The Hindu Business Line : Where the shoe pinched

IS IT possible to earn both salary and commission from the same employer in such a manner that the commission becomes assessable as `income from other sources'? If this were possible, the schedular system of taxation will lose much of its rigour.

A peculiar case arose before the Madras High Court involving an employee of Bata India Ltd. Under an agreement with Bata, Ramajayam was working as the manager of a retail shoe store in Coimbatore on a fixed salary of Rs 101 per week and a commission on the retail sales effected through the shoe staff at 1.60 per cent on shoes, umbrellas, and so on. He received from Bata a salary of Rs 19,879 and a commission of Rs 21,987. Against the commission income, he claimed expenses such as advertisement, gifts to children, taxi charges, telephone, and so on, totalling Rs 11,450.

The assessee contended before the ITO that only the net commission, after deducting the expenses of Rs 11,450, should be assessed to tax. The ITO declined to allow the same on the ground that the agreement entered into between the assessee and Bata was only on service and the commission received by the assessee was part and parcel of the salary received.

The ITO was of the view that the commission was given by way of incentive to the assessee to sell more products of the company. He relied upon the salary certificate issued by the employer, which showed that the commission received was salary. The ITO also examined the terms of the agreement and came to the conclusion that the commission received by the assessee constituted a major portion of the remuneration paid, and the salary paid to the assessee was much on the lower side. He, therefore, concluded that the commission received by the assessee was liable to be assessed under the head `salary' and negatived the claim of the assessee to deduct the expenditure from the amount of commission received.

The first and second appellate authorities decided in favour of Ramajayam. But the Revenue moved the Madras High Court, arguing that Ramajayam was only an employee entitled to receive a fixed salary and that the commission received by him would partake the character of salary. He was not entitled to the deduction from the salary income and apart from the deduction specifically provided by the Act, the assessee was not entitled to claim any other deduction.

In a painstaking judgment, the Madras High Court pointed out that the question whether the commission received by the assessee was assessable under the head `income from salary', `income from business' or `income from other sources' had to be decided on the basis of the agreement entered into between the assessee and Bata. The terms of the agreement clearly showed that the assessee had to incur certain expenditure in carrying out the obligations under the agreement and for earning the commission, and the company prescribed a limit for the expenditure to be borne by the company. He was also entitled to the profits on the repair work and pedicure turnover except for sharing a percentage thereof with the company.

The terms of the agreement clearly provided that the assessee was functioning in dual capacity, one as an employee and another under a contract for service. If the agreement was regarded as a contract of service, the assessee would not have been made to bear the expenditure on loss suffered.

The contract entered into between the assessee and the company consisted of i) a contract of service; and ii) a contract for service.

The High Court ruled that the contract while not a pure employment one was also a contract for service. The commission arose as a result of the contract for service and was not referable to his role as an employee. He was entitled to deduction for all expenditure claimed in earning the commission (CIT vs P. Ramajayam — 2004 136 Taxman 33 Madras).

This is an unusual ruling. It is difficult to visualise a dual role for the same individual under the same company. The decision will help employees to draft their agreements with the company carefully so as to minimise the tax burden.

(The author is a former Chief Commissioner of Income-Tax.)

More Stories on : Taxation | Courts/Legal Issues

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Resetting the terms

Budget 2004-05: A macro-economic preview

Professionals need crutches in politics

Taxman's date with death

Lay bare the gift wrap

Where the shoe pinched

Wives unwelcome on business trips

Sometimes some people can ride on a tractor

No one gets paid until the consumer releases cash