Law: Income Tax Act, 1922

Section: 10(2)(x)

Law: Income Tax Act, 1922

Section: 10(2)(x)

Section 36(1)(ii) of the Income-tax Act, 1961 [Corresponding to section 10(2)(x) of the Indian Income-tax Act, 1922] - Bonus or Commission - Assessment year 1949-50 - Assessee-company was carrying on business in cotton spinning Mills Association of which assessee was a member, fixed price of various counts of yarn and advised mills to sell at those rates - ITO found that during relevant accounting year assessee has shown in its books of account that yarn had been sold at fixed rates to its employees and some nearby villagers but ultimate buyers were regular dealers and sales were made to them at open market rates - Assessee took plea that they sold yarn to employees and villagers at association rate but these employees/villagers sold yarn to regular dealers at market rate - ITO therefore, estimated profit on these sales and added to income of assessee - Whether, since transaction were sham and made to circumvent circular issued by association, addition to income was just - Held, yes - Whether bonus could be given only after ascertainment of profit and since in instant case amount in question was unaccounted money, it could not be considered as bonus paid to employees - Held, yes FACTS The assessee-company was carrying on the business in cotton spinning. By a circular, the Mills Association, of which the assessee was a member, fixed the price of the various counts of yarn, and advised the mills to sell at those rates. The ITO found that the assessee has shown in its books that it had sold yarn at the association rate to its employees and some villagers in and around the place where the mill was situated but, in fact, the ultimate buyers were regular dealers who purchased goods at the open market rates. The assessee's case was that they sold goods to employees and villagers who in turn sold them to others. ITO disbelieved it. He, and, estimated the profit at 20 per cent and added it to the income returned by the assessee. On appeal, the AAC affirmed the order of the ITO. He is negative the alternative argument of the assessee that the amount should be allowed as an expenditure as bonus paid to employees. On second appeal, the Tribunal held that the transactions…

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