JUDGMENT - Chagla, C.J.

1. The question that arises in this reference is whether certain emoluments paid to one Sarabhai, who is an employee of the assessee firm, was a permissible deduction. It appears that this employee was in the service of the assessee firm for the Samvat year 1900. Ho was acting as the manager and from 1990 to 1997 he was paid a salary and varying bonuses. Up to 1995 the bonuses paid to Sarabhai were allowed by the taxing department, but from 1996 when the bonuses went up to Rs. 22,751, the Income-tax Officer refused to allow the full bonus and allowed only a part of it. Then the case of the assessee firm is that in 1993 an agreement was arrived at under which Sarabhai was to be paid a salary and a certain commission on profits, and in respect of Samvat years 1998. 1999, 2000 and 2001 a claim was made by the assessee firm that as the emoluments were paid to Sarabhai under an agreement, whatever was paid was a permissible deduction.

This claim was rejected by the taxing authorities and ultimately the Tribunal also refused to allow the full amount of the emoluments to which Sarabhai was entitled under the alleged agreement. The view taken by the Tribunal was that

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