Hira Lall and Sons Vs. Commissioner of Income-tax - Court Judgment

M.C. Jain C.J.

1. By these reference applications, the petitioner seeks a direction to the Income-tax Appellate Tribunal to state the case in respect of questions Nos. 1 to 15 framed by the petitioner in its reference applications as the same arise out of the order of the Tribunal. We are not stating all the questions mentioned in the applications as, during the course of the arguments, learned counsel for the applicants has confined his submissions in relation to the following two questions :

'1. Whether, on the facts and circumstances of the case, the Appellate Tribunal was legally correct and justified in law in upholding the disallowance of Rs. 23,196 out of the total payment of Rs. 79,996 made to Shri K. R. Sharma

2. Whether, on the facts and circumstances of the case, the Appellate Tribunal was legally correct and justified in law in upholding the disallowance of Rs. 32,770 by invoking the provisions of section 36(1)(iii)

2. Shri C. S. Aggarwal, learned counsel for the appellant, vehemently submitted that, having regard to the terms of the agreement, only a sum of Rs. 200 was agreed to be paid by way of remuneration to Shri K. R. Sharma by the applicant per month. Besides that he was to be paid one month's bonus and commission at the rate of 2% on the total turnover made directly from Moradabad or through the head office at Delhi. But the commission was to be increased to 3% if the turnover exceeded Rs. five lakhs.

3. We have been taken through the terms of the agreement and, on the basis of the terms agreed upon between the parties, it is urged that the salary payable to the second party to the agreement, i.e., Shri K. R. Sharma, was less than Rs. 7,500. The construction or the interpretation of the agreement is a question of law and as such question No. 1 arises from the order of the Tribunal.

4. We have considered the submissions of learned counsel for the applicant. It may be stated that had there been no decision of the Supreme Court, the position would have been different, but when any matter stands concluded by the Supreme Court, then, in that situation, this exercise would be futile to call for a reference on the aforesaid question. The Tribunal has referred to the decision of the Supreme Court and, on that basis, it has declined to make a reference. The relevant decision of the Supreme Court is Gestetner Duplicators P. Ltd. v. CIT : [1979]117ITR1(SC) . Their Lordships observed that if under the terms of the contract of employment, remuneration or recompense for the services rendered by the employee is determined at a fixed percentage of the turnover achieved by him, then such remuneration or recompense will partake the character of salary, the percentage basis being the measure of the salary and, thereforee, such remuneration or recompense must fall within the expression 'salary' as defined in rule 2(h) of part A of the Fourth Schedule to the Act. The expression 'salary' has also been defined in section 17. Under section 17, the expression 'salary' has been defined for the purposes of sections 15 and 16 and also for the purpose of section 17 to include wages, any annuity or pension, any gratuity, any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages. Reliance has also been placed on another decision of the Supreme Court in Ram Prashad v. CIT : [1972]86ITR122(SC) . There, the question was whether the managing director of the company can be considered to have his income in the form of salary or business. Their Lordships observed that there is no doubt that for ascertaining whether a person is a servant or an agent, a rough and ready test is, whether, under the terms of the employment, the employer exercises supervisory control in respect of the work entrusted to him. A servant acts under the direct control and supervision of his master. An agent, on the other hand, in the exercise of his work, is not subject to the direct control or supervision of the principal, though he is bound to exercise his authority in accordance with all lawful orders and instructions which may be given to him from time to time by his principal. But, this test is not universal in its application and does not determine, in every case, having regard to the nature of employment, that he is a servant. A person who is engaged to manage a business may be a servant or an agent according to the nature of his service and the authority of his employment. On the facts of that case, it was found that the remuneration paid to the managing director is his salary.

5. As far as the present matter is concerned, in view of the first decision referred to above, the status of Mr. K. R. Sharma can only be found to be that of a servant and whatever he draws would fall within the expression 'salary', though partly described in the agreement as commission payable to Shri K. R. Sharma. It may be stated here that the agreement was entered into with the view that the services of Shri K. R. Sharma can be availed of by opening a new branch at Moradabad. He was already in the employment of the applicant assessed. On account of his transfer from Delhi to Moradabad, what was needed by Shri Sharma was a substantial increase in his emoluments. The agreement also recites that the whole office at Moradabad would be under the direct control of Shri K. R. Sharma who will supervise the work and look after the work, employment and dismissal of the employees at Moradabad. Further restrictions were placed on him not to do any similar business of the nature done by the assessed while at Moradabad and Shri Sharma will be entitled to get a remuneration of Rs. 200 per mensem and one month bonus and besides this he will be entitled to a commission of two per cent. on the sale of goods made directly from Moradabad or through the head office and this term is also provided in the agreement that Shri Sharma will be responsible for all acts of omissions and commissions if not done honestly and bona fide and he alone will be responsible for any act done by him of a criminal nature or any act involving moral turpitude. Looking at the background in which the agreement was entered into and the terms of the agreement and further viewed in the light of the decision of the Supreme Court, it cannot be said that a question of law arises out of the order of the Tribunal which may call for any reference. The facts of the present case are identical to the aforesaid decision of the Supreme Court.

6. Counsel for the applicant also emphasises another aspect of question No. 1 and that aspect is in relation to the expenditure stated to have been incurred by Shri K. R. Sharma. According to the applicant, a sum of Rs. 21,618.85 was incurred by way of expenditure. Out of his salary, this amount ought to have been deducted in order to arrive at the net salary of Shri Sharma. This aspect has been considered by the Tribunal and the view expressed by the Tribunal is that, in the case of the assessed, no deduction can be allowed out of the salary paid to Shri Sharma; that question would arise only in the case of assessment of Shri Sharma. Section 40A (5)(b)(iii) provides that nothing in clause (a) shall apply to any expenditure or allowance in relation to any employee whose income chargeable under the head 'Salaries' is seven thousand and five hundred rupees or less. Counsel for the applicant submitted that the expression used in this provision is income chargeable under the head 'Salary''. So, K. R. Sharma's salary has to be taken into consideration and, on that basis, it should be found as to what is his net salary. What we have to see under the terms of the agreement is as to what is payable to Shri K. R. Sharma in the form of salary, bonus or commission. If Shri Sharma has spent any amount in connection with the business, the same would be recoverable from the assessed at this instance. But, so far as the assessed's assessment is concerned, whatever is payable to Shri Sharma would be taken into account and, on that basis, the allowable expenditure would be taken into consideration and that expenditure is to the extent of Rs. 60,000. Thus, in our opinion, the Tribunal was right and justified in declining to make a reference to this court on the aforesaid question.

7. With regard to the second question, in our opinion, there could be no reason for making any reference by the Tribunal. It is true that the assessed took money against his overdraft account and paid interest in that connection to the bank. Whether that interest can be claimed by way of deduction is to be considered in the light whether the money was borrowed by the applicant for the purpose of business. Admittedly, the amount borrowed was advanced to the Shri Sharma for construction of a house property and that very house property was taken on rent of Rs. 250 per month for running the business by the applicant. As regards advance to Shri Sharma, it cannot be considered that it was for the purpose of business when no interest was charged from Shri Sharma. On the contrary, rent was paid by the assessed for the user of the house property of Shri K. R. Sharma for business. Only that interest can be claimed under section 36(i)(iii) where loan is taken for the purposes of business. A sum of Rs. 32,770 was disallowed by the Tribunal as the loan was not obtained for the purposes of business. The Tribunal has observed that, in respect of the premises which were taken on rent, there is no proof that they were taken on concessional rent. Had there been a concessional rent, it could be said that the advance was for the purpose of business. The question whether loan was taken for the purpose of business is a question of fact in respect of which no reference can be called.

8. In the result, these applications are dismissed.