Full Judgment Text
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PETITIONER:
COMMISSIONER OF INCOME TAX. BOMBAY
Vs.
RESPONDENT:
INDIAN ENGINEERING AND COMMERCIAL CORPN.PVT. LTD.
DATE OF JUDGMENT13/04/1993
BENCH:
JEEVAN REDDY, B.P. (J)
BENCH:
JEEVAN REDDY, B.P. (J)
VENKATACHALA N. (J)
CITATION:
1993 AIR 1540 1993 SCR (3) 86
1993 SCC (3) 246 JT 1993 (2) 683
1993 SCALE (2)496
ACT:
Income Tax Act.1961:-S.40(a)(v)/140(A)(5)--constitution
sales in addition to salary paid to Directors at a
prescribed percentage of sales-Held,is not "perquisite:"-
Cash payment not contemplated by the provision.
HEADNOTE:
The respondent-assessee was a private limited company
trading in tractors and earth-moving equipment. During the
relevant the assessee pain commission on sales in addition
to salary to its directors at a prescribed percentage of the
sales effected by the assessee. The Income Tax Officer
treated the commission on sales as perquisites’ and
disallowed the same applying section 40 (a) (v) for the year
1971-72 and section 40 (A) (5) for the assessment year 1972-
73. Which are the concerned assessment years herein. On
appeal, the Appellate Assistant Commissioner held that
commission on sales cannot betreated as perquisites. The
Tribunal dismissed the Revenue’s appeal.
The question before this court was whether commission on
sales (paid in cash) falls within the four corners of
section 40 (a) (v) ,Section 40 (A) (5).
Dismissing the appeal, this court.
HELD: 1. Regarding Section 40 (1) (v) /40 (A) (5) as a
whole, the cash payment of the nature concerned in this case
does not fall within any of the situations/clauses
contemplated by sub-section (5). (92-D)
Payment of a certain cash amount by way of commission on
sales, directly to an employee cannot be said to fall with
the words "where the assessee incurs an expenditure which
results directly or indi-
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rectly" in Section 40 (A) (5). (92-F)
Nor can such a payment fall within a provision which speaks
of an expenditure or allowance in respect of any assets of
the assessee used by the employee DE. (92-F)
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1583 & 1584
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(NT) of 1977.
From the Judgment and Order dated 22.11.1976 of the Bombay
High Court in I.T. Application No. 191 of 1976.
S.C. Manchanda, Dr. K.P Bhatnager, C. Ramesh, T.V. Ratham
for P. Parmeswaran for the Appellant.
Mrs. A.K. Verma, S.V. Pathak, for J.B.D. & Co. for the
Respondent.
The judgment of the Court was delivered by
B.P. JEEVAN REDDY, J. These appeals are preferred by the
Revenue against an order of the Bombay High Court rejecting
an application under section 256 (2) of the Income Tax Act,
By means of the said application the Revenue sought to raise
the following three questions:
" (1) Whether, on the fact and in the
circumstances of the case, the Tribunal was
right in holding that the commission paid by
the assessee company to its directors was an
additional remuneration forming part and
parcel of the salary allowed to them and that
the said remuneration would not be covered by
section 40 (a) (v) of the Income-tax Act and
thereby allowing the assessee’s claim for
allowing the deduction of the whole amount of
commission paid to the directors ?
(ii)Whether the Tribunal was right in their
view that the words "Whether convertible into
money or not" used in section 40 (a) (v) of
the Act postulated that ,the
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benefit, amenity or perquisite mentioned
therein covers benefit, amenity or perquisite
allowed in Kind but not in cash?
(iii)Whether the Tribunal was right in holding
that the expenditure of Rs. 19,386 for the
assessment year 1971-72 and Rs. 29,283 for the
assessment year 197273 did not represent
entertainment expenditure within the meaning
of section 37 (ii) of the Income-tax Act ?"
The assessment years concerned here in are 1971-72 and 1972-
73. The first two questions go together. The provision
applicable for the A.Y. 1971-72 was Section 40 (a) (v)
whereas for the A Y. 1972-73, the provision applicable is
Section 40 (a) (5) which is a successor provision to Section
40 (a) (v).
The respondent is a private limited company trading in
tractors and earth moving equipment. During the accounting
years relevant to the aforesaid assessment years, the
assessee paid to three of its Directors commission on sales
in addition to salary as follows:
------------------------------------------------------------
Assessment Director Salary Commission
year
-------------------------------------------------------------
1971-72 Sh.S.B Lal 39,000 36,171
Sh. S.B. Mathur 18,000 36,171
Sh. A.B. Mathur 7,800 36,171
-------------------------------------------------------------
1972-73 Sh. S.B Lal 39,000 40,792
Sh. S.B. Mathur 18,000 40,792
Sh. A.B. Mathur 7,800 40,792
------------------------------------------------------------
The ’commission’ in the above table means the commission
paid to the said Directors on the sales effected by the
assessee, at a prescribed percentage. The Income Tax
Officer treated the commission on sales as "perquisites" and
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disallowed the same applying Section 40 (a) (v) for the
year 1971-72 and Section 40 (A) (5) for the assessment year
1972-73. fie also disallowed the expenses referred to
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in question No. (iii) as entertainment expenses. On appeal,
the Assistant Appellate Commissioner held that the
commission on sales cannot he treated as "perquisites". He
also held that the expenditure on dinner and tea cannot be
characterised as entertainment expenditure and ought not to
have been disallowed. The Revenue preferred appeals before
the Tribunal against the orders of the A.A.C., which appeals
were dismissed by the Tribunal following its order dated
August 25, 1973 relating to assessment years 1967-68 to
1968-70. The order dated August 25, 1973 dealt anter alia
with the questions arising herein ind held the same against
the Revenue. An application under section 256 (1) was
dismissed by the Tribunal.
The first question urged before us-which was also the
question urged before the Tribunal-is whether commission on
sales (paid in cash) falls within the fourcornersot
Section40 (a) (v)/Section40(A) (5)" It Would be appropriate
to set out the said provisions in so far as they are
relevant:
" Section 40-Amounts not deductible:-Notwith-
standing anytime, to the contrary in section
30 to 38 the following amounts shall not be
deducted in computing the income chargeable
under the head "Profits and gains of business
or profession-
(a) in the case of any assessee.............
" (v) any expenditure which results directly
or indirectly in the provision of any benefit
or amenity or perquisite. whether convertible
into money or not, to an employee (including
any sum paid by the assessee in respect of any
obligation which but for such payment would
have been payable by such employee) or any
expenditure or allowance in respect of any
assets of the assessee used by such employee
either wholly or partly for his own purpose or
benefit, to the extent such expenditure or
allowance exceeds one-fifth of the amount of
salary payable to the employee. or an amount
calculated at the rate of one thousand rupees
for each month or part thereof com-
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prised of his employment during the previous year, whichever
is less:"
Note:-(The two provisos and the two explanations are omitted
as not necessary for the purpose of this case.)
Section 40 (A) (5), which in so far as it is material, is
substantially in the same terms, reads as follows:
"Section 40 (A) Expenses or payments not deductible in
certain circumstances.
(5) (a) Where the assessee-
(i) incurs any expenditure which results
directly or
indirectly in the payment of any salary to an
employee or a former employee. or
(ii) incurs any expenditure which results
directly or indirectly in the provision of any
perquisite (whether convertible into money or
not) to an employee or incurs directly or
indirectly any expenditure or is entitled to
any allowance in respect of any assets of the
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assessee used by an employee either wholly or
partly for his own purposes or benefit.
then, subject to the provisions of clause (b),
so much of such expenditure or allowance as is
in excess of the limit specified in respect
thereof in clause (c) shall not be allowed as
a deduction:"
Explanation 2: In this sub-section-
(b) "perquisite" means-
(i) rent-free accommodation provided to the
em-
ployee by the assessee;
(ii) anv concession in the matter of rent
respecting any
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accommodation provided to the employee by the
assessee:
(iii)any benefit or amenity granted or
provided free of cost or at concessional rate
to the employee by the assessee:
(iv)payment by the assessee of any sum in
respect of any obligation which, but for such
payment, would have been payable by the
employee. and
(v) payment by the assessee of any sum
whether directly or through a fund. other than
a recognised provident fund or an approved
superannuation fund. to effect an assurance on
the life of the employee or to effect a
contract for in annuity."
Incidentally Section 40 (A) (5) which was inserted repealing
section 10 (a) (v) his itself been deleted with effect from
April 1, 1989 by the Direct Tax Laws (Amendment) Act, 1987.
The sister provision contained in sub-clauses (i) and (ii)
of clause (c) of’ section 40. applicable to directors of a
company (and other persons mentioned therein) has also been
deleted by the very same enactment with effect from April 1.
1989.
Since the relevant provisions in section 40 (a) (v) and 40
(A) (5) are substantially similar. we smile consider the
language employed in the latter provision. Sub-clause (5)
of section 40 (A) is applicable in the following Situations:
(1) Where the assessee incurs any expenditure which results
directed or indirectly in the payment of any salary to in
employee or it former employee or
(2) Where the assessee incurs any expenditure which results
directly or indirectly in the provision of’ any perquisite
(whether convertible into money or not to an employee;
(3) (it) Where the assessee incurs directly or indirectly
any
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expenditure or provides an allowance in respect of any
assets of the assessee used by the employee either wholly or
partly for his own purpose or benefit;
(b)Where an employee of the assessee is provided any
allowance ("entitled to any allowance") in respect of any
assets of the assessee used by such employee either wholly
or partly for his own purposes or benefit.
In either of these situations, so much of such expenditure
or allowance as is in excess of the limits specified will
not be allowed as a deduction. The question is whether the
commission paid to its directors/employees on the sales
effected by the assessee falls within any of the
situations/clauses mentioned above. The Revenue relies upon
the second one among them. According to them, the
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commission paid is a ’perquisite. which submission they say
is borne out by the words within the brackets " whether
convertible into money or not" immediately following the
word "perquisite". On the other hand the contention of the
assesses which his been accepted by the A.A.C. and
situations/clauses contemplated by sub-section 5. Having
regard to the language employed in clause (c) we are
inclined to agree with the assessee. The language of sub-
section (5) is significant. The first two situations, as we
have called them start with the words "where the assessee
incurs any expenditure which results directly or
indirectly.................It is difficult to say that
payment of a certain cash amount by wayof commission on
sales directly to an employee can be said to fall within
the words "where the assessee incurs any expenditure which
results directly or indirectly". Such a payment cannot also
fall within the two sub-clauses of clause (3) in our
analysis-since they speak of an expenditure or allowance in
respect of’ any assents of the assesee used by the employee.
Learned counsel for the Revenue. Shri Manchanda argued that
the words "whether convertible into money or not" bring out
the intention of the Parliament and support his contention.
He says, there is no reason not to include cash payment
within the ambit of sub-section(5) to Section 40 (A). We
are, however. not concerned with the generality of cash
payments but only with the payment concerned herein.
Reading, the Sub-section as a whole and having regard to the
language employed therein, the the Tribunal is that Such
cash payment does not fall within any of the
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payment concerned herein does not fit into it.
The employees concerned herein also happen to be directors.
The provision in clause (c) of Section 40 applies to
directors among others. Of course. Section 40 (A) (5) is
applicable only to companies where as Section 40 (A) (5) is
applicable to employees whether of companies or others. In
the case of directors, who are also employees, both the
provisions will be attracted- the higher of the two ceilings
has to be applied.
The learned counsel for the respondent-assessee brought to
our notice it circular issued by the Central Board of direct
Taxes which inter alia say. "its read is payment of
commission to the employees the question whether it forms
part of salary or perquisite has to he decided on the ’acts
of each case. If the terms and conditions of service are
such that commission is paid not as a bounty or benefit but
is paid ,is part and parcel of’the remuneration for the
service renders by the employees. such payment partake the
nature of salary rather than as a benefit or perquisite.
If, however, on terms and conditions of service either there
is no obligation for the employer to pay the commission or
it is a matter purely in the discretion of the employer,
such payment should he treated ,is a benefit by way of
addition to salary rattler thin in lieu of salary." It is
not necessary for us to make any comment on the said
circular.
For the above reasons. we are of the opinion that the High
Court was justified refusing to direct the Tribunal to state
question (1) and (2) under section 256 (2).
So far its question No.3 is concerned, it his not been
seriously pressed before us having regard to the smallness
of the amount involved. It is also stated that the said
question is pending consideration is a batch of appeals
before this Court. We do not propose to express any opinion
on question No. 3 for the reason that the amount involved is
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quite small having regard to the income of the assessee-
respondent.
The appeals accordingly fail and are dismissed. No costs.
Appeal dismissed.
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