COMMISSIONER OF INCOME TAX. BOMBAY v. INDIAN ENGINEERING AND COMMERCIAL CORPN.

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 Inconie-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" H used in section40 (a) (v) of the Act postulated that the

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A benefit, amenity or perquisite mentioned therein cov- ers benefit, amenity or perquisite allowed in Kind but not in cash?

(iii) Whetherthe Tribunal was right in holding..l.t.1t, expenditure of Rs. 19,386 for the assessment year the

B 1971-72 and Rs. 29,283 for the assessment year 1972- 73 qid 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- ~

c 73. The first two questions go together. The provision applicable for the A.Y.1971-72 was Section40 (;1 l (v) whereas forthe AY.1972-73. the provision applicable is Section 40 (a) (5) which is a successor ... provision to Section 40 (a) (v).

D 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 assessce paid to three of its Directors commission ~n sales in addition to salary as follows:

Assessment Director Salary Commission E year

1971-72 Sh.S.B Lal 39,000 36, l 71 • Sh. S.B. Mathur 18,000 36, l 71 Sh. A.B. Mathur 7.800 36.171 F _, 1972-73 Sh. S.B Lal 39,000 40.792 Sh. S.B. Mathur 18,000 40,792 Sh. A.B. Mat11ur 7,800 40.792 G The 'commission' in the above table means the conunission paid to the said Directors on the sales effected by the assessee, at a prescribed percentage. The Income Tax Officer treated the commis- sion 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. He also disallowed the expenses referred to

C.l.T. BOMBAY.,.. ENGG. & COMMERCIAL. CORPN. (JEEVAN REDDY .I.] 89

in question No. (iii) as entertainment expenses. On appeal, the A 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 expendi- tun: 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 B

-- August 25, 1973 relating to assessment years 1967-68 to 1968-70. The order dated August 25. 1973 dealt inter afia with the questions arising herein and held the same against the Revenue. An application under si:ction 256 ( 1) was dismissed by the Tribunal. c The first 4uestion urged before us-which was also the question urgi:d before the Tribunal-is whether commission on sales (paid in cash) falls within the four corners of Section 40 (a) (v) /Section 40 (A) (5 )'?It would be appropriate to si:t out the said provisions in so far as they arc relevant: D

"Section 4fJ-Amounts not deductible :-Notwith- standing anything to the contrary in section 30 to 38 the following amounts shall not be deducted in com- puting the income chargeable under the head "Profits and gains of business or profession--'- E

.. (a) in the case of any assessee ............ . I

•· (v) any expenditure which results directly or indi- rectly 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 em- ployee) 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- H

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A 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.) B 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 deduct- ible in certain circumstances . .c (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 .,·\

incurs any expenditure which results directly or · (ii) indirectly in the provision of any perquisite (whether convertible inlO 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. suhject to the provisions of clause (b), so much of such expenditure or allowance as is in excess t if thl.' limit specified in respect thereof in clause (c) shall Ill 11 be allowed as a deduction:"

Explanation 2: In this sub-sl.!ction- ·G (b) "perquisite" means-

(i) rent-free accommodation provided to the em- ployee hy the assessee; -- H (ii) any\.'( mcession in the matter of rent respecting any

C.l.T. BOMBAY. I'. El\OG. & COMMERCIAL. CORPN. (JEEV AN REDDY J.] 91

accommodation provided to the employee by the A asses see;

(iii) any bendit or amenity granted or provided free of cost or at concessional rate to the employee by the assessee; B (iv) payment by the assessee of any sum in respect of any obligation \vhich, hut for such payment. would have heen payable by the ci.nployee; and

- (v) payment by the asscssec of any sum. whether directly or through a fund. other ihan a recognised c

provident fund or an appnwed superannuation fund. to effect an assurance on the life of the employee or to effect a contract for an annuity." D ·Incidentally. Section 40 (A) (.5) which was inserted repealing section 40(a) (v) has itself been dektcd with effect from April I, 1989 .. by the Direct Tax Laws (Amendment) Act. 1987. The sister provision contained in sub-clauses (i) and (ii) of clause (c) or section 40. applicable to directors of a company (and other persons mentioned therein) has also been dektcd hy the very same enactment with effect E -. from April I. 1989.

Since the relevant provisions in section 40 (a) (v) and 40 (/\) (5) arc substantially similar. we shall consider the language employed in the latter provision. Sub-clause (5) ofscction40(A) is applicable in the F following situations:

(I) Where the asscssce incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a forma employee or G

(2) Where the assessee incurs any expenditure which results dircl·tJy or indirectly in the provision of any perquisite (whether conyertible into money or not ) to an employee;

< 3) (a) Where the assesscc incurs directly or indirectly any H

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A expenditure or provides an allow;l!lce in respect of any assets or the assessec used by the employel! either wholly or partly for his own purpose or benefit;

(h) Where an employee <>fthe asscssee is provided any allowance ("entitled to any allowance") in respect of any assets or lhl! asst:ssec B used hy such employt:e either wholly or partly for his own purposes or henefit.

In either or these situations, so much of such expenditure or allowance as is in eXCi!SS of the limits specified will not he allowed as C a deduction. Thc: question is whcth..:r the commission paid 10 i1s din.:ctors/cmployecs on the saks d'fccted by the asst:sst:e falls within -- any of the situations/clauses mentioned ahove. The Revenut: relies upon the second one amcing tht:m. According to them. the c< immission paid is a 'pcrquisik ·. which submission. they say. is home 0111 hy the words withi!1 the brackets "whelher convcrtihlc into money or not'' D immediately following the word ··perquisite". On the other hand. the contention ufthc asscssee which has been accepted hy tht: A.A.C. and

E the Tribunal is thal such cash payment dPcs not rail wilhin any or the situations/clauses contemplated by suh-sectiun (5). Having n.:gard to the language employed in clause (c). we are inclined to agn:e with the assessee. The language of suh-section (5) is significant. The first two .. situations, as we have called them. start with the wprds ''\\'hen.: the asscssec incurs any expenditure which resul1s directly or indi- rectly .............. ". It is difficult 10 say that payment pf a cc11ai11 cash • amount hy way of co111missio11 on sales. directly 11 i :111 employee. ca11 F be said to fall within the \\'Ords "where tht: assessce 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-sine..: they speak ur an expenditure or allowance in n:spect of any assets nfthe asscssee used hy the employee. Learned counsel for the Revenue. Shri Manchanda. argued that the words "whether con- G vertiblc into money or not" hring out the intention of the Parliament and support his contention. I le says, then~ is no reason not to include cash pay1m:nt within the amhit of suh-scction (5) of Section 40 (A). \Ve arc, however. not concerned with the generality of cash payments but only with the payment concerned herein. Reading the suh-section as a H whole and having regard to the language employed therein. the

-" - C.l.T.RO'.\WA Y.1·.ENCiG.&COMMERCIAL.CORP:'-1. (JEEVAN REDDY J.] 93

payment concerned herein does not fit into it. A

The employees conccrne·d 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 us Section 40 (A) (5) is applicable to employees whether of companies B or others. In the case of directors, who are also employees, both the pni\'isions will be attracted- the higher of the two ceilings has to be applied.

The karned counsel for the rcspondent-asscssee brought to our notice a circular issued by the Central Board of direct Taxes which C i111er afia says. '"as n:g.ards payment of commission to the employees the question whether it forms part of salary or perquisite has to be <.kdded on the facts of each case. If the terms and conditions of service arc such that cnmmission is paid not as a bounty or benefit but is paid as part and parcel of the remuneration for the sl:rvice renders by the D e mph 1yees. such payment partake the ~ature of salary rather than as a benefit or perquisite. If. however, on terms and conditions of service l!itht:r 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 as a benefit hy way of addition to salary rather than in lieu of sulary." It is not necessary for us to make any comment on E the said circular.

- For the above reasons. we are of the opinion that the High Court was justi ried in n:fusing to direct the Tribunal lo state question (I) and (2) under section 256 (2). F

So far as question No.3 is concerned, it has not bec:n seriously pressed before us having regard to the smallness of the· amount involved. It is als() stated that the said question is pending consideration is a batch of appeals hefore this Court. We do not propose to express G any upinion on question No. 3 for the reason that the amount involved is quite small having. regard to the income of the assessee-r:espondent.

ll1c appeals accordingly fail and arc dismissed. No costs.

U.R. Appeal dismissed.