Case: Shahzada Nand &amp; Sons Vs. The Commissioner Of Income Tax, Patiala

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 standpoint. It is clear from 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 these two employees and hence it could not be said that there were any special circumstances which warranted the payment of commission to them. But, as already pointed out above, the commission paid to an employee cannot be branded as unreasonable merely because the employee has 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 may require payment of commission to an employee. Here, Saheb Dayal and Gurditta Mal were each receiving a salary of Rs. 1, 000 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 lakhs. 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 of 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 difficult to see how such payment could be regarded as unreasonable. It is true that there was no obligation on the assessee 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 entitled to it 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 this 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 incentives to his employees by sharing a part of his profits with them. This would not only be good business but also good ethics. It would be in consonance with Gandhian concept as also modern socialistic thought which, with its deeply rooted faith in social and economic democracy, regards the employees as much as the employer 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 sharing of profits by employers with employees by adopting a progressive and liberal 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 advance his self-interest but in the context of current socio-economic thinking which places the general interest of the community 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 where 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., a part of it should in all fairness go to the employees. We are, therefore, of the view that the sum of Rs. 45, 380 paid by the assessee to Saheb Dayal and Gurditta Mal by way of commission during the relevant accounting year was reasonable having regard to all the circumtances of the case and it ought to have been allowed as a deductible expenditure under section 36, sub-section (1), clause (ii). 6.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]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 section 36, sub-section (1), clause (ii). No payment having been made, no deduction would have been permissibleThe 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 of commission 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 an allowable expenditureIt 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 them in the earlier years, but that is immaterial. There is no such requirement and the argument based on it cannot be sustained. It is not justified by the language of section 36, sub-section (1), clause (ii), and, indeed, if it were pushed to its logical extreme, it would be difficult to support even payment of bonus as a permissible deduction under that provision. Of course, the circumstance that no additional services are rendered by an employee would undoubtedly be of some relevance in determining the reasonableness of the amount of commission but it would have to be considered along with other circumstances and 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. This was the view taken by the Gujarat High Court in Laxmandas Sejram v. Commissioner of Income-tax [1964] 54 ITR 763 (Guj)   and we wholly accept that view. It is, therefore, no answer to the applicability of section 36, sub-section (1), clause (ii), to say that no extra services were rendered by Saheb Dayal and Gurditta Mal during the relevant accounting year. 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. It is clear from 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 these two employees and hence it could not be said that there were any special circumstances which warranted the payment of commission to them. But, as already pointed out above, the commission paid to an employee cannot be branded as unreasonable merely because the employee has 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 may require payment of commission to an employee. Here, Saheb Dayal and Gurditta Mal were each receiving a salary of Rs. 1, 000 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 lakhs. 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 of 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 difficult to see how such payment could be regarded as unreasonable. It is true that there was no obligation on the assessee 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 entitled to it 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 this 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 incentives to his employees by sharing a part of his profits with them. This would not only be good business but also good ethics. It would be in consonance with Gandhian concept as also modern socialistic thought which, with its deeply rooted faith in social and economic democracy, regards the employees as much as the employer 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 sharing of profits by employers with employees by adopting a progressive and liberal 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 advance his self-interest but in the context of current socio-economic thinking which places the general interest of the community 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 where 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., a part of it should in all fairness go to the employees. We are, therefore, of the view that the sum of Rs. 45, 380 paid by the assessee to Saheb Dayal and Gurditta Mal by way of commission during the relevant accounting year was reasonable having regard to all the circumtances of the case and it ought to have been allowed as a deductible expenditure under section 36, sub-section (1), clause (ii)