COMMISSIONER OF INCOME-TAX VS TRADE WINGS LTD.
2001 P T D 1666
[241 1 T R 198]
[Bombay, High Court (India)]
Before Dr. B. P. Saraf and Mrs. Ranjana Desai, JJ
COMMISSIONER OF INCOME‑TAX
versus
TRADE WINGS LTD.
Income‑tax Reference No.299 of 1988, decided on 17/08/1999.
(a) Income‑tax‑‑‑
‑‑‑‑Business expenditure‑‑‑Company‑‑‑Ceiling on expenditure‑‑‑Expenditure resulting in remuneration, amenity or benefit to employee or Director‑‑ Scope of Ss.40(c) & 40A(5)‑‑Expenditure should result in remuneration, amenity or benefit to employee or Director in his capacity as such Director or employee‑‑‑Director standing surety for loan taken by company‑‑ Guarantee commission paid to Director‑‑‑Not a remuneration, amenity or benefit to a Director within the meaning of S.40(c)‑‑‑Not to be taken into account in computing ceiling‑‑‑Indian Income Tax Act, 1961, Ss.40(c) & 40A(5).
(b) Income‑tax‑‑‑
‑‑‑‑Business expenditure ‑‑‑Company‑‑‑Ceiling on expenditure‑‑‑Expenditure resulting in remuneration, amenity or benefit to employee or Director‑‑ Directors who are employees‑‑‑Section 40(c) is applicable‑‑‑Indian Income Tax Act, 1961, S.40(c).
What is to be considered for the purpose of section 40(c) or 40A(5) of the Income Tax Act, 1961, is expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has substantial interest in the company or to a relative of the director, etc. Section 40A(5) talks , of an expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee or in the provision of any perquisite. The expenditure will fall within the purview of section 40(c) or 40A(5) of the Act only if it results in payment to the director or the employee in his capacity as director or employee. If the payment is made for the services rendered by any of them which they were not required to do in the capacity of Managing Director, Director or employee or for parting with valuable right, such expenditure would not fall within the purview of section 40(c) or 40A(5) of the Act. The guarantee commission paid to a Director for standing guarantee for the loans obtained by the assessee‑company cannot be held to be remuneration or benefit or amenity to a Director qua Director. It is paid for the personal guarantee furnished by him which he is under no obligation to furnish as a Director or a Managing Director. The guarantee commission paid to the Managing Director is not a remuneration, etc., to the Managing Director within the meaning of section 40(c) of the Act.
Bharat Beedi Works (P.) Ltd. v. CIT (1993) 201 ITR 1063 (SC) applied.
Pheros & Co. (P.) Ltd. v. CIT (1980) 124 ITR 188 (Gauhati); India Jute. Co. Ltd. v. CIT (1989) 178 ITR 649 (Cal.) and Suessen Textile Bearings Ltd. v. Union of India (1984) 55 Comp. Cas. 492 (Delhi) fol.
The disallowance out of remuneration, perquisites, etc., of the employee‑director of a company has to be worked out under section 40(c) and not under section 40A(5).
CIT v. Hico Products (Pvt.) Ltd. (No.l) (1993) 201 ITR 567 (Bom.) fol.
Nav Ketan International Films (P.) Ltd. v. CIT (1994) 209 ITR. 976 (Bom.); Pai Paper and Allied Industries (P.) Ltd. v. CIT (1994) 207 ITR 410 (Bom.) and T.T. (Pvt.) Ltd. v. ITO (1980) 121 ITR 551 (Kar.) ref.
R.V. Desai with P.S. Jetley for the Commissioner.
Ashok N. Bhogani with V.P. Salunkhe and Ms, A Mishra instructed by A. Bhogani & Co. for the Assessee.
JUDGMENT
Dr. B.P. SARAF, J.‑‑‑By this reference under section 256(1) of the Income Tax Act; 1961, the Income‑tax Appellate Tribunal has referred the following questions of law to this Court for opinion at the instance of the Revenue:
"(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the provisions of section 40(c) of the Income Tax Act, 1961, will not be applicable to guarantee commission paid by the assessee‑company to its Managing Director?
(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in holding that the disallowance out of remuneration, perquisites, etc., of the employee‑directors of the assessee‑company has to be worked out under section 40 (c) and not under section 40A(5) of the Income Tax Act, 1961?"
The assessee is a limited company. The controversy in this reference pertains to the assessment year 1978‑79. During the relevant previous year, the assessee‑company paid guarantee commission of Rs.91,194 to its Managing Director for giving personal guarantee to various banks and insurance companies for the loans advanced by them to the assessee company. The Income‑tax Officer included the above amount in the remuneration paid to the Managing Director for the purpose of working out the ceiling under section 40(c) of the Income Tax Act, 1961, (the "Act"). The assessee‑company appealed to the Commissioner of Income‑tax (Appeals). The Commissioner (Appeals) held that the guarantee commission paid to the Managing Director could not. be regarded as remuneration or perquisite within the meaning of section 40(c) of the Act for the purpose of the ceiling prescribed therein. The appeal of the Revenue against the above order was rejected by the. Income‑tax Appellate Tribunal (the "Tribunal").
The Tribunal held that the guarantee commission paid to the Managing Director of the company was outside the purview of section 40A(5) of the Act. While coming to the above conclusion, the Tribunal relied on the decision of the Karnataka High Court T.T. (Pvt.) Ltd. v. ITO (1980) 121 ‑ITR 551. Aggrieved by the above decision of the Tribunal, the Revenue is before us with this reference.
We have heard Mr. RN. Desai, learned counsel for the Revenue, as also Mr. A.N. Bhoghani, learned counsel for the assessee. Mr. Desai submits that the guarantee commission paid to the Managing Director is salary within the meaning of sub‑clause (iv) of clause (1) of section 17 of the Act which refers to fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages and hence remuneration for the purpose of section 40(c) or 40A(5). He submits that since commission paid to the director is salary, the guarantee commission' has to be included in the remuneration for calculating the ceiling specified in these sections. Mr. Bhogani, learned counsel for the assessee, on the other hand, submits that the ceiling prescribed under section 40(c) or 40A(5) of the Act is only in respect of the expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a‑director or a person who has a substantial interest in the company. In this case, the guarantee commission paid to the Managing Director, according to learned counsel for the assessee, is not an expenditure which results directly or indirectly in the provision of any remuneration to the Managing Director who stood guarantee for the loans given by the banks to the assessee‑company. The contention of learned counsel is that the guarantee commission is paid for the guarantee furnished by the Managing Director and not for any service rendered by him as Managing Director. The payment of guarantee commission is not qua Managing Director. It has nothing to do with his service as, a Managing Director. Learned counsel submits that such payment to the Managing Director or a director cannot be considered as an expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to the Managing Director or a Director. Such expenditure, according to him, will not fall within section 40(c) or 40A(5) of the Act. Reliance in support of 'this contention is placed on the decision of the Gauhati High Court in Pheros & Co. (P.) Ltd. v. CIT (1980) 124 ITR 188, the decision of the Calcutta High Court in India Jute Co. Ltd. v. CIT (1989) 178 ITR 649, the ratio of the decision of the Supreme Court in Bharat Beedi Works (P.) Ltd. v. CIT (1993) 201 ITR 1063 and the decision of this Court in Pai Paper and Allied Industries (P.) Ltd. v. CIT (1994) 207 ITR 410 and Nav Ketan International Films (P.) Ltd. v. CIT (1994) 209 ITR 976. Reliance is also placed by learned counsel for the assessee on the decision of the Delhi High Court in Suessen Textile Bearings Ltd. v. Union of India (1984) 5sb Comp Cas 492. Our attention has also been drawn to the Circular, dated February 16, 1994, issued by the Department of Company. Affairs of the Government of India by which in view of the decision of the Delhi High Court in Suessen Textile Bearings Ltd. v Union of India (1984) 55 Comp Cas 492, the earlier Circular, dated February 16, 1969, according to which guarantee commission payable to the Directors for personal guarantee on loans to the company was to be treated as remuneration under section 3090 ) of the Companies Act, 1956, has been withdrawn.
We have carefully considered the rival submissions. The controversy is in a narrow compass. There is no dispute about the fact that the guarantee commission of Rs.91,194, was paid to the Managing Director of the assessee‑company for the service rendered by him in his individual capacity for guaranteeing loans or credit facilities advanced by banks and other institutions. The Managing Director stood surety for such loans or credit facilities advanced by the financial institutions. It is for such service rendered by the Managing Director that the guarantee commission was paid. Obviously, the payment was not made to the Managing Director qua Managing Director. There is no service rendered by him in the capacity of a Managing Director. If the Managing Director would not have stood guarantor, the assessee might have been required to obtain guarantee from somebody else other than the Managing Director and pay guarantee commission to that person:. Merely because the person giving guarantee happened to be a Managing Director of the company, the guarantee commission paid to him cannot be treated as remuneration to .the Managing Director in his capacity as Managing Director. It is not an expenditure resulting directly or indirectly in the provision of any remuneration to the Managing Director in his capacity as Managing Director.
The Supreme Court in Bharat Beedi Works (P.) Ltd. v. CIT (1993) 201 ITR 1063, had occasion to deal with the question whether the ceiling under section 40(c) of the Act could apply to any and every payment made to the Managing Director. In that case, the assessee‑company paid royalty to a firm for use of a brand name of beedies. Three directors of the assessee company happened to be partners of that firm. The question was whether the ceiling prescribed by section 40(c) was applicable to the royalty paid by the company to the firm or three directors who were its partners. The High Court held that payments to the firm were in reality payments made to the directors. The Supreme Court reversed the above finding of the High Court and held that the payments were made in consideration of a valuable right parted with by the firm in favour of the company. It was further held that the payments could not be treated as payments made to directors as directors and hence would not fall within section 40(c) of the Act. This decision was followed by this Court in Pai Paper and Allied Industries (P.) Ltd. v. CIT (1994) 207 ITR 410. In that case, it was held by this Court that section 40(c) of the Act refers to an expenditure incurred by making periodical payments to a person mentioned in that clause apparently for any personal service that may be rendered by him. It was further held that it cannot have any reference to the payment made by the assessee for all kinds of "services or facilities" referred to in section 40A(2)(a). It was held that only payments made to directors as directors fall within section 40(c) of the Act.
Applying the ratio of the above decision, it is clear that the guarantee commission paid to a director for standing guarantee for the loans obtained by the assessee‑company cannot be held to be a remuneration or benefit or amenity to a Director qua Director. It is paid for the personal guarantee furnished by him which he is under no obligation to furnish as a Director or a Managing Director.
We are supported in our above conclusion by the decision of the Gauhati High Court in Pheros & Co. (P.) Ltd. v. CIT (1980) 124 ITR 188. In that case. also the controversy was. whether the guarantee commission paid to the Managing Director at the rate of 2.5 percent on the amount of loan on which personal guarantee had been given by him to the State Bank of India was an expenditure falling within section 40(c) of the Act. It was held by the Gauhati High Court that such an expenditure would not fall within section 40(c) of the Act.
To the same effect is the decision of the Caclutta High Court in India Jute Co. Ltd. v. CIT (1989) 178 ITR 649. In that case the question was whether the guarantee commission paid to the father of the Director can be regarded as remuneration within the meaning of section 40(c) of the Act. The Calcutta High Court held (page 652):
"That the guarantee has been given by the father of a director is not in dispute but the amount of guarantee commission has been paid in return for service rendered by M.L: Jalan, who stood guarantor for a loan obtained by the company. The liability of the guarantor is co extensive with that of the debtor. If the debtor fails to pay the loan, the guarantor will be liable to pay the loan. If the guarantor fails to pay the loan, his personal assets and properties may be attached and sold in execution of any decree that may be passed in respect of that loan. Therefore, by giving the guarantee, M.L. Jalan, has exposed himself to a liability. It is for his undertaking that liability that remuneration is being paid. This cannot be described as a benefit. If anything, he has taken upon himself the liability for which he is being remunerated.
The nature of the guarantee commission was also examined by the Dehli High Court in Suessen Textile Bearings Ltd. v. Union of Indian (1984) 55 Comp Cas 492, in the context of the provisions of section 309 of the Companies Act, 1956. Section 309 puts some ceiling on the remuneration paid to the director or the Managing Director of the company. The Delhi High Court held that the guarantee commission would not be a remuneration within the meaning of section 309 of the Companies Act. The above decision was also accepted by the Company Law Board by Circular, dated February 16, 1994. Following the above decision, the earlier circular, dated December 16, 1969, according to which guarantee commission payable to the directors or the Managing Director for giving personal guarantee was to be treated as remuneration under section 309 of the Companies Act, was withdrawn. "
It is clear from the above decision that what is to be considered for the purpose qt sections 40(c) or 40A(5) of the Act is expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a Director or to a person who has substantial interest in the company or to a relative of the director, etc. Section 40A(5) talks of an expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee or in the provision of any perquisite. As stated earlier, the expenditure will fall within the purview of section 40(c) or 40A(5) of the Act only if it results in payment to the director or the employee in his capacity as director or employee. If the payment is made for the services rendered by any of them which they were not required to do in the capacity of Managing Director, director or employee or for parting with the valuable rights, such expenditure would not fall within the purview of section 40(c) or 40A(5) of the Act.
In view of the above, we are of the clear opinion that the guarantee commission paid to the Managing Director is not a remuneration, etc., to the Managing Director within the meaning of section 40(c) of the Act. Question No. 1 is, therefore, answered in the affirmative, i.e,. in favour of the assessee and against the Revenue.
So far as Question No.2 is concerned, the controversy therein is covered by the decision of this Court in CIT v. Hico Products (Pvt.) Ltd. (No.1) (1993) 201 ITR 567. Following the same, Question No.2 is also answered in the affirmative, i.e., in favour of the assessee and against the Revenue.
The reference stands disposed of accordingly with no order as to costs.
M.B.A./533/FCReference disposed of.