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We are, therefore, of the view that on a proper construction of sub section (1) of section 53, read in the context of the other provisions of the Act, each of the persons mentioned in sub clauses (a), (b) and (c) would be accountable for the estate duty on the entire property passing_ on the death and his accountabilit... |
Though we are taking his view as a matter of construction, we must point out that it would be very harsh indeed if the Revenue were to proceed only against one accountable person for recovery of the whole of the estate duty, leaving out others to whom some property or the other may have passed, because that would drive... |
We think it would be desirable if the Estate Duty Officer himself apportions the estate duty amongst different accountable persons in accordance with their respective interests in the property and seeks to recover from each accountable person only that part of the estate duty which is payable in respect of the property... |
We are told that this is the practice which is at present being followed by the Estate Duty Office and we hope and trust that the Estate Duty Officer will continue to follow the same practice even under the law as interpreted by us. Ratio |
Now let us consider the position of the lessors in the light of the aforesaid discussion of the law. Ratio |
The lessors are clearly accountable persons since they admittedly took possession of and intermeddled with the leased premises which formed part of the estate of the deceased and if their contention is correct and we must assume it to be so since that was the case of the appellant the leased premises passed to them 505... |
The order of assessment made by the Assistant Controller was not challenged by the appellant in the writ petition nor was it at any time declared invalid by a superior authority at the ' instance of the lessons. Ratio |
Not even any steps appear to have been taken by the lessors for the purpose of challenging the order of assessment. Ratio |
The order of assessment must therefore, be taken to be valid for the purpose of the present proceedings. Ratio |
The lessors were in the circumstances accountable for the whole of the estate duty on the entire property passing on the death of the deceased and hence they were liable to pay the estate duty of Rs. 1,40,090.20 limited of course to the extent of the leased premises which constituted the asset of the deceased received ... |
Since the rent of the leased premises was payable by the appellant to the lessons under the lease deed and the lessors were liable to pay the estate duty of Rs. 1,40,090.20, it was competent to the Assistant Controller to issue a notice under section 73, sub section (5) read with section 46, sub section (5A) of the Act... |
Now it is true that in the notice dated 9th January, 1962, the lessors were not mentioned as the persons to whom the amount of rent was due from the appellant in respect of the leased promises but that does not render the notice invalid or ineffective. Ratio |
What the notice dated 9th January, 1962 in substance and effect required the appellant to do was to pay to the Assistant Controller the amount due or to become due from the appellant to the lessors in respect of the leased premises; that amount could rightly and legiti mately be described as amount due to the estate of... |
The appellant in fact rightly understood his obligation under the notice dated 9th January 1962 and paid 2 months rent aggregating to Rs. 2,800/ to the Assistant Controller and it is only thereafter that he refused to make further payment of rent, presumably with a view to obliging the lessors. Ratio |
This was clearly in breach of the requisition contained in the notice dated 9th Janu ary, 1962. Ratio |
Before we Close, we must refer to .one other contention urged on behalf of the appellant, namely, that no notice of demand having been issued under section 73, sub section (1) to the lessors, the amount of estate duty, though due in consequence of the order of assessment made by the Assistant Controller, was not payabl... |
The Revenue put forward a two fold argument in reply to tiffs contention. Ratio |
The first answer made by the Revenue was that this conten tion was at no time raised in ,he writ petition nor was it urged before the High Court and since it rested on a ques tion of fact as to 506 whether notice of demand under section 73, sub section (1) was served on the lessors before issuing the notice dated 9th J... |
This answer, in our opinion, affords complete refutation to the contention of the appellant. Ratio |
The question whether notice of demand was served on the lessors under section 73, subsection (1) before issue of the notice dated 9th January, 1962 is essentially a question of fact and if it has not been raised in the writ petition, nor argued before the High Court, it cannot be allowed to be agitated for the first ti... |
Secondly it was urged that in any event, notice under section 73, sub section (5) read with section 46, sub section (5A) of the Act of 1922 could be validly issued against a garnishee without service of notice of demand on the accountable person under sub section (1) of section 73 and hence the notice dated 9th January... |
Suppose for this contention was sought to be drawn from the decision of this Court in Third Income Tax Officer, Mangalore vs M. Damodar Bhat.(1) Now, this was a decision given with reference to sub,section (3) of section 226 of the Act of 1961 which corresponds to section 46, sub section (5A) of the Act of 1922 The que... |
This Court, speaking through Shah, J., pointed out: "Section 226, however, provides other methods of recovery and there is no reference in section 226 (3) to, any default on ,the part of the assessee. Ratio |
Section 226(3) merely states that the Income tax Officer may, at any time or from time to time ', by notice in writing require any person who holds or may subsequently hold money for or on account of the assessee, to pay to the Income tax Officer either forthwith so much of the money as iS sufficient to pay the amount ... |
In a proceeding under section 226(3) of the new Act, therefore, it is not necessary that the assessee should be in default or should be deemed to be in default and no such condition or limitation is imposed by the lan guage of that sub section. Ratio |
" If this decision lays down the correct law on the subject and since this is a decision given by a Bench of three judges of this Court, it must be regarded as binding upon us it must be held, while inter preting the corresponding provisions of sub sections (1), (2) and (5) of section 73 of the read with section 46, su... |
We must, however, point out that we are taking this view because the decision in Third Income Tax Officer, Mangalore. Ratio |
vs (1) 507 Damodar Bhat (supra) binds us, though we do feel that the view taken in this decision is not correct. Ratio |
In the first place, the decision seems to have overlooked the fact that it is only when a notice of demand is served on the asses see under section 156 and the period for payment of tax mentioned in it expires that the tax becomes payable by the assessee and it is only then the Income tax Officer can proceed to recover... |
The garnishee proceeding under section 226, subsection (3) is merely one of the modes of recovery prescribed by law. Ratio |
and it is diffi cult to see how it can be resorted to before the tax has become payable by the assessee. Ratio |
Secondly, sub section (3) of section 226 permits garnishee proceeding to be taken for recovery only of 'arrears ' and no tax be said to be in arrears until the expiry of the period for payment of tax specified in. Ratio |
the notice of demand, and thirdly, the concept of recovery by any mode whatever before the expiry of the time allowed for payment of tax is foreign to the whole scheme of recovery both under the Act of 1961 and the Act of 1962 But, as we have pointed out, the decision in Third Income Tax Officer, Mangalore vs M. Damoda... |
We must, in the circumstances, hold that the notice dated 9th January, 1962 was a valid notice and the appellant was bound to comply with it and to pay to the Assistant Controller the amount of rent due or to become due in respect of the leased premises. Ratio |
We accordingly allow the appeal in part and issue a writ quashing and setting aside the order dated 25th March, 1964 in so far as it imposes penalty of Rs. 3,000/ on the appel lant, but so far as the notice dated 9th January, 1962 is concerned, we uphold its validity and reject the appeal. RPC |
There will be no order as to costs throughout. RPC |
S.R. Appeal partly allowed. RPC |
ivil Appeal No. 1011 of 1972. FAC |
Appeal by Special Leave from the Judgment and Order dated the 18th August, 1971 of the Punjab and Haryana High Court in Income Tax Reference No. 17 of 1971. FAC |
section T. Desai, (Mrs.) A.K. Verma and Shri Narain for the Appellant. FAC |
T.A. Ramachandran and R.N. Sachthey for Respondent. FAC |
The Judgment of the Court was delivered by BHAGWATI, J. FAC |
The short question that arises for determination in this appeal is whether certain commission paid by the assessee to two of its employees is an allowable expenditure in computing the profits of the assessee from business. Ratio |
The assessee is a registered firm which at all material times consisted of five partners, namely, Chaman Lal, Madan Lal, Harbans Lal, Raj Mohan and Saheb Dayal representing a trust. FAC |
Chaman Lal was the son of Saheb Daval and Raj Mohan was the son of one Gurditta Mal. FAC |
During the accounting year relevant to the assessment year 1963 64, Chaman Lal and Harbans Lal had their own independent factories and hence they were not attending 531 to the business of the assessee and Raj Mohan too was not actively associated with the conduct of the business of the assessee as he was working with t... |
Thus, from amongst the partners, only Madan Lal was looking after the day to day management of the business of the assessee and he was assisted by Saheb Dayal and Gurditta Mal who were engaged as employees of the assessee. FAC |
Saheb Dayal and Gurditta Mal were .looking after the busi ness of the assessee since a long time and they were each paid remuneration of Rs. 1000/per month. FAC |
The business of the assessee consisted of sole selling agency of OCM in respect of yarn, cloth and blankets manufactured by OCM and for the sales affected by the assessee as such sole selling agents, commission was paid to the assessee by OCM. FAC |
The figures show that the business of the assessee prospered from year to year from 1959 60 onwards and there was a gradual increase in the turnover of the assessee which jumped from the figure of Rs. 39.99 lacs for the assessment year 1962 63 to the figures of Rs. 54.28 lacs for the as sessment year 1963 64. FAC |
Since the assessee showed very satisfactory turnover from year to year, OCM started giving to the assessee, in addition to the usual commission, over riding commission at the rate of 21/2% on the sales affected by the assessee and the. over riding commission thus re ceived by the assessee during the previous years corr... |
The aggregate amount of commission paid to Saheb Dayal and Gurditta Mal thus came to Rs. 45,380/ and this amount of commission was claimed by the assessee as a deductible expenditure in its assessment to income tax for the assessment year 1963 64. FAC |
The Income Tax Officer, disallowed the claim of the assessee on the ground that there was no material produced by the assessee which would "prove the nature of services rendered by these two gentlemen in lieu of which the commission is claimed to have been paid" and there being no evidence to show that the increase in ... |
The assessee appealed against the disallowance of the amount of commission but the Appellate Assistant Commis sioner in appeal affirmed the disallowance on the ground that no evidence had been 532 produced by the assessee to prove that the activities of Saheb Dayal and Gurditta Mal in the relevant account year were or ... |
The matter was carried in further appeal before the Tribu nal, but the Tribunal also took the same view and held that since there was no proof to show that any services were rendered by Saheb Dayal and Gurudayal Mal for which payment of commission in addition to salary and bonus could be justified, commission could not... |
The Tribunal observed that it was not possible to say "that the increase in the turnover in the year under appeal was due to the extra efforts put in by these two employees or that the employees had worked in the hope of receiving extra commission" and since bonus equivalent to three months ' salary was paid to saheb D... |
The assessee being aggrieved by the order made b the tribu nal applied for a reference of the question of law arising out of the order of the Tribunal and on the application of the assessee, the following question of law was referred for the opinion of the High Court: "Whether on the facts and circum stances of the cas... |
The view taken by the High Court was that in order to attract the applicability of section 36, sub section (1), clause (ii), it was necessary that the payment of commission should be for services rendered and since there was no evidence led on behalf of the assessee to show that any extra services were rendered by Sahe... |
The High Court in this view held that section 36, sub section (1), clause (ii) was not applicable and no claim for deduction could be sustained under it. RLC |
The correctness of this decision is impinged in the present appeal preferred by the assessee with special leave obtained from this Court. Ratio |
533 Now, before we proceed to consider, the question which arises for determination before us, we must make it clear at the out set that m the present case the genuineness of the payment of commission made to Saheb Dayal and Gurditta Mal was at no time doubted by the Revenue authorities. Ratio |
It was not the ease of the Revenue that this payment was not made or that it was sham or bogus. Ratio |
If that had been the finding, there would have been an end of the case of the assessee. Ratio |
No question would then have arisen for considering the applica bility of section 36, sub section (1), clause (ii). Ratio |
No payment having been made, no deduction would have been permissible. Ratio |
But here the commission was paid: it was a genuine payment and the only question was whether it was deductible as an allowable expenditure under section 36, sub section (1), clause (ii). Ratio |
Section 36, sub section (1) provides for making of various deductions in computing the income of an assessee under the head: "Profits and Gains of Business or Profession" and one such deduction is set out in clause (ii) which, as it stood at the material time during the assessment year 1963 64, read as follows: "36(1)(... |
" Saheb Dayal and Gurditta Mal were admittedly employees of the assessee. Ratio |
They were each paid a salary of Rs. 1000/ per month and for the previous year relevant to the assess ment year 1963 64 bonus equivalent to three months ' salary was also paid to each of them. Ratio |
The income Tax Officer disal lowed even this salary and bonus paid to Saheb Dayal and Gurditta Mal on the ground that there was nothing to show that any services were rendered by them and the payment of salary and bonus appeared to be ex gratia. Ratio |
But this deci sion was reversed in appeal by the Appellate Assistant Commissioner who, following his earlier order dated 12th December, 1967 in the appeal against the assessment to tax for the assessment year 1962 63, allowed the payment of salary and bonus as a deductible expenditure. Ratio |
The Appel late Assistant Commissioner c:early recognised that Saheb Dayal and Gurditta Mal were employees of the assessee and were attending to the business of the assessee as such employees since a long time and Gurditta Mal was in fact "a seasoned and experienced businessman" and he looked after the assessee 's trans... |
The Tribunal also found that Saheb Dayal and Gurditta Mal 534 "were looking after the business of the assessee firm for a long time". Ratio |
Thus, there can be no doubt that services were rendered by Saheb Dayal and Gurditta Mal to the asses see and for these services, besides Salary and bonus, com mission was paid to them, because, according to the asses see, during the relevant accounting year, there was consid erable enlargement in the turnover of the sa... |
The question is whether this commission qualifies for deduction as an allowable expenditure under section 36, sub section (1), cause (ii). Ratio |
The only ground on which the High Court negatived the ap plicability of section 36, sub section (1), clause (ii) was that during the relevant accounting year Saheb Dayal and Gurditta Mal rendered the same services which they were rendering in earlier years and no extra services were ren dered by them which could justif... |
The High Court appeared to take the view that there must be correlation between the payment of commission and the services rendered and since commission was paid by the assessee for the first time during the relevant accounting year, there must be some extra services rendered by Saheb Dayal and Gurditta Mal in that yea... |
Since, according to the High Court, there was no proof that any extra services were rendered by Saheb Dayal and Gurditta Mal, the High Court held that the payment of commission could not be said to be for services rendered within the meaning of section 36, sub section (1), clause (ii). Ratio |
This view taken by the High Court is, in our opinion, plainly erroneous. Ratio |
Section 36, sub section (1 ), clause (ii) does not postulate that there should be any extra services rendered by an employee before payment of commission to him can be justi fied as on allowable expenditure. Ratio |
What it requires is only this, namely, that commission paid to an employee should be for services rendered by him. Ratio |
For example, if an employ ee has not rendered any services at all during the relevant accounting year, no commission can be paid to him which would be an allowable expenditure. Ratio |
There must be some services rendered by an employee and where commission is paid for the services so rendered, section 36 sub section (1), clause (ii) would apply and the commission to the extent to which it is found reasonable would be an allowable expenditure under that provision. Ratio |
It is not necessary that the commission should be paid under a contractual obligation. Ratio |
It may be purely voluntary. Ratio |
But it must be for services rendered and here services were in fact rendered by Saheb Dayal and Gurditta Mal during the relevant accounting year. Ratio |
It is true that the services rendered by these two employees during the relevant accounting year were in no way greater or more onerous than the services ren dered by them in the earlier years, but that is immaterial. Ratio |
There is no such requirement and the argument based on it cannot be sustained. Ratio |
It is not justified by the language of section 36 sub section (1), clause (ii) and indeed, if it were pushed to its logical extreme, it would be difficult to support even payment of bonus as a permissible deduction under that provision. Ratio |
Of course the circumstance that no additional services are rendered 535 by an employee would undoubtedly be of some relevance in determining the reasonableness of the amount of commission but it would have to be considered along with other circum stances and the question whether commercial expediency justified the paym... |
This was the view taken by the Gujarat High Court in Laxmandas Sejram vs Commissioner of Income Tax, Gujarat, (1) and we wholly accept that view. Ratio |
It is, therefore, no answer to the applicability of section 36, sub section (1), clause (ii) to say that no extra services were rendered by Saheb Dayal and Gurditta Mal during the relevant accounting year. Ratio |
The amount of commission having been paid for services admittedly rendered by them, the only question would be whether it was reasonable under section 36, sub section (1), clause (ii). Ratio |
Turning to the provisions of section 36, sub section (1), clause (ii), we find that the proviso to that clause lays down three factors for the purpose of determining the reasonableness of the commission paid to an employee. Ratio |
The question whether the amount of the commission is a reasona ble amount or not has to be determined with reference to these three factors. Ratio |
Sometimes these three factors are loosely described as conditions but they are not really conditions on the fulfilment of which alone the amount of commission paid to an employee can be regarded as reasona ble. Ratio |
They are merely factors to be taken into account by the Revenue authorities in determining the reasonable ness of the amount of commission. Ratio |
It may be that one of these factors yields a negative response. Ratio |
To take an exam ple, there may be no general practice in similar business or profession to give commission to an employee, but, yet, having regard to the other circumstances, the amount of commission paid to the employee may be regarded as reasonable. Ratio |
What the proviso requires is merely that the reason ableness of the amount of commission shall be determined with reference to the three factors. Ratio |
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