Decided on August 25,1962

K.R.IRANI Respondents


TAMBE, J. - (1.)THIS is a reference under sub-s. (1) of s. 66 of the Act at the instance of the CIT. We are here concerned with the asst. yr. 1956-57; the relevant accounting year, however, has not been mentioned in the statement of case. The assessee is a consulting architect and civil engineer. At the material time he was a partner in two registered firms, viz., M/s K.R. Irani & Co. and M/s National Steel Works, Bombay. The firm of National Steel Works, Bombay, was assessed for the asst. yr. 1956-57 and the share income apportioned to the assessee as a partner therein under s. 23(6) of the Act came to Rs. 1,30,265. In his own assessment the assessee claimed a deduction of Rs. 15,337 from the aforesaid amount of Rs. 1,30,265 on the ground that the said sum represented payment of bonus to the staff of M/s National Steel Works made by him in his capacity as a partner. The aforesaid amount of Rs. 15,337 has been debited to the account of the assessee partly on 29th Sept., 1955, and partly on 15th Oct., 1955, in the books maintained by the firm. The payment of the said sum by the assessee to the employees of the National Steel Works was not disputed before the Tribunal. The bona fides of the assessee in making the payment was also not disputed.
(2.)AS already stated, the assessee had claimed a deduction of the said amount of Rs. 15,337 from the amount of his share in the profits of the firm amounting to Rs. 1,30,265. The ITO took the view that payment of bonus, etc., to the workers is a liability of the firm and not of the partners and once the profit from the firm has been computed, no further claims could be put by the assessee as deduction from his share of income unless he can prove that it was absolutely necessary for him to do so in the interest of the firm. According to him there was nothing on the record to show that the payment made by him was wholly and exclusively incurred for the purpose of earning the profits from the firm. The matter was taken in appeal before the AAC, but the appeal was dismissed by him. In his order he observed :
"The applicant's point is that on account of the difference of opinion between the partners of the firm, he himself paid the bonus to the firm's employees to have a contented labour and that act of the appellant was in the interest of the firm's business as a whole. Whatever be the motive for this payment of the bonus by the appellant, the amount cannot be set off against the share income. When once the share income is determined under s. 23(5)(a), that is the figure to be adopted for the purpose of assessment as contemplated in s. 16(1)(b) of the Act."

In this view of the matter, the appeal was dismissed by the AAC. The assessee took a further appeal before the Tribunal. Placing reliance on a decision of this Court in Tata Sons Ltd. vs. CIT (1950) 18 ITR 460 (Bom) : TC15R.653 the assessee contended that the view taken by the AAC was erroneous and claimed that the order of the AAC be set aside and the said amount be allowed as a deduction. The only contention which appears to have been raised by the Departmental representative before the Tribunal was that the decision of this Court had no application to the facts of this case inasmuch as the assessee was not a managing agent of the firm. The Tribunal did not accept the contention of the Department but accepted that of the assessee. The Tribunal accordingly allowed the appeal and held that the sum of Rs. 15,337 was liable to be allowed as a deduction in the hands of the assessee. At the instance of the CIT, the Tribunal stated the case raising the following question :

"Whether, on the facts and in the circumstances of this case, the payment of bonus of Rs. 15,337 to the employees of National Steel Works in which the assessee was a partner is an allowable deduction ?"

Mr. Joshi appearing for the Revenue has raised before us three contentions. Referring to the provisions of s. 10(2)(x) he contends that in order to claim any payment by way of bonus, it was necessary for the assessee to establish that the bonus paid to the labour including the amount claimed as a deduction was a reasonable amount of bonus. The assessee not having established it, he cannot claim the deduction of the said amount. The decision in Tata Sons Ltd. vs. CIT (supra) on which reliance has been placed by the assessee as well as the Tribunal has, therefore, no application to the facts of the case. In the second instance Mr. Joshi contends that the payment of bonus is nothing but the diversion of income to avoid payment of tax and, lastly, it is contended by him that, at any rate, the alleged expenditure has not been incurred for the purpose of earning the profits of the relevant accounting year.

(3.)ON the case stated, we find it difficult to accept any one of the contentions raised by Mr. Joshi. As regards the first contention there was no dispute at any time raised before any of the authorities about the reasonableness or otherwise of the payment claimed to have been made by the assessee to the labour by way bonus. ON the other hand, the statement of case shows that payment has, in fact, been made and the bona fides of the assessee in making the payment was also not in dispute. The reason why such a dispute was not raised by the IT authorities, presumably appear to be the smallness of the amount paid by way of bonus as against the profits earned by the partners.
As regards the second contention, again no contention was raised before any of the authorities or the Tribunal that the payment made by the assessee was nothing but the diversion of the profits. On the other hand, the circumstance under which the payment was made by the assessee to the labour was that there was a difference between him and the other partner and, therefore, to keep the labour contented the payment has been made. It is clear that the circumstance under which the payment was made and which was not challenged before the Tribunal establishes the commercial expediency of the payment. In support of his last contention Mr. Joshi argued that the relevant accounting year of the firm for the asst. yr. 1956-57 was one that ended on 30th June, 1955. The payments shown to have been made on 29th Sept., 1955 and 15th Oct., 1955, would not, therefore, be for earning the profits of the relevant accounting year and the assessee at any rate is not entitled to claim deduction of the amount for the asst. yr. 1956- 57.

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