Madras High Court
Mcdowell And Co. Ltd. vs Commissioner Of Income-Tax on 4 March, 1998
Equivalent citations: [1999]240ITR877(MAD)
Author: R. Jayasimha Babu
Bench: R. Jayasimha Babu
JUDGMENT N.V. Balasubramanian, J.
1. It is a consolidated reference both at the instance of the assessee and at the instance of the Revenue for the assessment year 1979-80. The questions of law referred at the instance of the assessee read as under :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the surtax liability was not an allowable deduction in the computation of the income ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the commission paid to the directors was part of the remuneration for the purpose of computation under Section 40(c) of the Income-tax Act of the admissible expenditure ?"
2. The questions of law referred at the instance of the Department read as under :
"1. Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in holding that the subsidy received from SIPCOT should not be deducted from the cost of assets for purposes of allowing depreciation ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the value of work-in-progress and the goods in transit should be included in computing the capital employed for the purpose of allowing the relief under Section 80J ?"
3. In so far as the first question of law referred at the instance of the assessee is concerned, the issue raised in the question is whether the surtax paid is an allowable deduction. The Supreme Court in the case of Smith Kline and French (India) Ltd. v. CIT [1996] 219 ITR 581, held that the surtax liability is not an allowable deduction in the computation of business income of the assessee. Following the decision of the apex court, we are of the opinion that the Tribunal was right in holding that the surtax liability was not an allowable deduction. Accordingly, we answer the first question of law referred at the instance of the assessee in the affirmative and against the assessee.
4. In so far as the second question of law referred at the instance of the assessee is concerned it relates to the determination of ceiling under Section 40(c) of the Income-tax Act in respect of the remuneration paid to the directors. The assessee-company paid certain commission to the directors and claimed that the commission paid to the directors was not a part of remuneration as the directors were not paid fixed salaries, but were paid commission on the turnover basis. Mr. Janarthana Raja, learned counsel for the assessee, relied upon a decision of the Supreme Court in the case of CIT v. Indian Engineering and Commercial Corporation P. Ltd. [1993] 201 ITR 723, and submitted that in so far as the commission paid to the directors at a percentage of sale by the assessee is concerned, the provisions of Section 40(a)(v) and Section 40A(5) do not apply. We are of the opinion that the decision of the Supreme Court relates to the interpretation of Sections 40A(5) and 40(a)(v) of the Act. But, we are now concerned with the provisions of Section 40(c) of the Act and the wording of Section 40(c) of the Act are materially different from those found either in Section 40A(5) or in Section 40(a)(v) of the Act. Under Section 40(c) of the Act, if a company incurred any expenditure directly or indirectly to the provision of any remuneration or benefit or amenity to a director or a person substantially interested in the company such remuneration, benefit or amenity to the director or such person would be subject to the ceiling limit prescribed under Section 40(c) of the Act The commission paid, in our opinion, would fall either as remuneration or benefit to the director and, therefore, the ceiling limit prescribed under Section 40(c) of the Act would apply to the commission paid by the assessee to its directors as it was paid for the work done and can be claimed as of right by the director. A similar question of law whether the commission paid to the directors would be subject to the ceiling limit prescribed under Section 40(c) of the Act was considered by this court in T. C. No. 1136 of 1983 (Metal Powder Co. Ltd. v. CIT [1999] 238 ITR 756) and this court, by judgment dated November 7, 1997, held that the commission paid to the director should be taken into account for the purpose of determining the ceiling under Section 40(c) of the Act. We are, therefore, of the opinion that the Tribunal was correct in holding that the commission paid to the directors should be regarded as a part of the remuneration for the purpose of computing the ceiling under Section 40(c) of the Act was an admissible expenditure. Accordingly, we answer the question of law referred at the instance of the assessee in the affirmative and against the assessee.
5. In so far as the first question of law referred at the instance of the Revenue is concerned, Mr. C. V. Rajan, learned counsel for the Revenue, fairly submitted that the first question of law referred is liable to be answered against the Department in view of the decision of the apex court in the case of CIT v. P. J. Chemicals Ltd. [1994] 210 ITR 830, wherein the apex court held that the subsidy granted by the Government should not be deducted in computing the actual cost of assets. Following the decision of the Supreme Court, we are of the opinion that the subsidy received from SIPCOT should not be deducted from the cost of assets for the purpose of allowing depreciation. Accordingly, we answer the first question of law referred to at the instance of the Department in the affirmative and against the Department.
6. In so far as the second question of law referred at the instance of the Department is concerned, it is also covered against the Department by a decision of the Supreme Court in CIT v. Alcock Ashdown and Co. Ltd. [1997] 224 ITR 353, wherein the apex court held that the value of work in progress and the goods-in transit should be included as a part of the capital employed for the purpose of granting deduction under Section 80J of the Act. We find no error in the view taken by the Appellate Tribunal and so hold that the said two amounts should be taken as a part of the capital employed for the purpose of determining the relief under Section 80J of the Act. Accordingly, we answer the second question of law referred to at the instance of the Revenue in the affirmative and against the Revenue. In T. C. No. 149 of 1986, the Revenue is entitled to costs of Rs. 1,000 and in T. C. No. 150 of 1986, the assessee is entitled to costs of Rs. 1,000.