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PUNJAB & HARYANA HIGH COURT
Bhopinder Singh Dhillon and S.P.Goyal JJ.
Commissioner Of Income-tax
Versus
Avon Cycles (P.) Ltd.
Income tax Reference No. 110 of 1977,
Decided On : MAY 12, 1980
INCOME TAX - Section 40(c) and 40A - Whether payment of commission to a firm which undertook the responsibility of being the sole distributors of the company, is a remuneration or benefit within the terms of the provisions of Section 40(c) of the Act.
Fact of the Case:
The assessee, a private limited company, appointed M/s. Hans Raj Pahwa and Brothers as its sole distributors for the sale of its products. The firm was constituted by a partnership deed comprising three partners, who agreed to share the profits and losses of the firm in equal proportion. By a deed of partnership dated 15th February, 1963, Shri Harmohinder Singh, son of Shri Jagat Singh, was taken as a fourth partner and whereas the aforesaid three partners share in profits and losses was fixed at 20% each, Shri Harmohinder Singhs share was fixed at 16%. By another agreement dated 30th March, 1965, the assessee again appointed M/s. Hans Raj Pahwa and Brothers, Ludhiana, as its sole selling agent for a further period of five years from 1st April, 1965, to 31st March, 1970. The rate of commission was reduced to 3% on all sales made to parties in India by the company direct or through the efforts of the sole selling agents. By a deed of partnership dated 1st April, 1969, there was a change in the constitution of M/s. Hans Raj Pahwa and Brothers, inasmuch as two more persons, namely, Inderjit Singh, son of Shri Hans Raj Pahwa, and Swaranjit Singh, son of Shri Jagat Singh Pahwa, were taken as partners. The shares in the profits and losses of the firm were fixed as under: (1) Shri Hans Raj Pahwa 18%. (2) Shri Jagat Singh Pahwa 15%. (3) Shri Sohan Lal Pahwa 25%. (4) Shri Harmohinder Singh Pahwa 12%. (5) Shri Inderjit Singh Pahwa 18%. (6) Shri Swaranjit Singh Pahwa 12%. The assessee-company again appointed M/s. Hans Raj Pahwa and Brothers as its sole selling agents for a further period of five years from 1st April, 1970, to 31st March, 1975. The sole selling agents were entitled to commission at 3% on all sales made to parties in India by the assessee direct, or through the efforts of the sole selling agents. By a deed of partnership dated 1st April, 1971, there was a change in the profit-sharing ratio of the six partners of M/s. Hans Raj Pahwa and Brothers and the share in profits and losses of the firm of each partner was fixed at l/6th.
Finding of the Court:
The payment of commission to the firm is in lieu of the business activity of the firm and not by way of remuneration or benefit to a director or to a person who has a substantial interest in the company or a relative of a director or of such person, as the case may be. That being so, the mere fact that the partners of the firm happened to be directors or the relatives of the directors of the company, would not change the nature of the original transaction between the company and the firm which acted as the sole distributing agency of the company. The payment of commission cannot also fall within the ambit of the word "benefit" used in Section 40(c).
Issues: Whether the payment of commission to a firm which undertook the responsibility of being the sole distributors of the company, is a remuneration or benefit within the terms of the provisions of Section 40(c) of the Act.
Ratio Decidendi: The payment of commission to a firm by the company is a payment to a person within the meaning of Section 2(31) of the Act, but certainly the firm, as it is, cannot be said to be having a substantial interest in the company. The firm itself is not a director or a person who has a substantial interest in the company or a relative of a director. The ingredients of Section 40(c) can be satisfied only if the expenditure results directly or indirectly in the provision of remuneration or benefit or amenity to a, director or to a person who has a substantial interest in the company or to a relative of the director or such other person, as the case may be. There is no nexus between the services rendered by the partners of the firm and the payment of commission to the firm.
Final Decision: The questions of law referred to us in both these references are answered in the affirmative, i.e., in favour of the assessee and against the revenue, with costs.
B.S.Dhillon, J.
1. This judgment will dispose of Income-tax References Nos. 110 of 1977 and 56 of 1979. Since the facts on the basis of which the questions of law arise in both these references are common, the same are being disposed of by a common judgment.
2. The facts as given in I.T. Ref. No. 110 of 1977, which pertains to the assessment year 1972-73, may be stated. The assessee is a private limited company and carries on the business of manufacture and sale of cycles. The previous year for the assessment year 1972-73 ended on 31st March, 1972. By an agreement dated 1st April, 1960, the assessee had appointed M/s. Hans Raj Pahwa and Brothers, Ludhiana, as its sole distributors for the sale of all its products for a period of five years from 1st April, 1960, to 31st March, 1965, and the commission was fixed at 4% on all the sales made by the company direct or through the efforts of the sole distributors. The firm of M/s. Hans Raj Pahwa and Brothers was constituted by a partnership deed dated 26th March, 1960, comprising the following partners, who agreed to share the profits and losses of the firm in equal proportion :
(1) Shri Hans Raj representing his HUF.
(2) Shri Jagat Singh representing his HUF.
(3) Shri Sohan Lal representing his HUF.
3. By a deed of partnership dated 15th February, 1963, Shri Harmohinder Singh, son of Shri Jagat Singh, was taken as a fourth partner and whereas the aforesaid three partners share in profits and losses was fixed at 20% each, Shri Harmohinder Singhs share was fixed at 16%. By another agreement dated 30th March, 1965, the assessee again appointed M/s. Hans Raj Pahwa and Brothers, Ludhiana, as its sole selling agent for a further period of five years from 1st April, 1965, to 31st March, 1970. The rate of commission was reduced to 3% on all sales made to parties in India by the company direct or through the efforts of the sole selling agents.
4. By a deed of partnership dated 1st April, 1969, there was a change in the constitution of M/s. Hans Raj Pahwa and Brothers, inasmuch as two more persons, namely, Inderjit Singh, son of Shri Hans Raj Pahwa, and Swaranjit Singh, son of Shri Jagat Singh Pahwa, were taken as partners. The shares in the profits and losses of the firm were fixed as under :
(1) Shri Hans Raj Pahwa 18%.
(2) Shri Jagat Singh Pahwa 15%.
(3) Shri Sohan Lal Pahwa 25%.
(4) Shri Harmohinder Singh Pahwa 12%.
(5) Shri Inderjit Singh Pahwa 18%.
(6) Shri Swaranjit Singh Pahwa 12%.
5. The assessee-company again appointed M/s. Hans Raj Pahwa and Brothers as its sole selling agents for a further period of five years from 1st April, 1970, to 31st March, 1975. The sole selling agents were entitled to commission at 3% on all sales made to parties in India by the assessee direct, or through the efforts of the sole selling agents. By a deed of partnership dated 1st April, 1971, there was a change in the profit-sharing ratio of the six partners of M/s. Hans Raj Pahwa and Brothers and the share in profits and losses of the firm of each partner was fixed at l/6th. Consequent upon the aforesaid agreements the assessee-company paid commission to M/s. Hans Raj Pahwa and Brothers in different years. The figures of sales and commission, etc., during the period of ten years, from the assessment year 1963-64 to 1972-73, are as under : Asst. yearSalesGross profitNet profitCommission 1963-6473,77,00416,12,5083,25,3083,13,458 1964-6589,41,23018,78,6005,99,8173,70,651 1965-661,09,71,54119,79,4745,23,1774,30,952 1966-671,28,76,57220,90,9654,79,5673,58,949 1967-681,62,13,76126,64,5857,81,6314,40,481 1968-691,92,98,94535,65,61011,56,1085,42,826 1969-702,12,86,91335,64,65111,98,3596,15,853 1970-712,24,42,25543,33,86613,43,2417,03,003 1971-722,98,33,12361,54,39216,17,2847,84,494 1972-733,10,15,97951,75,91717,03,88310,11,110
6. The aforesaid commission paid to M/s. Hans Raj Pahwa and Brothers as sole selling agents was allowed in all the assessment years including the assessment year 1972-73 for
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