(Appeals by special leave from the judgment and order, dated November 22,1976 of the Bombay High Court in I.TA. No.191 of 1976)

Income-tax---

----Business expenditure---Company---Director or employee-- Remuneration---Limit to allowance---Does not apply to commission paid at a percentage on sales effected by assessee---Indian Income Tax Act, 1961, Ss.40(a)(v) & 40-A(5).

During the accounting years relevant to the assessment years 1971-72 and 1972-73, the respondent, a private company, paid in cash to its directors in addition to their salary, a "commission" at a percentage on the sales effected by the respondent. The Appellate Tribunal held that the commission was not a "perquisite" and the limits prescribed for allowance under section 40(a)(v) and section 40-A(5) of the Income Tax Act, 1961, were respectively not applicable to those payments and no part of the commission could be disallowed in the computation of the respondent's profits. Both the Tribunal and the High Court dismissed the applications of the Department for a reference. On appeal to the Supreme Court:

Held, dismissing the Department's appeals, that section 40-A(5) started, with reference to the two situations, with the words "where the assessee incurs any expenditure which results directly or indirectly". Any payment of a cash amount by way of commission on sales, directly to an employee could not be said to fall within those words and such a payment could not also fall within the contemplation of the later part of section 40-A(5)(a)(ii) since that part spoke of an expenditure or allowance in respect of any assets of the assessee used by the employee. On a reading of section 40-A(5) as a whole and having regard to the language employed therein, the payment of commission on sales directly to the employee concerned did not fit into it. The position under section 40(a)(v) was substantially similar. The High Court was, therefore, justified in refusing to direct the Tribunal to call for a reference.

Having regard to the smallness of the amount involved, the Department did not seriously press the appeal in regard to another question regarding entertainment expenditures and the Supreme Court did not express any opinion on that question.

Decision of the Bombay High Court affirmed.

S.C. Manchanda, Senior Advocate (K.P. Bhatnagar, T.V. Ratnam and P. Parameswaran, Advocates with him) for Appellants.

Mrs. A.K. Verma, Advocate (of J.B. Dadachanji & Co., Advocates) for Respondent.

JUDGMENT

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 anadditional 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 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 year, the assessee paid to three of its directors commission on sales in addition to salary as follows:

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 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 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 40-A(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 the 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 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 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 subsection,---

(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 costs 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 an annuity." '

Incidentally, section 40-A(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 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 sections 40(a)(v) and 40-A(5) are substantially similar, we shall consider the language employed in the latter provision. Subsection (5) of section 40-A 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 subsection (5). Having regard to the language employed in clause (c), we are inclined to agree with the assessee. The language of subsection (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 subsection (5) of section 40-A. We are, however, not concerned with the generality of cash payments but only with the payment concerned herein. Reading the subsection 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 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.

Learned counsel for the respondent-assessee brought to our notice a 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.

M.BA./2461/TAppeals dismissed.