In order to claim a deduction under Section 36(1)(ii) of the Income-tax Act, 1961, for commission paid to employees, the assessee must prove that the employees rendered services for which the commission was paid and that the commission was paid for business purposes or out of commercial expediency.

1. The Income-tax Appellate Tribunal, Chandigarh Bench, has referred the following question of law for our opinion:

"Whether, on the facts and circumstances of the case, the sum of Rs. 45,380 paid to L. Gurandittamal and L. Sahibdiyal, employees of the applicant firm, is permissible deduction in computing the business income of the applicant ? "

2. In order to answer the question, it is necessary to advert to the relevant facts. The assessee is a partnership firm. It holds the sole selling agency of Messrs. Oriental Carpet Manufacturers (India) Private Ltd. in respect of sale of yarn, cloth and blankets manufactured by the said company. The assessee was receiving commission as selling agent and over and above that commission, it started receiving overriding commission at 2 1/2 per cent, on the total sales effected. The overriding commission thus received by the assessee is as follows:

Assessment year

Amount received

1960-61

Rs. 35,964

1961-62

Rs. 61,818

1962-63

Rs. 83,922

1963-64

Rs.1,13,449

3. The turnover of the assessee increased from Rs. 39.99 lakhs during the year relevant to the assessment year 1962-63 to Rs. 54.28 lakhs during the year under consideration, namely, 1963-64. The assessee-firm paid during the previous year relevant to the assessment year 1963-64 to each of its employees, Gurandittamal and Sahibdiyal, commission @ 1/2 per cent, on the sales effected out of the overriding commission received by it from Messrs. Oriental Carpet Manufacturers (India) Private Ltd. It may be mentioned that these two employees were receiving salary at Rs. 1,000 per month from the assessee-firm. The Income-tax Officer, for the assessment year in question, computed the total income of the firm at Rs. 3,08,034 and while computing the said income by his order dated 24th August, 1967, disallowed an amount of Rs. 45,380 representing 1/2 per cent, commission paid by it to the said two employees.

4. Against the disallowance of this amount, the firm appealed to the Appellate Assistant Commissioner, but without success. A further appeal was taken to the Tribunal by the assessee-firm and the Tribunal has also concurred with the decision of the Appellate Assistant Commissioner. The reasons which prevailed with the Tribunal in concurring with the Appellate Assistant Commissioner may be stated in its own words. After quoting Section 36(1)(i) and (ii) of the Income-tax Act, 1961, it was observed :

"It will be seen that this section authorised the payment of any commission or bonus to an employee subject to the satisfaction of the conditions laid down in Sub-clauses (a), (b) and (c) above. This section no doubt says that the amount of bonus or commission paid should be reasonable with reference to the pay of the employee, the profits of the business and the general practice in similar business or profession. But, when this section says that any sum paid to an employee as bonus or commission for services rendered is to be allowed it means that before the claim is allowed there should be proof to show that some services were rendered for which the payment is made. If there is no proof to show that services were rendered, it appears to us that this section becomes inapplicable. In this connection the Income-tax Officer had pointed out that there was no proof of any services being rendered by these two employees. In view of that finding the bonus or commission paid cannot be said to be for the purpose of business. Further, Clause (ii) of Sub-section (1) says: where such sum would not have been payable to him as profit or dividend if it had not been paid as bonus or commission, the bonus or commission should be allowed as an expenditure. It, therefore, means that if the sum was payable to him as part of profits but described as bonus or commission the amount is not to be allowed as deduction. In this case we found that the two employees were no other than the partners of the assessee-firm. In other words the sons were taken as partners