Case: Commissioner of Income Tax, Bombay City I Vs. E. Francescanto

1. This appeal by special leave is preferred against the judgment and order of the High Court of Bombay in a reference made to it by theAppellate Tribunal under section 66(1) of the IndianAct, 1922, hereinafter called the Act The following question was referred to the High Court"Whether, on the facts and in the circumstances of the case, the commission of Rs. 2, 45, 557 was exempt in the hands of the assessee by virtue of the Notification No. 878F dated March 21, 1922, as amended by Notification No. 8 dated March 24, 1928 ?"2. The facts that led up to the reference may be briefly statedOne S. P. Gallini was doing business inin the name and style of " Rayon Yarns Import Company ". Under an agreement dated May 30, 1948, he appointed E. Francescanto, the respondent, as his manager. For the assessment yearGallini claimed a deduction of Rs. 2, 45, 557, the commission paid by him to the respondent in terms of the agreement, from his taxable income. But theOfficer rejected the claim on the ground that " the payment of commission is but a way to reduce his income and his tax liability." That is to say, in effect and substance he held that the profits of the said company were divided between Gallini, the employer, and the respondent, his employee, to evadeand, therefore, the said amount was to be included in the taxable income of the employer. After having assessed the said amount in the hands of the employer for the assessment yearthe department sought to assess the said income over again in the hands of the assessee as commission received by him from his employer. The assessee claimed exemption on the basis of the Notification No. 878F dated March 21, 1922, as amended by Notification No. 8 dated March 24, 1928. The claim was rejected. On appeal, the Appellate Assistant Commissioner came to the same conclusion as theOfficer. On further appeal, the Appellate Tribunal, Bombay, held that the conditions laid down by the said notification had been fulfilled and that the assessee was entitled to the exemption claimed by him. At the instance of the revenue, the aforesaid question was referred to the High Court for its opinion. The High Court agreed with the Appellate Tribunal and answered the question in the affirmative. Hence, the present appealMr. Desai, learned counsel for the revenue, contended that, in order to qualify for the exemption under the aforesaid notification the assessee had to fulfil the conditions laid down therein, that he had not fulfilled any one of them and that, therefore, he was not entitled to any

Court's reasoning:
4. At the outset we may point out that the first argument advanced by Mr. A. V. Viswanatha Sastri is not available to him. The entire proceedings up to now went on the basis that the commission was the income of the assessee, but he was entitled to an exemption under the said notification. The question referred by the Tribunal to the High Court was also related to the exemption under the said notification. If his argument be accepted, no question of exemption under the notification would arise, as the income was not the income of the assessee but of his employer. That question not having been referred to the High Court, it is not open to the assessee to raise it for the first time beforeIn the instant case, admittedly, the third condition was satisfied, for in assessing Gallini the said amount was disallowed in the computation of the profits of the business and had been assessed and charged under the head "business" in hisour view, this reasoning is not sound. It is not possible to say that the entire incomings of the employers business were profits. There must have been a capital, however little, invested in the business and overhead charges must have been incurred in carrying out the business. The profits could only be the balance arrived at after deducting the outgoings from the incomings. We cannot, therefore, sustain the validity of the said reasoning. But, though under the agreement the commission payable to the assessee had to be calculated at a certain percentage on the gross turnover of the business, we find that the commission was in fact paid out of the profits of the business. TheOfficer added the commission of Rs. 2, 45, 557 to the profits disclosed by the employer and assessed the total sum of Rs. 7, 74, 454 to tax. He did so, because in his view the commission was paid out of the profits to evade tax to that extent. It was said that the said finding of theOfficer was not conclusive and that the Tribunal should have given an independent finding in the present proceedings. Though the said finding was not conclusive, it would certainly prove that thedepartment, after enquiry, found that the said commission was part of the profits of the employer. In the absence of any other evidence, the Tribunal accepted that finding and we do not see any justification to disturb the same. If so, it follows that the said commission was in fact paid out of the profits of the employers business8. The second condition was also fulfilled in this case, for, though the employer claimed the commission paid to the assessee as a deduction, theOfficer included that amount in the profits of the business and assessed that income to tax. Therefore, the said sum had not been allowed as a deduction to the employerIn this view, as all the three conditions laid down by the notification had been complied with, the assessee was entitled to exemption from tax in respect of the saidThe decisions in Commissioner ofv. Mulraj Karsondas and Ramanlal C. Parekh v. Krishnamachari, Commissioner ofdealt with the case where the salary of an employee was deducted before the profits were ascertained and the courts held that the salary was not paid out of the profits. The decision in V. Narayanaswami Iyer v. Commissioner ofturned upon the third condition of the notification and it was found that the commission was disallowed under section 10(2)(xv) of theAct. The decision in Balakrishnan v. Commissioner ofis directly in point, for in that case under circumstances similar to those in the present one, it was held that the commission was paid out of the profits. None of these decisions had laid down any principle of universal application. Whether the commission was paid out of the profits or determined with reference to the profits has to be decided on the facts of each case. In the present case, the Tribunal rightly found that the commission was paid out of the profits of the business. We, therefore, agree with the conclusion of the High Court, though on different grounds.