Bombay High Court
M/S Nagpur Engineering Co. Pvt. Ltd vs The Commissioner Of Income Tax,Nagpur on 9 April, 2015
Author: B.P. Dharmadhikari
Bench: B. P. Dharmadhikari
Judgment itr21.93
1
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
NAGPUR BENCH, NAGPUR.
INCOME TAX REFERENCE No. 21 OF 1993.
M/s. Nagpur Engineering Co.
Pvt. Ltd., Nagpur. ....APPLICANT.
ig VERSUS
The Commissioner of Income Tax,
(Vidarbha), Nagpur. ....RESPONDENT
.
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Mr. K.P. Dewani, Advocate for Applicant.
Mr. Anand Parchure, Advocate for Respondent.
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CORAM : B. P. DHARMADHIKARI
AND S.B. SHUKRE, JJ.
DATED : APRIL 09, 2015.
ORAL JUDGMENT. (Per B.P. Dharmadhikari, J)
The applicant/ assessee moved an application under Section 256[1] of the Income Tax Act, 1961 before the ITAT, Nagpur requesting it ::: Downloaded on - 07/05/2015 20:34:10 ::: Judgment itr21.93 2 to refer two questions to this Court for its opinion. According to it, the questions of law arise out of order of ITAT dated 17.07.1990 in ITA No. 374 and 375 of 1986 for the Assessment Years 1981-82 and 1982-83. Those questions are referred to by the ITAT as per its reference order dated 13.11.1991. The questions are -
"1. Whether the commission on sales paid by the assessee constituted "the provisions of any remuneration or benefit or amenity" within the meaning of Section 40(c)(iii) of the Income Tax Act, 1961 ?
2. That in view of the findings recorded by the Tribunal that the claim of commission paid was reasonable, any dis-allowance under section 40(c) is permissible ?"
2. Shri Dewani, learned counsel for the assessee after narrating the facts has urged that the commission paid to the Directors of assessee was a lumpsum payment, contingent upon the annual turn over and as such could not have been subjected to Section 40[c] of the Income Tax Act. He has relied upon certain judgments to substantiate his contentions and we find it ::: Downloaded on - 07/05/2015 20:34:10 ::: Judgment itr21.93 3 convenient to refer to those judgments as and when occasion therefor arise.
3. Shri Parchure, learned counsel for the revenue on the other hand while accepting the facts mentioned in reference order, attempted to distinguish the judgments relied upon by Shri Dewani. According to him, the view taken is in facts and circumstances of the said matter and in some cases question was about deduction on payment of gratuity. Here the commission has been paid to the Directors of the assessee company, who were under its control, and though it is made in one lumpsum, its splitting every month is not prohibited. He has submitted that in this situation, when the Directors were being paid remuneration and commission has been paid over and above it, it is rightly subjected to section 40(c)(iii) of the Income Tax Act.
4. The facts are not in dispute. One B.N. Shaw (HUF), A.K. Jaiswal and M.K. Jaiswal have been paid commission to the extent disclosed in reference order. Reference order also mentions salary paid to B.L. Shaw and A.K. Jaiswal. Assessing officer after applying Section 40[c][iii] held that commission amount of Rs. 60,000/-, Rs. 48,000/- and Rs.48,000/- was reasonable figure. He therefore, calculated total amount including the said reasonable figure of commission admissible to be Rs. 78,000/-, Rs. 62,000/-
::: Downloaded on - 07/05/2015 20:34:10 :::Judgment itr21.93 4 and Rs. 48,000/- in case of above mentioned three persons and disallowed the excess. This dis-allowance has been upheld by CIT (Appeals) and thereafter by ITAT.
5. Perusal of the order passed by the CIT (Appeals) shows that it has relied upon two Special Bench judgments which are mentioned in paragraph no.5 of its order. The judgments of Special Bench in case of I.T.O. .vrs. Sapt Textile Products India Ltd. (ITA No.1304/Bom/79 dated 20.04.1981), is examined by this Court and the appeal of the Assessee - Sapt Textile has been partly allowed. The expenditure on payment of retirement, gratuity to one of the Directors is allowed as not includible under either the provisions of Section 40[c] or Section 40A[5] of the Income Tax Act. This judgment of Division Bench is reported at (1996) 217 ITR 378 (Bom) (Sapt Textile Produces (India) Ltd. .vrs. Commissioner of Income Tax). In the process the Division Bench has found that in case of Director employee, the provisions under Section 40[c] and 40A[5], are applicable and the higher of the two ceilings has to be applied. The judgment of Hon'ble Apex Court reported at (1993) 201 ITR 1063 (SC) (Bharat Beedi Workers (Private) Ltd .vrs. CIT) has been followed. However, as reference before this Court is restricted to only Section 40[c], we are not required to look into any other provision.
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6. Other Division Bench judgment of this Court reported at (1994) 210 ITR 770 (CIT .vrs. Colgate Palmolive (India) again considers the issue of retirement gratuity. This judgment is delivered by same Bench on same day i.e. the day on which SAPT Textile Produces (India) Ltd .vrs. CIT (supra), came to be decided. In this judgment, in paragraph no.11 the Division Bench has examined the question whether retirement gratuity to a retiring director in the relevant previous year can be considered as an expenditure, which can be subjected to Section 40A[5][c]. After considering the various precedents, the Division Bench has found that any expenditure which can be computed in the manner laid down in said Sections would be covered by those provisions. By this analogy, it is observed that if the computation provisions contained in Section 40[c] and Section 40A[5] do not for non-periodic payments not relatable to the previous year, such payments are not contemplated, as being covered by these sections. It is further observed that maximum ceiling in Section 40[c] is clearly in respect of periodic payments only. Conclusion drawn is, payments in both these sections envisage only periodic payments.
7. Here it will be proper to refer to the Division Bench judgment of this Court reported at (1994) 207 ITR 410 (Bom) (Pai Paper and Allied ::: Downloaded on - 07/05/2015 20:34:10 ::: Judgment itr21.93 6 Industries (P) Ltd .vrs. Commissioner of Income Tax). There the commission paid to the Managing Director acting as selling agent fell for consideration and this Court has found that it does not fall under Section 40[c] of the Income Tax Act. Question before this Court in that matter was whether the Tribunal erred in holding that dis-allowance of a sum of Rs.
1,83,842/- out of the amount of commission on sales paid to International Paper Co. which was the sole proprietary concern of the said Managing Director was correct under Section 40[c]. The Division Bench in paragraph no.5 in this judgment has made reference to judgment of Karanataka High Court reported at (1980) 121 ITR 551 (Kar) T.T.Krishnamachari & Co.
.vrs. ITO), and found that there the Karanataka High Court categorically held that expenditure incurred by way of commission paid to the independent selling agent to act as an independent entrepreneur with an independent organization who is not subjected to control and supervision of the assessee for the services and facilities provided to him, cannot be considered as benefit, within the meaning of Section 40[c] of the Act. In paragraph no.6, after referring to the budget speech of the Finance Minister, Division Bench notices that the Hon'ble Apex Court has approved the decision of the Karnataka High Court and the paragraph from the judgment of Karnataka High Court quoted with approval by the Hon'ble Apex Court, has been reproduced. In para 8, the Division Bench has held that the Hon'ble ::: Downloaded on - 07/05/2015 20:34:10 ::: Judgment itr21.93 7 Apex Court has clearly answered the controversy about the scope and ambit of Section 40[c]. It has found that payments made to Directors, as Directors (qua Director) fall within Section 40[c]. Payment made in consideration of the valuable right parted with by the directors of the assessee company in favour of the assessee company are outside the scope of the said section.
Thereafter in (CIT .vrs. Colgate Palmolive (India) (supra), while considering the provisions under Section 40[c], the Division Bench has found that it deals with remuneration, benefits or amenities to a Director, or any expenditure or allowance in respect of any asset of the company which is used by that person. In the process, it is observed that Section 40[c], describes and refers to such expenditure or allowance as related to a specific period during the previous year. The Division Bench has taken two hypothetical illustrations in that paragraph and thereafter found that the expenditure must be relating to the period comprised in the previous year or specific part thereof. The Hon'ble Apex Court also in case of (Bharat Beedi Workers (Private) Ltd .vrs. CIT) (supra), considered the issue and in paragraph no.8 found that the net is cast very wide to ensure that excessive or unreasonable payments are not made to the persons in control of the affairs of the assessee in the name of paying for the goods, services and facilities rendered, supplied or extended by them. In paragraph no.9, it is observed that so long as the agreement where under the said payments ::: Downloaded on - 07/05/2015 20:34:10 ::: Judgment itr21.93 8 were made, is not held to be mere device or a mere screen, the said payments cannot be treated as payments made to the directors as directors [qua directors]. In paragraph no.10, portion of judgment of Karnataka High Court mentioned supra, has been reproduced. The Hon'ble Apex Court has approved the finding of Karnataka High Court that Section 40[c] refers to an expenditure incurred by making periodical payments to a person mentioned in that clause apparently for any personal service that may be rendered by him.
8. Gujarat High Court has in (2001) 251 ITR 364 (Guj) (CIT .vrs.
Commercial Ahmedabad Mills Co. Ltd.), while accepting the view of Bombay High Court in Colgate Palmolive (India) (supra), noted that in facts before it a lump-sum payment of Rs. 10,500/- was made to the Managing Director on his retirement. It also found that whether it was by way of gratuity or some other account of terminal benefits, was not clear, but, then it was certainly not a periodical payment to which ceiling provided in Section 40[c] could have been applied. It not being a periodical payment has been held falling outside Section 40[c]. Tribunal was therefore found in error in applying those provisions for coming to a conclusion that amount paid in excess of ceiling prescribed, could not have been allowed to be deducted.
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9. Thus, the precedents looked into by us above, essentially show that in order to attract ceiling under Section 40[c] of the Act, the payment in dispute must be shown to be a periodical payment. A lump-sum payment or one time payment does not fall in it. Here the fact that commission was payable only if annual turn over exceeded Rs. 2 Crores, is not in dispute.
Facts show that payment was thus contingent upon turn over and also not periodical. Hence, following this law, we find that the commission on sales paid by the assessee could not have been subject to provisions of Section 40[c][iii] of the Income Tax Act, 1961. Here, we have to also take note of the finding reached by the CIT (Appeals), in paragraph no.4 that the commission paid was not excessive or unreasonable. Infact CIT (Appeals) has held that first limb of the counsel is arguments before it had succeeded.
We therefore, find its dis-allowance under Section 40[c] not permissible.
10. Accordingly, question nos. 1 and 2 referred for opinion to this Court, are answered in favour of the assessee and against the revenue.
Reference is disposed of accordingly.
JUDGE JUDGE
Rgd.
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