Vildirect: IncomeTax-caselaws-1993-VIL-76-SC-DT

1993-VIL-76-SC-DT

Equivalent Citation: [1993] 201 ITR 723 (SC)

Supreme Court of India

Date: 13.04.1993

COMMISSIONER OF INCOME-TAX

INDIAN ENGINEERING AND COMMERCIAL CORPORATION PVT. LIMITED

BENCH

B. P. JEEVAN REDDY. and N. VENKATACHALA.

JUDGMENT

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 :

" (i) Whether, on the facts 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 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 1972-73 did not represent entertainment expenditure within the meaning of section 37(ii) of the Income-tax Act ? "

The assessment years concerned herein are 1971-72 and 1972-73. The first two questions go together. The provision applicable for the assessment year 1971-72 was section 40(a)(v) whereas for the assessment year 1972-73, the provision applicable is section 40A(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 year	Director	Salary	Commission
		(Rs.)	(Rs.)
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 11 perquisites" and disallowed the same applying section 40(a)(v) for the year 1971-72 and section 40A(5) for the assessment year 1972-73. He also disallowed the expenses referred to in question No. (iii) as entertainment expenses. On appeal, the Appellate Assistant Commissioner held that the commission on sales cannot be 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 Appellate Assistant Commissioner, which were dismissed by the Tribunal, following its order dated August 25, 1973, relating to the assessment years 1967-68 to 1969-70. The order dated August 25, 1973, dealt, inter alia, with the questions arising herein and 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 four corners of section 40(a)(v)/section 40A(5) ? It would be appropriate to set out the said provisions in so far as they are relevant :

" Section 40. Amounts not deductible. Notwithstanding anything to the contrary in sections 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 purposes 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 comprised in the period 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 40A(5), which in so far as it is material, is substantially in the same terms, reads as follows :

" Section 40A. 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 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 employee by the assessee;

(ii) any concession in the matter of rent respecting any 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 super annuation fund, to effect an assurance on the life of the employee or to effect a contract for an annuity. "

Incidentally, section 40A(5) which was inserted repealing section 40(a)(v) has 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 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 sections 40(a)(v) and 40A(5) are substantially similar we shall consider the language employed in the latter provision. Sub-section (5) of section 40A is applicable in the following situations :

(1) Where the assessee incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a 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)(a) Where the assessee incurs directly or indirectly any expenditure or provides an allowance in respect of any assets of the assessee used by the employee either wholly or partly for his own purposes 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 any 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 commission paid is a " perquisite ", which submission, they say, is borne out by the words within brackets " whether convertible into money or not " immediately following the word "perquisite". On the other hand, the contention of the assessee which has been accepted by the Appellate Assistant Commissioner and the Tribunal is that such cash payment does not fall within any of the 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 way of 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 assets of the assessee 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 Parliament and support his contention. He says, there is no reason not to include cash payment within the ambit of sub-section (5) of section 40A. 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 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(c) is applicable only to companies whereas section 40A(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.

Learned counsel for the respondent-assessee brought to our notice circular issued by the Central Board of Direct Taxes which, inter alia, says, " as regards payment of commission to the employees, the question whether it forms part of salary or perquisite has to be decided on the facts 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 as part and parcel of the remuneration for the service rendered by the employees, such payment may partake of the nature of salary rather than a benefit or perquisite. If, however, on the 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 be treated as a benefit by way of addition to salary rather than 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 in refusing to direct the Tribunal to state questions Nos. (i) and (ii) under section 256(2).

So far as question No. (iii) is concerned, it has 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 in a batch of appeals before this court. We do not propose to express any opinion on question No. (iii) for the reason that the amount involved is quite small having regard to the income of the assessee-respondent.

The appeals, accordingly, fail and are dismissed. No costs.

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