METAL POWDER CO. LTD. VS COMMISSIONER OF INCOME-TAX
2001 P T D 322
[238 I T R 756]
[Madras High Court (India)]
Before N. V. Palasubramanian and P. Thangavel, JJ
METAL POWDER CO. LTD.
versus
COMMISSIONER OF INCOME‑TAX
T.C. No. 1136 of 1983 (Reference No.588 of 1983), decided on 07/11/1997.
Income-tax--
‑‑‑‑Business expenditure‑‑‑Amounts not deductible‑‑‑Company‑‑‑Commission paid to director‑‑‑Disallowance‑‑‑Commission paid is also remuneration‑‑‑Is subject to ceiling limit prescribed under sub‑cl. (i) of cl. (c) of S.40 of Income‑tax Act‑‑‑Indian Income Tax Act, 1961, S.40(c).
The commission paid to the director at a fixed percentage of the net profits of the company is also remuneration though it may be termed as commission and, therefore the commission payment is also subject to the ceiling limit prescribed under sub‑clause (i) of clause (C) of section 40 of the Income Tax Act, 1961.
Gestetner Duplicators (P.) Ltd. v. CIT (1979) 117 ITR 1 (SC) and Rane (Madras) Ltd. v CIT (1995) 212 ITR 583 (Mad.) fol.
P.P.S. Janarthana Raja for Padmanabhan and Ramamani for the Assessee.
C.V. Rajan for the Commissioner.
JUDGMENT
N.V. BALASUBRAMANIAN, J.‑‑‑The question of law that is referred at the instance of the assessee by the Income‑tax Appellate Tribunal, for the assessment year 1978‑79 under section 256(1) of the Income Tax Act, 1961 (hereinafter to be referred to as "the Act", reads as under:
"Whether, on the facts and in the circumstances of the case, the commission paid to the director could be regarded as remuneration within the meaning of section 40(c) of the Income Tax Act, 1961?"
The assessee is a company and the Income‑tax Officer, while passing the assessment order for the assessment year 1978‑79, applied the provisions of section 40(c) of the Act for limiting the deduction of expenditure incurred in respect of a director of the assessed‑company to a sum of Rs.72,000. The Income‑tax Officer found that on the basis of the approval given by the Central Government under sections 268/269 and 198/309 of the Companies Act, 1956, the assessee was entitled to a remuneration not exceeding five per cent. of the net profits of the company. The case of the assessee before the Income‑tax Officer was that though the total remuneration paid to the director as well as the general manager was Rs.60,000, the sum represented commission and, therefore, the amount was not liable to be included in determining the ceiling prescribed under section 40(c) of the Act. The Income‑tax Officer, however, rejected the claim of the assessee on the ground that what was paid by the company to the director was remuneration and limited the allowance of the' expenditure by invoking the provisions of sub‑clause (i) of clause (c) of section 40 of the Act.
The Commissioner of Income‑tax (Appeals), however, allowed the appeal preferred by the assessed and the Income‑tax Appellate Tribunal, in an appeal preferred by the Revenue held that the commission paid to the director was subject to ceiling limit prescribed under sub‑clause (i) of clause (c) of section 40 of the Act and that the payment of commission has to be taken into account in applying the ceiling limit prescribed therein. The assessee has challenged the order of the Income‑tax Appellate Tribunal in the present tax case reference and the Tribunal has stated a case and referred the question of law set out supra.
Mr. Janarthana Raja, learned counsel for the assessee, submitted that the commission paid to a director cannot, be regarded as one of the income falling within the scope of sub‑clause (i) of clause (c) of section 40 of the Act. He submitted that the Bombay Tribunal has taken a‑ view that the commission paid to a director cannot be the subject‑matter for disallowance under section 40(c) of the Act.
Mr. C.V. Rajan, learned counsel for the Revenue, on the other hand, submitted that the commission paid is in fact a remuneration paid to the director and, therefore, the remuneration paid to the director is subject to the ceiling limit prescribed under clause (c) of section 40 of the Act:
We have carefully considered the submissions of learned counsel for the assessee as well as learned counsel for the Revenue. The question whether the commission paid should be treated as remuneration or not is no longer res integta as the Supreme Court, in the case of Gestetner Duplicators (P.) Ltd. v. CIT (1979) 117 ITR 1, held that if, under the terms of the contract of employment, the remuneration was paid for the services rendered by the employee, it would be remuneration. The remuneration may be determined at a fixed salary or it may be fixed on a percentage of turnover achieved by him, but in both cases, what was paid was remuneration and it will partake of the character of salary.' The Supreme Court also held that the salary can be fixed on the basis of time spent in service or on the basis of work done or partly by the time spent in service and partly by the work done. The decision of the Supreme Court makes it clear that whatever may be the basis for fixing the remuneration, the remuneration was paid to the director for services rendered by the director' to the company and the commission paid at a fixed percentage .of the net profits of the company, in our opinion, is still a remuneration, though it may be termed as commission, and therefore, the payment is subject to the ceiling limit prescribed .under sub‑clause (i) of clause (c) of section 40 of the Act.
That apart, in Rane‑(Madras) Ltd. v. CIT (1995) 212 ITR 583, this Court considered the provisions. of section 40(c) of the Act and held that the commission paid to the director should be taken into account while invoking the provisions of section 40(c) of the Act. In view of the decision of the apex Court in Gestemer Duplicators (P.) Ltd.'s case (.1979) 117 ITR 1, as well as the decision of this Court in Rane (Madras] Ltd.'s case (1995) 212 ITR 583, both cited supra, we hold that the commission paid to the director is a remuneration within the scope and ambit of section 40(c) of the Act and the allowance of remuneration paid to the director is subject to the ceiling limit prescribed thereunder: We, therefore, hold that there is no infirmity in the order of the Appellate Tribunal in holding that the commission paid to the director should also be taken into account for the purpose of determining the limit of allowance under Section 40(c) of the Act.
Accordingly, we answer the question of law referred to us in the affirmative and against the assessee. However, in the circumstances of the case, there will be no order as to costs.
M.P.A./153/FC???????????
Reference answered.