JETHABHAI HIRJI AND CO Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE question that arises on this reference is whether a certain amount paid by an employer to his employees is a valid deduction under Section 10 (2) (xv), Income-tax Act, 1922, and in order to determine it we have got to consider whether it is an expenditure laid out or expended wholly and exclusively for the purpose of the business of the assessee. THE assessee employed two persons by the name of Jamnadas and Purshottamdas to attend to a branch business of his. Jamnadas was employed in samvat year 1993 on a salary of RS. 125, and Purshottamdas was employed in samvat year 1995 on a salary of Rs. 111. On 1st September 1940, the assessee agreed to pay to each of these employees a commission of 20 per cent. on the net profits of the branch in addition to their respective salaries, and pursuant to this agreement each of the employees was paid Rs. 6000 in the year of account. THE Income-tax Officer considered the claim and allowed only a sum of Rs. 1000 in all for both the employees and the balance of Rs. 11,000 was disallowed by him. THE tribunal came to the conclusion that the sum of RS. 11,000 was rightly disallowed by the Income-tax Officer, as according to the view of the Tribunal only one thousand rupees had been expended wholly and exclusively for the purpose of the assessee s business.

(2.) NOW, Sir Jamshedji s contention is that it is for the employer to determine what remuneration he should pay to his employees for the services rendered by him. In this case it is not disputed that there was an agreement between the employer and the employees to pay 20 per cent. of the net profits of the business. Nor is it disputed that in fact the sum of Rs. 6000 was paid to each of the employees. From these admitted facts, Sir Jamshedji contends that the quantum of the payment should be left to be determined by the employer and should not be considered by the Income-tax Officer. Sir Jamshedji contends that an Income-tax Officer can never be in a position to judge as to how and in what manner employers should remunerate their employees. It is a matter of business and businessmen know these things better than the Department does. I agree with Sir Jamshedji s contention that it must be left in every case to an employer to determine for himself, taking all circumstances into consideration, in what manner he should remunerate his employee who is rendering certain services to him. But the section requires that whatever amount he pays to his employee must be paid wholly and exclusively for the purposes of his business, and it is for the Income-tax Officer to decide whether any remuneration paid by the employer to his employee was wholly and exclusively expended for the purpose of his business. In my opinion, it is erroneous to contend that as soon as an assessee has established these two facts, viz., the existence of an agreement between the employer and the employee and the fact of actual payment, no discretion is left to the Income-tax officer except to hold that the payment was made wholly and exclusively for the purposes of the business. Although the payment might have been made and although there might be an agreement in existence, it would be open to the Income-tax Officer to take into consideration various factors which would go to show whether the amount was paid as required by the section. For instance, the Income-tax Officer may take into consideration whether the moneys were paid to a near relation of the employer. He may take into consideration the extent of the business and the particular services rendered by the employee which called for a special remuneration at the hands of his employer. He may take into consideration the quantum of the payment made with a view to decide whether the payment was or was not grossly out of proportion to the work done by the employee. If after taking these factors into consideration he comes to the conclusion that the payment was not made wholly and exclusively for the purpose of the business of the assessee, it would be open to him either to disallow the whole sum or a part of the sum paid. The question whether a particular sum was expended wholly and exclusively for the purposes of such business must essentially be a question of fact to be determined by the Income-tax Officer. But it would be open to the assessee to contend, as it has been contended in this case, that the decision arrived at by the Income-tax Officer was based on no evidence at all. If the assessee satisfies the Court that apart from the actual payment and existence of the agreement there were no other factors which were taken into consideration by the Income-tax Officer, then perhaps the Court would say that the Income-tax Officer was not justified in coming to the conclusion that he did.

(3.) ONE more question also arises on this reference and that is with regard to whether the disallowance of this very sum for the purpose of excess profits tax is justifiable or not. The contention of the assessee was that the disallowanc with regard to this sum was made under Rule 12 of Schedule 1 to the Excess Profits Tax Act, and before a disallowance can be made under that rule the consent of the Commissioner of Excess Profits Tax was necessary, and in this case it is not disputed that the Excess Profits Tax Officer did not obtain any such permission of the Commissioner of Excess Profits Tax. Rule 12 gives the Excess Profits Tax Officer power to refuse to allow any deduction which in his opinion is in excess of the amount which he considered reasonable and necessary having regard to the requirements of the business of the assessee. The basis of the Excess Profits Tax Act is that substantially the very income which is liable to tax for income-tax is also liable to tax for excess profits tax under the Excess Profits Tax Act, and, therefore, in order to arrive at the total income of the assessee for both purposes the question whether deductions are permissible under Section 10 or not has to be considered. The Excess Profits Tax Act gives wider powers to the Excess Profits Tax Officer and that is that although a deduction may be permissible under the Income-tax Act, he may still disallow it under the Excess Profits Tax Act. But in this case as the deduction was disallowed under the Income, tax Act itself, no question arose of disallowing it under Rule 12 of Schedule 1 of the Act, and, therefore, no question as to the necessity of the permission of the Commissioner of Excess Profits Tax arises.