Case: Commissioner of Income Tax, Bombay City Vs. M.K. Kirtikar

1. This is an appeal by special leave from the order of the High Court of Judicature at Bombay passed on September 22, 1955, on a reference under S. 66(1) of the Indian Income Tax Act (XI of 1922, hereinafter referred to as "the said Act") made by the Income Tax Appellate Tribunal whereby the High Court answered the question of law referred to it by the Tribunal in the affirmative.2. The respondent was an employee of Dadajee Dhackjee and Co., Bombay (hereinafter referred to as "the firm"). The firm used to pay to each of its three employees, including the respondent, a commission of one percent on its total annual turn over in its Colour Department in addition to their respective salaries. In connection with the assessment of the firms income for the assessment yearfor which the accounting year was Sambat 2000 (covering the period between October 30, 1943, to October 17, 1944), the Income Tax Officer found that the profit and loss account of the Colour Department of the firm had been debited with Rs. 84,540 as and by way of commission paid to three employees of the firm including the respondent, the commission being calculated at three per cent. on the annual turnover of that Department, i. e., at one per cent. in respect of each of the three employees. The firm had, on the same basis, paid commission at three per cent. to those three employees in the preceding accounting year, i. e., Sambat 1999 and in the assessment for the corresponding assessment yearthe Income Tax Officer had allowed only one per cent. commission on the total annual turnover of the Colour Department as a reasonable and permissible deduction under S. 10(2) (xv) and disallowed the balance of two per cent. commission actually paid by the firm in that year. As, according to him, the same condition obtained in the assessment yearhe allowed Rupees 28,180 being commission at one per cent. as reasonable and disallowed the balance amounting to Rs. 56,360. Thus the share of each of the three employees in the amount disallowed in Sambat year 2000 worked out at Rs. 18,787. Besides, this certain other sums on certain other heads were also disallowed. The result was that the profit of the Colour Department shown as Rs. 4,27,139 in the Profit and Loss account of that Department for Sambat 2000 was raised from that figure to Rs. 5,30,900 by adding back Rs. 56,360 which was disallowed out of Rs. 84,540 paid to the employees as and by way of commission and certain other sums which we need not specify or discuss. The reason given for this disallowance was that the amount paid as commission was to the extent of 2/3 thereof, unreasonable and excessive, and not permissible under S. 10(2) (xv). After deducting Rs. 1,19,816 being the loss of the Motor Department from the profit of Rs. 5,30,900 of the Colour Department, so arrived at, the total income of the firm was computed at Rs. 4,11,084. As the firm was registered under S. 26A of the said Act, no demand was made on the firm in view of S. 23(5) (a) and the total income computed as aforesaid was distributed amongst the two partners who were husband and wife. As the wifes share is to be included in the total income of the husband under S. 16(3)(1), the entire income of the firm was taken into consideration in the assessment of the male partner. The Income Tax Officer next considered the claim of the firm for relief under S. 25(4) of the said Act, as the business of the firm had been taken over by a private limited company, Dadajee Dhackjee and Co. Ltd., as a going concern with its assets and liabilities from the Sambat year 2001. As the firm had been assessed under theAct, 1918 and as notice was duly given on June 4, 1945 about the discontinuance of the business, the Income Tax Officer held that the firm was entitled to the relief claimed and accordingly allowed the same.3. On March 19, 1949 the respondent submitted returns for the assessment years8 andIn connection with the assessment years6, the respondent claimed that, as in the assessment of the firm during the years46 two thirds of the commission paid to him for Sambat years 1999 and 2000 had been disallowed and taxed in the hands of the firm, he was entitled to an exemption fromand super tax on the commission so disallowed to the firm and on which the firm had paid the tax. As already stated the respondents share of commission disallowed to the firm in respect of the assessment yearwas Rupees 18,787. This claim was made on the strength of the Finance Department Notification No.dated March 21, 1922 as amended by Notification No. 8 dated March 24, 1928. The said Notification was expressed in the termsfollowing classes of income shall be exempt from the tax payable under the said Act, but shall be taken into account in determining the total income of an assessee for the purposes of the said Act:1. Sums received by an assessee on account of salary, bonus, commission or other remuneration for services rendered or in lieu of interest on money advanced, to a person for the purposes of his business, Where such sums have been paid out of, or determined with reference to, the profits of such business and by reason of such mode of payment or determination, have not been allowed as a deduction but have been included in the profits of the business on whichhas been assessed and charged under the head business. Provided that such sums shall not be exempt from the payment ofunless they are paid to the assessee by a person other than a company and have already been assessed tox Officer rejected this claim and his decision was upheld on appeal by the Appellate Assistant Commissioner. A further appeal to the Tribunal was also rejected, the Tribunal taking the view that the Notification could only apply in respect of the profits of a business on whichhad been assessed and charged and that as the income of the firm had not been assessed and charged toin the relevant year, the Notification had no application.4. On application under S. 66(1) of the said Act, the Tribunal, on January 14, 1955, submitted a statement of case to the High Court raising the following question of law for the determination of the Highthe assessee is entitled to relief granted by the Notification referred toHigh Court answered the referred question in the affirmative, i.e., in favour of the assessee respondent. In doing so, the High Court repelled both the contentions of the learned Advocate General appearing for the department, namely, that the commission had not been paid out of the profits and thathad not been assessed and charged on the income. According to the High Court, the order of assessment clearly showed that the commission had been paid out of the profits and that, as on computation the amount of income was assessable, it became immediately liable to tax under Section 3 and was, therefore, statutorily charged to tax. The High Court having refused to grant a certificate of fitness for appeal to this Court, the Commissioner of Income Tax, Bombay applied for and obtained from this Court special leave under Art. 136 of the Constitution to appeal to this Court

Court's reasoning:
Although this point was raised before the High Court, it does not appear to have been mooted before theauthorities and can, therefore, hardly be said to arise out of the Tribunals order. Further, in the view we have taken, it is not necessary for us to express any opinion on this question and we shall assume, without deciding, that the commission had been paid out of theis clear that the primary object and purpose of the Notification is to prevent double taxation on the same amount, namely, once in the assessment of the income of the business and again in the hands of the assessee who receives it from the business as commission etc.The word "charged" must be construed having regard to the subject and to the context in which it has been used. It is true that S. 3 of the said Act is the charging Section and lays down that tax at the rate specified by any Central Act (which is the annual Finance Act) shall be charged, subject to the provisions of the Act, in respect of the total income of the previous year. This Section does declare that income is, subject to the provisions of the Act, chargeable to tax. But there is a good deal of difference between income being liable to tax and tax being assessed and charged on income. The Notification talks ofhaving been assessed and charged under the head "business". Having regard to the purpose of the Notification and the context and the sequence in which the words "assessed" and charged have been used, it is clear that the word "charged" does not, in the Notification, mean the mere statutory liability to pay tax but goes further and includes the actual charge or levy.Apart from the fact that in view of the claim for relief under S. 25(4) theOfficer need not have taken the trouble of going through the process of assessment of the firms income at all, it is not disputed that in fact the firms income has not been assessed to tax and no tax has been charged in the sense of being levied.In this view of the matter the third condition has not been fulfilled and the assessee cannot, therefore, claim any relief under the Notification.