JUDGMENT
B.M. Lal, J.
1. This is a reference under Section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), whereby the following question of law has been referred to this court for opinion :
“Whether, on the facts and circumstances of the case, the Tribunal was right in law in holding that the commission paid to the manager, R.P. Patel, was not an allowable deduction ? ”
2. The assessee-applicant is a private limited company carrying on the business of printing and supplying bidi labels and such work is undertaken for the firm, M/s. Mohanlal Hargovind Das, bidi manufacturers.
3. The assessee-firm, M/s. Anand Jyoti Printers Private Limited, Jabalpur, has 1,000 equity shares of which 535 shares are held by Shri Parmanand Bhai Patel who is carrying on the business of bidi manufacturing, 63 shares are held by his sister, Shrimati Madhukanta Patel, the wife of Shri R.P. Patel, the manager of the assessee-company, M/s. Anand Jyoti Printers. Thus, by relationship, the manager of this company, Shri R.P. Patel, is the brother-in-law of Shri Parmanand Bhai Patel.
4. The relevant assessment years are 1963-64 and 1965-66 to 1968-69. During these years, the assessee-company, M/s. Anand Jyoti Printers Private Limited, claimed payment of salary, bonus and commission to its manager as follows :
Asst. Year
Salary per month
Total salary
Bonus
Commission
Rs.
Rs.
Rs.
Rs.
1963-64
800
9,600
2,250
29,868
1964-65
850
10,200
2,400
53,242
1965-66
900
10,800
2,556
52,711
1966-67
950
11,400
2,700
43,175
1967-68
1,050
12,600
2,850
67,294
1968-69
1,150
13,800
3,150
69,435
Total
3,15,725
5. The Income-tax Officer, while allowing the salary and bonus as claimed by the assessee, disallowed the commission paid to him as not deductible under Section 36(1)(ii) of the Act. On the other hand, it has been found that the payment of commission alleged to have been paid to Shri R.P. Patel was due to close relationship between him and Shri Parmanand Bhai Patel who is the head of the family controlling the business of M/s. Mohanlal Hargovind Das. As stated, Shri R. P. Patel is the brother-in-law of Shri Parmanand Bhai Patel.
6. The contention of the assessee-company relating to the payment of commission as allowable deduction has been repelled even by the Tribunal against which a reference has been made to this court by framing and referring the legal question referred to above, for our reply.
7. On the other hand, Shri B.K. Rawat, appearing for the Revenue, argued that in the facts and circumstances of the case, when it was not brought on record that Shri R.P. Patel had acquired any extra-technical skilful knowledge in carrying on the business of printing press, the commission paid is not liable to be deducted under Section 36(1)(ii) of the Act.
8. After hearing the assessee’s counsel, Shri H.S. Shrivastava, and Shri B.K. Rawat for the Revenue, we have reached the conclusion that this reference has to be answered in the affirmative and in favour of the Revenue, i.e., the commission so paid to the manager, Shri R.P. Patel, was not an allowable deduction for purpose of income-tax.
9. The fact is not disputed even by the Revenue that in the year 1958, it was considered expedient by the assessee to shift the printing press from Bombay to Panagar near Jabalpur, and in the same year, new modern imported printing equipments were purchased from Germany and the same were brought to Panagar near Jabalpur for installation.
10. It was argued by Shri Shrivastava for the assessee that Shri R. P. Patel was not inclined to shift to Panagar, but he was told that he will be given more salary in different emoluments, i.e., bonus, commission, etc., and it was that incentive which had persuaded him to come to Panagar.
11. Shri Shrivastava further submitted that on both occasions, i.e., in 1953 and 1958, when the imported machine was installed, Shri Patel had received technical instructions from the German technician and as such acquired technical skill. It was also argued that the German technician had come for the purpose of giving training to Shri R. P. Patel and the other staff members, and thus with this new technical qualification, the work, efficiency and skill of Shri Patel had increased which resulted in an increase in the income of the firm. Shri Patel also started looking after not only the technical aspect of management but also the general management, financial management, booking of orders and supervising accounts, etc. Therefore, in view of the multifarious business activities and responsibilities shouldered by Shri R.P. Patel, the payment of commission, in addition to his salary and bonus, had become expedient.
12. Although it was argued that the petitioner-company’s manager, Shri R.P. Patel, acquired special qualifications from the German technician, yet nothing has been filed on record to show what extra technical educational qualifications were acquired by Shri R.P. Patel. On the other hand, the record bore out that he was simply a matriculate and the German technician had come only to instal the printing machine and not to import any technical education to Shri R.P. Patel or to any one of the staff members working in the printing press. The German technician who installed the machine might have left some brochures, but that does not mean that by reading those brochures, Shri R.P. Patel had received any special qualifications which had increased his business prudence resulting in earning more profit. If no extra profit has been shown by the assessee on account of the so-called extra qualifications acquired by Shri R. P. Patel, then payment of commission as envisaged under Section 36 of the Income-tax Act has no justification at all. On the other hand, the reasoning as arrived at by the Tribunal that the commission of Rs. 3,15,725 paid to Shri R.P. Patel during the assessment years in question, in the business of printing, was for extra-commercial considerations, i.e., only on account of
relationship (brother-in-law) between him and Shri Parmanand Bhai Patel, cannot be said to be unjustified.
13. It was next submitted on behalf of the assessee-company that under the provisions of Section 2(41) of the Act, the theory of relationship as propounded, between Shri R. P. Patel and Shri Parmanand Bhai Patel, does not have any effect. The definition of “relative” contained in Section 2(41) of the Act may not be said to be applicable to the instant case, but the fact remains that the huge amount of commission as has been paid, despite the fact found by the Tribunal that Shri R. P. Patel had not acquired any extra special technical qualification by receiving training from the German technician, leads to the legitimate conclusion that the payment of the huge amount of commission to the tune of Rs. 3,15,725, was on account of relationship, though it may not be covered fully within the meaning of Section 2(41) of the Act.
14. Pertaining to the previous assessment years, i.e., right from 1961-62 to 1964-65, the matter in issue relating to the deduction of payment of commission was considered by a Division Bench of this court in Miscellaneous Civil Case No. 17 of 1970 dated November 6, 1975, between the same parties, and it was held that the payment of commission to Shri R.P. Patel was on account of extra-commercial considerations because of the relationship of Shri R.P. Patel and Shri Parmanand Bhai Patel, and not due to extra-technical educational qualifications of Shri R.P. Patel. After this decision, nothing has been shown or brought on record by leading any evidence or by filing any documentary proof that Shri R.P. Patel had acquired any technical knowledge or extraordinary skill in the business of printing, with the result that the assessee-firm started earning more profits in the business.
15. For the reasons aforesaid, we have no hesitation in reaching the conclusion that there was no extra contribution extended by Shri R.P. Patel because of his extra-technical qualifications or extraordinary skill in the business of printing which entitled him to receive the commission and the same would be allowable deduction under Section 36(1)(ii) of the Act.
16. Shri Shrivastava by placing reliance on Shahzada Nand and Sons v. CIT [1977] 108 ITR 358 (SC), has strenuously argued that commission paid to the employee of the assessee is an allowable expenditure under Section 36(1)(ii) of the Act. The facts of Shahzada Nand and Sons’ case [1977] 108 ITR 358 (SC) are quite distinguishable from the facts of the present case. In the said Supreme Court case where extra services were rendered by the employees giving more profits to the business, entitled them to get commission and the same was allowable as deductible expenditure under
Section 36(1)(ii) of the Act. But as discussed above at length in the instant case, Shri R.P. Patel has not put in any extra service by virtue of any technical education or extraordinary skill in the business. Therefore, in the facts and circumstances of the instant case, Shri R.P. Patel is not entitled to receive any commission from the company and as such the amount paid towards commission, so far as has been paid to him, is not allowable as deductible expenditure under Section 36(1)(ii) of the Act.
17. At this juncture, dealing with this aspect, it will not be out of place to state that in this modern era of socialistic pattern of society, when our country is passing through a transitory period of overall development, paramount preferences have to be given to rapid industrialisation. In our fast developing country, employees/workers are the backbone of the industry, without whose toil the employer cannot amass good fortune and, therefore, it would be in consonance with the Gandhian economic concept and modern socialistic thought, which has its deeply rooted faith in social and economic equality, that in this new horizon, the workers are the producers of wealth as much as of capital and, therefore, due regard must be paid to them by recognizing them as co-sharers in the enterprise.
18. However, for the employees who are devoting extra work by any means including their expertise in the business, they must be given some incentive, may be in the shape of commission so that they may be induced to work hard resulting in increased output of the business.
19. But, such is not the situation appearing in the case on hand, Shri R.P. Patel, as stated above, has no extra skilful technical qualifications and, therefore, in our opinion, the huge amount of commission paid by the assessee-company appears to have been paid on extraneous considerations, i.e., because of the relationship of brother-in-law between Shri R. P. Patel and Shri Parmanand Bhai Patel and, therefore, the assessee-firm is not entitled to claim the commission paid to Shri R. P. Patel as allowable expenditure within the meaning of Section 36(1)(ii) of the Act.
20. As a result of the above discussion, we answer the question of law referred to us in the affirmative, in favour of Revenue and against the assessee, i.e., the Tribunal was right in law in holding that the commission paid to the manager, Shri R.P. Patel, was not an allowable deduction.
21. The assessee-firm shall pay the costs of this reference. Counsel’s fee Rs. 1,000, if certified.