B.J.DIVAN, J. - (1.)IN this reference made at the instance of the revenue, the following question has been referred to us for our opinion by the Tribunal :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the payment of commission paid to the employees of the respondent is allowable under section 37 of the Income -tax Act, 1961 ?'

(2.)THE assessee is a registered firm and the relevant assessment years are 1963 -64 and 1964 -65. The assessee -firm carries on business in Bombay and Ahmedabad in the textile chemicals, dyestuffs and auxiliaries and supplies these materials to the textile mills at Ahmedabad and Bombay. During the course of the assessment proceedings the Income -tax Officer noticed that the following commission was paid by the assessee -firm to its employees in assessment years 1963 -64 and 1964 -65 :
Name Amount Amountof commission of salary1963 -64Rs. Rs.p.m.1. Shri N.J. Trivedi 25,320 3252. Shri B.K. Gutta 18,465 500 - - - - - - - - -43,785 - - - - - - - - -1964 -651. Shri N.J. Trivedi 28,675 4002. Shri B.K. Gutta 25,094 5153. Shri K.G. Nayak 24,929 315 - - - - - - - - - -78,698 - - - - - - - - - -

In 1963 -64, the assessee -firm had two employees, namely, N. J. Trivedi and B. K. Gutta, whereas in 1964 -65 one more employee was taken up in service, namely, K. G. Nayak, and he joined the assessee -firm's service as a probationer some time in August, 1962 and with the commencement of the calendar year 1963 which is the previous year relevant to the assessment year 1964 -65, K. G. Nayak was appointed as a regular employee under a proper agreement of service.

(3.)THE Income -tax Officer doubted the genuineness of these payments of commission to the assessee's employees and caused various inquiries to be made. He asked the assessee to prove the genuineness of the claim made. The assessee relied upon four factors in support of its contention before the Income -tax Officer : (1) the agreements entered into with the employees at the beginning of the year; (2) statements of the employees as also statement of one of the partners of the assessee -firm and replies by the assessee to the letters issued by the Income -tax Officer regarding this deduction of commission; (3) account books of the assessee -firm; and (4) past history indicating that similar commission was being allowed in the past. The Income -tax Officer brought on record of the case, letters from various mills to which the assessee -firm supplied goods. The letters generally indicated that the dealings were directly made with the assessee -firm and not through any agency. The Income -tax Officer held that though there was substantial increase in turnover year after year it was not due to the services rendered by any of the employees and that the employees were not independent men but were employees drawing meagre salaries of Rs. 300 and odd per month. He further held that there was no commercial expediency proved by the assessee -firm and he also held that the commission in fact was not paid to the employees but was paid to some unknown persons and the details of such payments were not given either by the assessee or its employees in their statements when asked for. He came to the conclusion that the agreements between the assessee -firm and its employees were sham and not genuine agreements and the entries made in the books of account showing payments of commission and withdrawals by the employees were fictitious. The Income -tax Officer also held that the replies of the various mills also showed that the assessee was directly dealing with the mills and there was no agency for the purpose of soliciting orders from the textile mills. The Income -tax Officer came to the conclusion that neither the quantum of the commission nor its direction had been proved by the assessee and he, therefore, disallowed the claim in respect of this commission amount. The payment of th so -called secret commission was substantial and where principles of public policy were involved, deduction of secret commission was entirely wrong and unjustifiable. These findings were recorded by the Income -tax Officer in the assessment proceedings for 1963 -64 and for the assessment year 1964 -65, the Income -tax Officer observed that the reasons and findings given in the assessment for 1963 -64 would equally apply for the assessment year 1964 -65 and he further held that there was no general practice to pay any commission to the employees in the trade which was similar to that of the assessee.
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