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Andhra Pradesh High Court
Judges : B.S.RAIKOTE, S.S.M.QUADRI
Commissioner of Income Tax - Appellant
Versus
Bakelite Hylam Ltd - Respondent
Decided On : 04-25-95
INCOME TAX - DEDUCTIONS - EXPENDITURE - COMMISSION PAID TO MANAGING DIRECTOR - WHETHER ALLOWABLE - DISALLOWANCE OF INTEREST UNDER SECTION 40A(8) - WHETHER INTEREST DISALLOWED CAN BE DEDUCTED UNDER SECTION 80V - AMOUNT PAID BY COMPANY TO SOLE SELLING AGENT WHOSE PARTNERS ARE ITS DIRECTORS - WHETHER ALLOWABLE - GRATUITY - PROVISION FOR GRATUITY - WHETHER ALLOWABLE.
Fact of the Case:
The assessee, Bakelite Hylam Limited, Hyderabad, paid commission to its managing director, Dr. W. R. Carrea. The Income-tax Officer disallowed the commission paid to Dr. Carrea under section 40(c) of the Income-tax Act, 1961 (the Act). On appeal, the Appellate Commissioner confirmed the order of the Income-tax Officer. On a further appeal by the assessee, the Income-tax Appellate Tribunal held that the commission paid to Dr. Carrea was an allowable deduction. The Revenue challenged the order of the Tribunal before the High Court.
Finding of the Court:
The High Court held that the commission paid to Dr. Carrea was remuneration within the meaning of section 40(c) of the Act and was, therefore, not allowable as a deduction. The High Court also held that the interest disallowed under section 40a(8) of the Act could not be deducted under section 80v of the Act. Further, the High Court held that the amount paid by the company to its sole selling agent, whose partners were its directors, was not allowable as a deduction under section 40(c) of the Act. Lastly, the High Court held that the provision made by the assessee for gratuity was allowable under section 36(1)(v) read with section 40a(7)(b)(i) of the Act.
Issues: 1. Whether the commission paid to the managing director was an allowable deduction under section 37 of the Act? 2. Whether the interest disallowed under section 40a(8) of the Act could be deducted under section 80v of the Act? 3. Whether the amount paid by the company to its sole selling agent, whose partners were its directors, was allowable as a deduction under section 40(c) of the Act? 4. Whether the provision made by the assessee for gratuity was allowable under section 36(1)(v) read with section 40a(7)(b)(i) of the Act?
Ratio Decidendi: 1. The word "remuneration" in section 40(c) of the Act is wide enough to include commission paid to a director. The commission paid to Dr. Carrea was remuneration for the services rendered by him to the company and was, therefore, not allowable as a deduction under section 40(c) of the Act. 2. The interest disallowed under section 40a(8) of the Act cannot be deducted under section 80v of the Act. 3. The amount paid by the company to its sole selling agent, whose partners were its directors, is not allowable as a deduction under section 40(c) of the Act. 4. The provision made by the assessee for gratuity is allowable under section 36(1)(v) read with section 40a(7)(b)(i) of the Act.
Final Decision: The High Court answered the questions referred to it by the Tribunal in the following manner: 1. Question No. 2 in R. A. No. 317/ (Hyd) of 1983: In the affirmative, that is to say, in favour of the assessee and against the Revenue. 2. Question No. 4 in R. A. No. 318/ (Hyd) of 1983: In the affirmative, that is to say, in favour of the assessee and against the Revenue. 3. Question No. 3 (II) in R. A. No. 318/ (Hyd) of 1983: In the negative, that is to say, in favour of the Revenue and against the assessee. 4. Question No. 5 (IV) in R. A. No. 318/ (Hyd) of 1983: In the affirmative, that is to say, in favour of the assessee and against the Revenue.
( 1 ) THE Income-tax Appellate Tribunal, Hyderabad Bench "b", has referred the questions mentioned hereunder to this court for opinion under section 256 (1) of the Income-tax Act, 1961, vide its order dated Jan 23/01/1986, passed in R. A. Nos. 317 and 318/ (Hyd) of 1983 in appeals I. T. A. Nos. 605 and 620/ (Hyd) of 1982 for considering the following questions, i. e. , question No. 2 in R. A. No. 317/ (Hyd) of 1983 and question Nos. 3, 4 and 5 in R. A. No. 318/ (Hyd) of 1983 : Question No. 2 in R. A. No. 317/ (Hyd) of 1983 :" (1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is justified in holding that the sum of Rs. 47,104 representing fee for technical services constitute revenue expenditure allowable under section 37 of the Income-tax Act, 1961?"questions Nos. 3, 4 and 5 in R. A. No. 318/ (Hyd) of 1983 :"ii (3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the commission paid to the managing director, Dr. W. R. Carrea, should not be taken into consideration for purposes of computing the disallowance under section 40 (c) of the Income-tax Act, 1961? (III) (4) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the assessee is entitled for deduction under section 80v in respect of the interest disallowed under section 40a (8) of the Income-tax Act? (IV) (5) Whether, on the facts and in the circumstances of the case the Appellate Tribunal was justified in holding that the amount of Rs. 74,124 was deductible?"
( 2 ) THIS matter pertains to the assessment year 1978-79. The assessee is one, Bakelite Hylam Limited, Hyderabad. It is a registered company.
( 3 ) LEARNED counsel appearing on both sides do not dispute that the question No. 2 (1) R. A. No. 317/ (Hyd) of 1983, has already been answered by a Full Bench of this court in Praga Tools Ltd. v. CIT [1980] 123 ITR 773. Hence, following the same, we answer this question in the affirmative, that is to say, in favour of the assessee and against the Revenue.
( 4 ) LIKEWISE, learned counsel appearing on both sides admitted that even question No. 4 in R. A. No. 318/ (Hyd) of 1983 also is covered by the decision in Jaipuria Samla Amalgamated Collieries Ltd. v. CIT [1971] 82 ITR 580 (SC ). Hence, following the same, we accordingly answer this question also in the affirmative, that is to say, in favour of the assessee and against the Revenue.
( 5 ) LEARNED counsel appearing on both sides placed their respective contentions with regard to questions Nos. 3 and 5 (II and IV) in R. A. No. 318/ (Hyd) of 1983.
( 6 ) WE now take up question No. 3 (II ). This question pertains to the claim of the assessee that the commission paid to Dr. W. R. Carrea, the managing director of the company, was an allowable deduction. In respect of this Dr. W. R. Carrea, the Income-tax Officer worked out disallowance under section 40 (c) of the Income-tax Act (hereinafter referred to as "the Act") as under : Rs. P. "salary 57,339. 00rent, etc. , after deducting 1/3rd for office was 7,995. 00medical expenses 2,505. 00commission 28,670. 00 ---------Total 96,509. 00 Less : Allowable 72,000. 00 ---------Disallowance 24,509. 00"---------
( 7 ) IN the appeal preferred by the assessee, the Appellate Commissioner agreed with the order of the Income-tax Officer disallowing the commission paid to Dr. Carrea. On a further appeal by the assessee before the Income-tax Appellate Tribunal, the Tribunal, having regard to the absence to the word "commission" in section 40 (c) in contrast to section 40 (b) of the Act, held that the commission paid to Dr. Carrea, the managing director, was an allowable deduction. It relied upon its own decision passed on an earlier occasion regarding the present assessee for the assessment years 1973-74 to 1976-77 and, ultimately, held that if the commission was excluded from the purview of operation of section 40 (c) of
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