Find a Lawyer

Income‑tax Reference No. 17 of 1961, decided on 25th August 1962.

Firm‑

----

--Bonus to employees of firm paid by partner‑Whether allowable from partner's share in income of firm‑Income‑tax Act, 1922, Ss. 10(2), 16(1)(b) & 23(S)(a), (6).

Where, owing to difference of opinion between the assessee and his partner, bonus to the employees of the firm was not paid by the firm itself, but the assessee paid bonus to the employees of the firm in order to keep the labour con tented, and the assessee claimed deduction of the amount so: paid by him from his share in the income of the firm in his own assessment :

Held, that, as the circumstances of the case showed commercial expediency of the payment, the amount of bonus paid by the assessee was an allowable deduction.

There is no rule of law that once the share of a partner in the profits of the firm is ascertained he cannot claim any deduction therefrom.

Tata Sons Ltd. v. Commissioner of Income‑tax (1950) 18 I T R 460 ref.

By this application under section 66(1) of the Indian Income‑tax Act, the Commissioner requires the Appellate Tribunal to refer a certain question of law said to arise out of the Tribunal's order in I. T. A. No. 12942 of 1958‑59 dated June 23, 19E 0, to the High Court of Judicature at Bombay. Inasmuch as, in our opinion, a question of law does arise, we hereby draw up an agreed statement of the case and refer it to the High Court of Judicature at Bombay.

2. The assessee is a consulting architect and civil engineer. He is a partner in two registered firms viz., Messrs K. R. Irani & Co. and Messrs National Steel Works, Bombay. The firm of National Steel Works, Bombay, was assessed for the assessment year 1556‑57. The share of income apportioned to the assessee, a partner therein, under section 23(6) came to Rs. 1,30,265.

3. In the assessment proceedings of the assessee for the assessment year 1956‑57, with which we are now concerned, the assessee claimed a sum of Rs. 15,337 as deduction from his share income. This sum of Rs. 15,337 represents payment of bonus to the staff of Messrs National Steel Works. This sum was debited to the account of the assessee on September 29, 1955, and October 15, 1955, in the books maintained by the firm. The payment of this sum to the employees of National Steel Works is not disputed. The bona fides of the assessee making the payment is also not in dispute.

4. In dealing with this claim, the Income‑tax Officer observed as follows in paragraph 6 of his order :

"Any payment for bonus, etc., to the workers of that firm are clearly the firm's liability and once the profits from the firm has been computed no further claims can be put by the assessee as deduction from that share unless he can prove that these were absolutely necessary for him in order to maintain the interest of the firm. Obviously, there is nothing like it in this case and payment made by the assessee cannot be said to be wholly and exclusively in curred for the purpose of earning the profits from the firm. Under these circumstances the claim will not be allowed."

For the reasons set out above, he disallowed the payment.

5. The matter was taken up in appeal to the Appellate Assistant Commissioner. The Appellate Assistant Commissioner upheld the assessment and he observed as follows :

"The appellant's share income from this firm is Rs. 1,30,265. Against this share income, the appellant claimed a sum of Rs. 15,337 representing the bonus paid by him to the workers of that firm. The appellant'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 the 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 shale income is determined under section 23(5)(a), that is the figure to be adopted for the purpose of assessment as contemplated in section 16 (1)(b) of the Act. There is no doubt a difference of opinion on this point among the High Courts but a plain reading of section 23(5)(a) and section 16(1)(b) shows that no allowance of any kind can be made against the share income. In this view of the matter, I am of the opinion that the Income‑tax Officer was justified in not allowing the bonus as a set‑off against the appellant's share income from the firm."

6. On further appeal to the Tribunal at the instance of the assessee, the facts on the basis of which the deduction was claimed and disallowed were not in dispute. The relevant contentions of the assessee and the Department may be summarised as follows : The assessee submitted that the conclusion of the Income‑tax Officer and the Appellate Assistant Com missioner that when once the share income was determined there is no scope for further allowance was wrong in law and is contrary to several decisions. It was also submitted that when once the payment is not in dispute and no other motive is attributed to the payment there can be no dis allowance of the deduction as the amount was actually laid out and expended only out of commercial considerations in order to earn a larger income. The Departmental Representative submitted that the principle of the decisions relied on was that the share income is not liable to be interfered with, that these decisions are on different facts, that the bonus is payable by the firm and not by the assessee and that this was merely a diversion of income at the instance of the assessee.

7. The Tribunal held for the reasons set out in its order which is annexed hereto as Annexure "A", that the share income from the firm was liable for modification in the partners' hands by deduction being allowed of the amount spent for earning the share income, that the actual payment not being in dispute the motive for paying the same was out of commercial considerations for earning the share income and that the payment was liable to be allowed in the hands of the ‑ assessee as a deduction as per the decisions of the High Court.

8. On these facts, the following question of law arises :

"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 "

9. Both the parties agree to all the statements made above. The Departmental Representative wants us to incorpo rate the figures of bonus payments for earlier years also in this statement. He agreed that he did not draw the attention of the Tribunal to any such statement during the bearing. We see no reason to incorporate any material which was not referred to by either party at the time of the appeal. We, therefore, reject this suggestion.

G. N. Joshi with R. J. Joshi for the Commissioner.

N. A. Palkhivala with B. A. Palkhivala for the Assessee.

TAMBE, J.

‑This is a reference under subsection (1) of section 66 of the Act at the instance of the Commissioner of Income‑tax. We are here concerned with the assessment year 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., Messrs K. R. Irani & Co. and Messrs National Steel Works, Bombay. The firm of National Steel Works, Bombay, was assessed for the assessment year 1956‑57 and the share income apportioned to the assessee as a partner therein under section 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 Messrs 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 September 29, 1955, and partly on October 15, 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 pay ment was also not disputed.

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 Income‑tax Officer 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 exclu sively incurred for the purpose of earning the profits from the firm. The matter was taken in appeal before the Appellate Assistant Commissioner, 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 section 23(5)(x), that is the figure to be adopted for the purpose of assessment as contemplated in section 16(1)(b) of the Act."

In this view of the matter, the appeal was dismissed by the Appellate Assistant Commissioner. The assessee took a further appeal before the. Tribunal. Placing reliance on a decision of this Court in Tata Sons Ltd. v. Commissioner of Income‑tax ((1950) 18 I T R 460) the assessee contended that the view taken by the Appellate Assistant Commissioner was erroneous and claimed that the order of the Appellate Assistant Commissioner 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 Com missioner of Income‑tax, 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 section 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 Messrs Tata Sons Ltd. v. Commissioner of Income‑tax 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.

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 of bonus. On the other hand, the state ment 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 income‑tax 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 assessment year 1956‑57 was one that ended on 30th of June 1955. The payments shown to have been made on September 29, 1955, and October 15, 1950 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 assessment year 1956‑57.

Now, the entire argument is founded on a fact that the relevant accounting year of the firm ended on 30th of June 1955. We do not find any material on the record to so hold 'nor does any contention to this effect appears to have been raised before the Tribunal. We, therefore, fail to see how the contentions raised by Mr. Joshi would arise out of the order of the Tribunal. The view taken by the income‑tax authorities that once the share of profits of a partner is ascertained, he cannot claim any deduction therefrom, has not been pressed before us by Mr. Joshi. In our opinion, there fore, the Tribunal was right in allowing the deduction claimed by the assessee.

Our answer to the question stated, therefore, is in the affirma tive. The Commissioner shall pay the costs of the assessee.

Question answered in the affirmative.

Find a Lawyer Near You

Dealing with a matter like this? Connect with a verified advocate in your city — free on SJP Lawyers Directory.