SHAHZADA NAND & SONS versus THE COMMISSIONER OF INCOME TAX, PATIALA

Citation: [1977] 3 S.C.R. 529 · Decided: 12-04-1977 · Supreme Court of India · Bench: P.N. BHAGWATI · Disposal: Appeal(s) allowed

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Judgment (excerpt)

) 
•• 
.. 
, 
SHAHZADA NAND & SONS 
v. 
THE COMMISSIONER OF INCOME TAX, PATIALA 
April 12, 1977 
f P. N. BHAGWATI, N. L. UNIWALIA AND S. MuRIAzA FAzAL ALI, JJ.J 
1-llowable expenditure in 
computing the profits of the assessee 
from 
busuzess-Whether the commission paid by the assessee to its employees an 
allolvable expenditure u/s. 36(1) (ii) of Income Tax Act. 
The appellants were the sole ·selling agents of the Oriental Carpet- 1'.fanu- . 
facturers India Pvt. Ltd. in respect of yarn, cloth and blankets manufactured by 
·them ~n-;J. for the s~es effected by the appell~nts, as such sole selling agenrs 
co~m1ss1on was paid to them by OC]i.f. Since the appellants showed \'ery 
~at1sfactory turnover from year to year, OCA-1 started giving to them, in addi-
11on to the usual commissio~ over-riding commission·@ 2t per cent on the 
sales effected by the appellants. Since the turnover of the sales reached the 
figure of Rs. 54.28 lacs and over-riding commission ·increased to Rs. 1,13,449/-
<luring the previous year corresponding to the assessment year 1963-64, the 
appellants paid out of the over-riding commission received by them a sum of 
Rs. 22,690/- (i.e. at the rate of !% of the sales) each to two of their employees 
viz» Saheb Dayal and Gurditta ]I.fall since they were primarily responsible for 
the i.ncreased prosperity of the appellants. The commission so paid viz. Rs. 
45,380/- was claimed by the appellants as -a deductible expenditure in .their 
assessment to income tax for the assessment year 1963-64. The Income Tax 
Officer disallowed· the claim on- the ground that there was no evidence to show 
that the increase in sales during the relev·ant accounting year was due to the 
efforts of Saheb Dayal and Gurditta Mal. The Appellate Assistant Comm.is-_ 
sioner rejected the appeal preferred to him and held that since no evidence had 
been produced by the assessee to prove that the activities -of Saheb Dayal and 
Gurditta 1-fal in the relevant account year were of a nature different from those 
in th: earlier years so that they put in any extra time or energy in the conduct 
of _the business of the assessee so as to justify the payment of the commission, 
it could not be said that the commission was paid for services rendered by them. 
The Tribunal, in further appeal took the same view and held that since there 
was no proof to show that any extra services were rendered by Saheb Dayal 
and Gurditta l\.Ial for which payment of commission in addition to salary and 
bonus could be justified, commission could not be said to have been paid for 
services rendered so as to attract the applicability of s. 36(1) (ii) of the Act • 
. The High Court was also of the same view and answered the reference made 
to it, in favour of the Revenue. 
Allowing the appeal by .special leave, the C.ourt;-
. HELD : (!) The sum of Rs. 45,380/- paid by the assessee to Saheb Dayal 
and Gurditta 1-Ial by way of commission ·during the relevant accounting year 
was reasonable, having regard to all the circumstances of the case and it ought 
to have been allowed as a deductible expenditure u/s. 36(1) (ii) of the Income 
Tax Act. [537 BJ 
. 
· (2) Section 36, sub-section. (1) 
clause (ii) does not postulate that there 
should be any extra services rendered by an employee before payment of com-
mission to him can b'! justified as an aUowable expenditure. What it requires, 
ls only this, namely, that com.mission paid to an employee. sl!onld be for son:ie 
se"ices rendered by him. It is not necessary that the commISSton should be paid 
under a contractual obligation. It may be purely- voluntary. 
(3) It is immaterial that the services rendered during the r~levant accou~t· 
ing year ·were in no way greater or mor~ onerous than the sef!tces ren~e~ed tn 
the earlier years. There is no such reau1rement under the section and it ts not 
justified by the language of s. 36, sub-section(!), clause (ii) and indeed if it 
were pushed to its logical extreme, even payment of bot1US cannot be treated 
as permissible deduction under that provision. 
[534. G-H] 
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530 
SUPREME COURT REPORTS 
[1977] 3 s.c.R. 
(4) It is n<>w well-settled that the mere fact that commission is paid ex-
gratla would not necessarily mean that it is unreasonable. Commercial ex4 
pediency does not mean that an employer should not make any payment to an 
employee unless the employee is entitled to it under a contract. What is the 
requirement

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