011 of 1972.
Appeal by Special Leave from the Judgment and
Order dated
the 18th August, 1971 of the Punjab and Haryana High Court iu
Income Tax Reference No. 17 of 1971.
S. T. Desai, (Mrs.) A. K. Verma and Shri Narain for the Appellant.
T. A. Ramachandran and R. N. Sachthey for Respondent.
The Judgment of the Court was delivered by
BHAGWATI, J.-The short question that arises for
determination
in this appeal is whether certain commi.ssion paid by the assessee to
two of 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 Mohau 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
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SHAHZADA NAND v. C.I.T: (Bhagwati, 1.)
531
to the business of the assessee and Raj Mohan too was not actively
A
associated with the conduct of 1he business of the assessee as he was
working with the Oriental Carpet Manufacturers India Pvt. Ltd.
(hereinafter referred to as OCM). lhus, 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
B
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, ctoth and biankets manufactured
by OCM and for the sales affected by the assessee as such sole selling
agents, commission was paid to the assessee by OCM.
The figures
show that the business of the assessee prospered from year to year
from 1959-60 onwards and there was a o,>radual increase in th.e tumC
over of the assessee which jumped from the figure of Rs. 39.99 lacs
.for the assessment year 1962-63 to the figures 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, over-riding commission at the rate
of 2t % on the sales affected by the assessee and the over-riding commission thus received by the assessee during the previous years corresD
ponding to the assessment year 1960-61 to 1963-64 was as follows:
Assessment year
1960-61
1961-62
1962-63
1963-64
Amount Received
Rs.
35,964/-
Rs.
6L818/-
Rs.
83,922/-
Rs. 1,13,449/-
E
Since the turnover of the sales reached the figure of Rs. 54.28 lacs
and overriding commission increased to Rs.
1,13,449/-
during tb.e
previous year corresponding to the assessment year 1963-64, the
assessee decided to give to each of Saheb Dayal and Gurditta Mal,
who were looking after the business and were primarily responsible
for the increased prosperity of the assessee, commission at the rate of
F
!% of the sales out of 2t% overriding commission received from
OCM and each of these two employees was accordingly paid by the
assessee a snm of Rs. 22,690/- by way of commission.
The aggregate amount of commission paid to Saheb Dayal and· Gurditta Mal
thns came to Rs. 45,380/- and this amount of commission was claimed
by the assessee as a deductible expenditure in its assessment to income
tax for the assessment year 1963-64. The Incori1e Tax Officer, disallowG
ed the claim of the assessee on the ground that there was no material
produced by the assessee· which would "prove the nature of services rendered by these two gentlemen in lieu of which the commission is
claimed. to have been paid" and there being no evidence to show that
the increase in sales during the relevant ·accounting year was dne to
the efforts of Saheb Dayal and Gnrditta Mal, the claim for deduction
of the amount of commffision as a business exoenditure remained unH
proved.
The assessee appealed against the disallowance of the amount
of comn1ission but the Appellate Assistant Commssioner in appeal
affirmed the disallowance on the ground that no evidence had been
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SUPREME COURT REPORTS
(1977} 3 S.C.R.
produced by the. assessee to prove that the activities of Saheb Dayal
and Gurditta Mal in the relevant account year . were of a nature
different from those in the earlier years or that they put in any extra
time or energy in the conduct of the business of the assessee so as to
justify the payment of the commission and hence it could not he said
that the commisson was paid for services rendered by them. The matter
was carried in further appeal before the Tribuna~ but the Tribunal also
took the same view and held that since there was no proof to show
that any services were rendered by Saheb Dayal and Gurditta Mal
for which payment of commission in addition to salarv
and · bonus
could be justified, commission coqld not he said to have been paid for
services rendered so as to attract the applicability of section 36, subsection (1), clause (ii). The Tribunal observed that it was not possible
to say "that the increase in the turnover in the year under appeal
was due to the extra efforts put in by these two employees or that the
employees had worked in the hope of receiving extra commission" and
since bonus equivalent to three months' sa:ary was paid · to Sahe.b ·
Dayal and Gurditta Mal in addition to their .salary during the releval!t
accounting year, any extra services rendered by them, if any, "should
be deemed to have been covered by the payment of this bonus". Since
in the view taken by the Tribunal it was necessary that there should
be .some extra services rendered by Saheb Dayal and Gurditta Mal for
which payment of commission could be said to be justified and there
was nothing to show that any such extra services were rendered
by
them, the Tribunal came to the conclusion that the payment of commi5sion could .not be said to be justifieμ on grounas of commercial
expediency and section 36, sub-section (1), clause (ii) had no application.
The assessee being aggrieved by the order made by the Tribunal applied for a reference of the question of law arising out of the
order of the Tribunal and on the application of · the
assessee, tne
following question of law was referred for the opinion of the High
Court :
"Whether on the facts and circnmstances of the case,
the sum of Rs. 45,380/- paid to L. Gurandittamal and L.
Sahebdiyal, employees of the applicant firm is pennissible
deduction in computing the business income of tlie applicant?"
The High Court answered the question in favour of the Revenue.
The view taken by the High Court was that in order to attract the
applicability of section 36, sub-section (1), clause (ii), it was necessary that the payment of commission should be for services rendered
and since there was no evidence led on behalf of the assessee to show
that any extra services were rendered by Saheb Dayal and Gurditta
Mal, which were responsible for increase in the sales and ·consequent
enlargement, of the overriding commission, there was no justification
for payment of commission to them and the commission paid could
not be said to be for services rendered.
The High Court in this view
held that section 36, sub-section (1), clause (ii) was not applicable
and no claim for deduction could be sustained under it.
The correctness of this decision is impinged in the present appeal preferred by the
assessee with special leave obtained from this Court.
SHAHZADA NAND v. C.I.T. (Bhagwati, J.)
533
Now, before we proceed to consider, the question which Jrises for
A
determination before us, we must make it clear at the out set that m
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 applicab1lity
B.
of section 36, sub-section (1), clause (ii). No payment having been
made, no deduction would have been permissible. But here the commission was paid : it was a genuine payment and th~ only question was
whether it was deductible as an allowable expenditure under section
36, sub-section (1), clause (ii). Section 36, sub-section (1) provides
for making of various deductions in computing the income of an
assessee under the head : "Profits and Gains of Business or ProC
fession" and one such deduction is set out in clause (ii) which, as it
stood at the material time during the assessment year 1963-64, read
as follows :
"36(1) (ii) Any sum paid to an employee as bonus or
commission for services rendered, where such sum would
not have been payable to him as profit or dividend if it had
D
not been paid as bonus or commission :
Provided that the amount of bonus or commission is
reasonable with reference to -
(a) the pay of the employee and the conditions of his
service;
(b) the profits of the business or profession for the previous year in question; and
( c) the general practice in similar business or profession."
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. Saheb Dayal and Gurditta Mal were admittedly employees of the
assessee.
They were each paid a salary of Rs. 1000/- per month and
F
for the previous year relevant to the assessment year 1963-64 bonus
equivalent to three months' salary was also paid to each of them. The
Income Tax Officer disallowed even this salary and bonus paid to
Saheb Dayal and Gurditta ]Mal on the ground that there. was nothing
to show that any services were rendered by them and the payment
of salary and bonus appeared to be ex-gratia. But this decision was
reversed in appeal by the Appellate Asi;istant Commissioner who
G
foll?wing his .earlier order dated 12th December, 1967 in the appeal
agamst the assessment to tax for the assessment year 1962-63, allowed
the payment <?f salary and. b?nus as a deductible expenditure.
The
Appellate Ass1st~nt Comm1Ss10ner
c:early recognised
that Saheb
Dayal and Gurd1tta Mal were employees of the assessee and were
attend!ng to the bus!ness of the assessee as such employees since a
Ion~ time ai;i;ct Gurd1tta Mal was in fact "a seasoned and experienced
H
busmessman and he looked after the assessee's transactions with OCM
and on behal~ of the assessee advised OCM in connection with designs
etc. The Tnbunal also found that Saheb Dayal and Gurditta Mal
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SUPREME COURT REPORTS
[1977] 3 S.C.R.
"were looki11g after the business of the assessee firm for a long time".
Thus, there can be no doubt that services were rendered by Saheb Dayal
and Gurd1tta Mal to the assessee and for these services, besides salary
and bonus, co=ission was paid to them, because, according to".the
assessee, during the relevant accounting year, there was considerable
enlargement in the turnover of the sales with consequent increase in
the amount of overriding commission and the assessee felt, on grounds
orf co=ercial expediency, that a part o~ the overriding commission
should be paid to the two employees who had worked so well and
contributed to the prosperity of the assessee.
The question is whether
this commission qualifies for deduction as an allowable expenditure
under section 36, sub-section (1), c;ause (ii).
·
The only ground on which the High Court negatived the. applicability
of section 36, sub-section (1), clause (ii) was that during the relevant
accounting year Saheb Dayal and Gurditta Mal rendered the same
services which they were rendering in earlier years and no extra services were rendered by them which could justify payment of commission in addition to salary and bonus.
The High Court appeared
to take the view that there must be correlation between the payment
of commission and the services rendered and since commission was
paid by the assessee for the first time during the relevant accounting
year, there must be some extra services rendered by Saheb Dayal and
.Gurditta Mal in that year over and above the usual services rendered
by them in the earlier years.
Since, according to the High Court,
there was no proof that any extra services were rendered by Saheb
Dayal and Gurditta Mal, the High Court held that the payment ot
co=ission could not be said to be for services rendered within the
meaning of section 36, sub-section (1), clause (ii). This view taken
by the High Court is, in our opinion, plainly erroneous. Section 36,
sub-section (1), clause (ii) does not postulate that there should be
any extra services rendered by an employee before payment of commission to him can be justified as on a!Jowable expenditure.
What it
requires is only this, namely, that commission paid to
an employee
should be for services rendered by him. · For example, if an empioyee
has not rendered any services at all duri.ng the relevant accounting
year, no commission can be paid to him which would be an alTowable
expenditure.
There must be some services rendered by an employee
and where commission is paid for the services so rendered, section 36
sub..section (I), clause (ii) would apply and the commission to the
extent to which it is found reasonable would be an al:owable expenditure under that provision.
11· is not necessary that the commis.sion
should be paid under a contractual obligation.
It may be purely
voluntarv.
But it must be for services rendered and here services
were in fact rendered by Saheb Dayal and Gurditta Mal during the
relevant accounting year. It is true that· the services rendered by
these two employees during the relevant accounting year were in no
way greater or more onerous than the services rendered by theJI! in the
earlier years, but that is immaterial. There is no such requtrement
and the argument based on it cannot be sustained. It is not 1ust1Hed
by the lani'Uage of section 36, sub-section (1). clause (ii) and indeed,
if it were pushed to its logical extreme, it wou!d be difficult to 5U?~ort
even payment of bonus as a permissible rled11rt•<m under that prov1s10n.
Of course, the circumstance that no additional services are rendered
,.
SHAHZADA NAND v. C.I.T. (Bhagwati, !.)
535
by an employee would undoubtedly be of some relevance in deterA
mining the reasonableness of the amount of commission but it would
have to be considered along with other circumstances and the qnestlon
whether commercial expediency justified the payment of commission
wou:d have to be judged in the light of all the circumstances existing
at the material time.
This was the view taken by the Gujarat High
Court in Laxmandas Sejram v.
Commissioner of Income-Tax,
Gujarat,(') and we wholly accept that view. It is, therefore, no
B
answer to the applicability of section 36, sub-section (1), clause (11)
to say that no extra ·services were rendered by Saheb Dayal and
Gurditta Mal during the relevant accounting year.
The amount of
commission having been paid for services
admittedly rendered
by
them, the only question would be whether it was reasonable under
section 36, sub-section (1), clause (ii).
Turning to the provisions of section 36, sub-section (l), clause
(ii), we find that the proviso to that clause lays down three factors for
the purpose of determining the reasonableness of the commission paid
to an employee. The question whether the amount of the commission
is a reasonable amount or not has to be determined with reference to
these three factors. Sometimes these three fators are loosely described
as conditions but they are not really conditions on the fulfilment of
which alone the amount of commission paid to an employee can be
regarded as reasonable. They are merely factors to be taken
into
account by the
Revenue
authorities
in
determining
the
reasonableness of the amount of commission.
It may be that one of
these factors yields a negative response.
To take an example, there
may be no general practice in similar business or profession to give
commission to an emp:oyee, but, yet, having regard to the other circumstances, the amount of commission paid to the employee may be
regarded as reasonable.
What the proviso requires is
merely that
the reasonableness of the amount of commission shall be determined
with reference to the three factors.
But it is well settled that these
factors are to be considered from the point of view of a normal, prudent businessman.
The reasonableness of the payment with reference
to these factors has to be judged not on any subjective standard of the
assessing authority but from the point of . view of commercial expediency.
Let us see whether the amount of commission paid to Saheb
Dayal and Gurditta Mal in the present case can be said to be reasonable from this stand point. It is clear froin the order of the Tribunal
that reliance was placed by the Tribunal mainly and substantially on
the fact that the nature. of the work done by Saheb Dayal and Gurditta
Mal remained unchanged in the relevant accounting year and there
was nothing to. show that the increase in the turnover during the relevant accounting year was as a result of any extra efforts made by
t!Jese two employees and hence it could. not be said that there were
any special circums•ances which warranted the payment of commission
to them. But, as already pointed out above, the commission paid to
an emn'.oyee cannot be branded as unreasonable merely because the
employee ha.s done in the relevant accounting year the same work which
he was doing in the earlier years.
Even where the nature of the work
has remained the same, commercial expediency mav require pavment
of commission to an employee.
Here, Saheb Dayal
and
Gurditta
(I) 50 I.T.R. 763:
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SUPREME COURT REPORTS
[1977] 3 s.c.R.
Mal were each receiving a salary of Rs. 1000/- per month and besides
this salary, there were admittedly no other perquisites given to them.
They were the persons attending to the business of the assessee and
in fact Gurditta Mal was an experienced and seasoned businessman
and it was he who was advising OCM in regard to designs etc. and he
and Saheb Dayal were primarily responsible for the flourishing state
of the business.
The turnover of the sales of the assessee steadily
rose from 1960-61 and in the relevant accounting year, it reached the
exciting figure of Rs. 54.28 lacs.
So also the overriding commission
which started with the modest figure of Rs. 35,964/- in the accounting
year relevant to the assessment year 1960-61 went on steadily increasing from year to year until it reached the figure of Rs. 1, 13,449 /-
in the relevant accounting year.
The assessee, therefore, felt that in
view of the tremendous progress in the business which was largely the
result of the services rendered by Saheb Dayal and Gurditta Mal, a
part of the overriding commission should be paid to them, so that they
may carry a sense of satisfaction that their efforts have been suitably
rewarded and they may have an added incentive to work and may be
spurred to greater efficiency in the future.
It may be noted that the
overriding commission of the assessee during the relevant accounting
year was Rs.1,13,449/- and the total profit was Rs. 3,08,034/- and
if out Qf this! total profit of Rs. 3,08,034/-, an
aggregate sum of
Rs. 45,380/- was paid to Saheb Dayal and Gurditta Mal as commission, it is diflicu:t to see how such payment could be regarded as
unreasonable. It is true that there was no obligation on the as~see
to make payment of this commission to Saheb Dayal and Gurditta
Mal, but it is now well settled that the mere fact that commission is
paid ex-gratia would not necessarily mean that it is
unreasonable.
Commercial expediency does not mean that an employer should not
make any payment to an employee unless the employee is entitl\:d to
i& under a contract. Even where there is no contract, an employer
may pay commission to an employee if he thinks that it would be in
the interest -of his business to do so. It is obvious that no business
can prosper unless the employees engaged in it are satisfied and contented and they feel a sense of involvement and identification and tbis
can be best secured by giving them a stake in the business and
allowing them to share in the profits.
It would indeed be a wise step
on the part of an employer to offer incentive to his employees by
sharing 'a part of his profits. with them.
This W?uld not only be "s<J?d
husine&S: but a¥.lo good ethics. It would · be 1n
consonance ·With
Gandhian concept ·;is also- modem socialistic thought which, with its
deeply rooted faith in social and economic democracy, regards the
employees as much as the 61llployer as co-sharers in the business. If
an employer -earns profits to which the employees have necessarily
contributed by putting in their labour, there is no reason why the
employer should not share a part of these profits with the employees.
That is the demand of social justice today and it is high time that the
administration of our tax law recognised it and encouraged sj:Jarine of
pr-Ofim by employers with emoloyees by adopting a progressive and libec
ral approach in the applicability of section 36, sub-section (1), clause
(ii).
What is the requirement of commercial expediency must be
judged not in the light of the 19th Century· laissez faire doctrine which
regarded man as an economic being concerned only to protect and
;
•
'
. SHAHZADA NAND "· C.J.T. (Bhaf!Wati, J.)
537
advance his self-interest but in the context ·of current socio-economic
A
thinking which places the general interest of the community above the
personal interest of the iqdividual and believes that a business or undertaking is the product of the combined efforts of the employer and the
employees and where there is sufficiently large profit, after providing
for the salary or remuneration of the employer and the employees ana
other prior charges such as interest on capital, depreciation, reserves
etc., a part of it should in all fairness go to the employees.
We are.
B
therefore. of the view that the s11m of Rs. 45,380/-
paid by the
asBeSsee to Saheb Dayal and . Gurditta Mal by way of commission
during the relevant accounting year was reasonable having regard. to
all the circumstances of the case and it ought to have been allowed
as a d~dnctible expenditure under section 36, sub-section (I), clause
(ii).
We ~c.;ordingly allow the appeal, set aside the judgment of the
C
High Court and answer the question referred by the Tribunal in the
affirmative in favour of the assessee.
The Commissioner will pay
the cos\3 0i the appeal as also of the reference to the assessee.
S.R.
Appeal allowed .