COMMISSIONER OF INCOME-TAX VS SUDARSAN CHITS (I.) LTD.
2001 P T D 3265
[240 I T R 319]
[Madrad High Court (India)]
Before N. V. Balasubramanian and P. Thangavel, JJ
COMMISSIONER OF INCOME‑TAX
Versus
SUDARSAN CHITS (I.) LTD.
Tax Case No. 1739 of 1986 (Reference No. 1172 of 1986), decided on 24/12/1997.
(a) Income‑tax‑‑‑
‑‑‑‑Business expenditure‑‑‑Company‑‑‑Disallowance of expenditure‑‑ Remuneration to director or person substantially interested in company‑‑ Amount paid to managerial staff of holding company under an agreement‑‑ Finding that agreement was genuine and had been entered into for business purposes‑‑‑Amount could not be disallowed under S.40(c)‑‑‑Indian Income tax Act, 1961, Ss.37 & 40(c).
During the course of assessment proceedings for the assessment year 1978‑79, the assessee claimed deduction for a sum of Rs.2,50,000 being the remuneration paid to the managerial staff of the holding company under an agreement, dated May 1, 1973, entered into, for the use of the services of the Managing Director and four other officers of the holding company in the business of the assessee‑company. The Income‑tax Officer held that the assessee was not entitled to the deduction of Rs.2,04,000 and applying the provisions of section 40(c) of the Income Tax Act, 1961, he restricted the allowance as regards the managerial remuneration paid by the assessee company to those persons. The Commissioner of Income‑tax (Appeals) and the Tribunal, however, held that the assessee was entitled to the deduction.
The Income‑tax Officer had also disallowed the payment to .the gratuity funds on the grounds that the employees of the assessee‑company had not rendered continuous service of five years to warrant a provision for gratuity. The Commissioner of Income‑tax (Appeals) on appeal preferred by the assessee, held that the contribution made towards approved gratuity funds was an allowable deduction, which view was confirmed by the Tribunal. On a reference:
Held, (i) that with regard to the payment to the holding company for managerial services, the Tribunal was correct in holding that the provisions of section 40(c) read with sections 2(31) and 2(32) of the Act were not attracted. It had been found by the Tribunal that the agreement was genuine. The Tribunal had come to the conclusion that the payment was reasonable and it could not be stated that the payment made to the holding company by the assessee was made on extra commercial considerations. The provisions of section 40(c) were not applicable. The payment was deductible.
CIT v. Sudarsan Chits (India) Ltd. (1990) 182 ITR 94 (Ker.) fol.
(b) Income‑tax‑‑‑
‑‑‑‑Business expenditure‑‑‑Gratuity‑‑‑Contribution to approved, gratuity fund‑‑Deductible‑‑‑Indian Income Tax Act, 1961.
The contribution shade by‑the assessee towards approved gratuity fund was an admissible deduction.
CIT v. Sudarsan Chits (India) Ltd. No.l (1999) 239 ITR 170 (Mad.) fol.
CIT v. Sri Meenakshi Mills Ltd. (1967) 63 ITR 609 (SC); Life Insurance Corporation of India v. Escorts Ltd. (1986) 59 Comp. Cas. 548 (SC) and (1986) 1 SCC.26d ref,
SN. Rajan for the Commissioner.
P.P.S. Janarthana Raja for the Assessee.
JUDGMENT
N.V. BALASUBRMANIAN, J.‑‑‑ At the instance of the revenue, the Appellate Tribunal has stated a case and referred the following questions of law for our consideration under section 256(1) of the Income‑tax Act, 1961 (hereinafter to be referred to as "the Act").
"(1)Whether, on the facts and in the circumstances of the case and on an interpretation of section 40(c) read with sections 2(31) and 2(32) of the Income‑tax Act, the 'tribunal is right in holding that the provisions of section 40(c) are not attracted.
(2)Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the sum of Rs.5,33,755 being contribution made by the assessee to the approved gratuity fund is an admissible deduction?
T e assessee is a company carrying on business in chits. During the course of assessment proceedings for the assessment year 1978‑79. the assessee claimed deduction for a sum of Rs.2,50,000 being the remuneration paid to be managerial staff of the holding company under an agreement dated May 1. 1973, entered into for the use of service of the Managing Director and four other officers of the holding company in the business of the assessee‑company. In the agreement it was stipulated that 75 per cent. of the salary payable by the holding company, namely, Sudarsan Trading Company Limited, to the five person's, viz. M. Velayudhan, T.P. Ravindran; V.P: Balaraman, P. Shanmugham and K.P. Balan, or Rs.2,50,000 whichever is less is payable by the assessee‑company to the ‑holding company for the services made available by the holding company to the assessee‑company. The agreement also provided for taking over of the chit business by the assessee‑company in view of the segregation of the chit business from other business of the holding company at the direction of the Reserve Bank of Indian.
The Income‑tax Officer took a view that it was not possible to quantify the services of the concerned persons to the assessee‑company and further the, work relating to the chit business was previously undertaken by the staff members and it cannot be stated that the directors were fully and directly involved to the chit business. He, therefore, held that the assessee was not entitled to a deduction of Rs.2,04,000 and applying the provisions of section 40(c) of the Act, he restricted the allowance as regards the managerial remuneration paid by the assessee‑company to the abovesaid persons.
The assessee preferred an appeal before the Commissioner of Income‑tax (Appeals) challenging the order of assessment regarding the disallowance of remuneration paid to the abovesaid five persons. of the holding company. The Commissioner of Income‑tax (Appeals), following an order of the Tribunal, Cochin Bench, in I.T.A. No. 159/Cock of 1979, dated April 10, 1981, rendered in the assessee's own case for the assessment year 1975‑76, held that the Income‑tax Officer was not justified in making disallowance of the remuneration paid to the managerial staff of the holding company and the disallowance made by the Income‑tax Officer of a sum of Rs.2,04,000 was deleted for the assessment year 1978‑79.
The Revenue carried the matter in appeal before the Income‑tax Appellate Tribunal and the Appellate Tribunal following the earlier order of the Tribunal, Cochin Bench, rendered in the assessee's own case in I.T.A. No.159/Coch. of 1979, dated April 10, 1981, for the assessment year. 1975‑76 held that the Income‑tax Officer was not justified in disallowing Rs.2,04,000 being the remuneration paid to the managerial staff of the holding company and thereby upheld the order of the Commissioner of Income‑tax (Appeals). As against that part of the order of the Appellate Tribunal, the Revenue sought for and obtained a reference and accordingly, the first question of law set out supra has been referred to us.
In so far as the second question of law that has been referred to us is concerned, it relates to the disallowance of a sum of Rs.5,33,755 being the contribution made by the assessee towards an approved gratuity fund. The Income‑tax Officer disallowed the payment to the gratuity fund on the ground that employees of the assessee‑company had not rendered continuous service of five years to warrant a provision for gratuity. The Commissioner of Income‑tax (Appeals), on appeal preferred by the assessee, held that the contribution made towards approved gratuity fund is an allowable deduction, which view was confirmed by the Appellate Tribunal. Against that part of the order of the Appellate Tribunal, as the instance of the Revenue, the second question of law has been referred to us.
Mr. C.V. Rajan, learned counsel for the Revenue, submitted that the Tribunal was not correct in holding that the assessee is entitled to deduction for a sum of Rs.2,04,000 as the amount was paid as extra commercial considerations and the provisions of section 40(c) read with section 37 of the Act would apply. In so far as the payment made towards approved gratuity fund is concerned, he submitted that the Tribunal was also not correct in holding that the amount contributed to the approved gratuity fund is an allowable deduction.
Mr. Janarthana Raja, learned counsel for the assessee, supported the order of the Appellate Tribunal.
We have carefully considered the rival submissions of learned counsel for the respective parties. We have noticed, the Appellate Tribunal, in the instant case, followed an earlier order of the Tribunal Cochin Bench, in I.T.A. No. 159(Coch.) of 1979, dated April 10, 1981, and as against that order of the Appellate Tribunal rendered in the assessee's own case for the assessment year 1975‑76, a reference was made to the High Court of Kerala and the reference came up for consideration before the Kerala High Court in the case of CIT v. Sudarsan Chits (India) Ltd. (1990) 182 ITR 94. The Kerala High Court considered the agreement entered into between the assessee‑company and the holding company and after considering the terms of the agreement, the Kerala High Court held as under (page 97):
"The payment in question was made on contractual basis and it was incurred on account of business expediency. The arrangement was made bona fide and in the interest of the business. The contractual payment has not been shown as colourable or otherwise suspect. That is the finding of the Commissioner of Income‑tax (Appeals) as well as of the Tribunal. The appellate authorities also found that the apportionment is justified with reference to the gross turnover. There was nothing to suspect in the payment which was a contractual one made to another company. The Tribunal clearly found that the agreement arrived at by the parties is genuine and bona fide and it was not the case of the Revenue that the said agreement was bogus or sham. The assessee‑company has an independent and legal personality distinct from its members. The corporate veil can be lifted in exceptional circumstances as indicated in LIC of India v. Escorts Ltd. (1986) 59 Comp. Cas. 548; (1986) 1 SCC 264. In CIT v. Sri Meenakshi Mills Ltd. (1967) 63 ITR 609 (SC), the corporate veil, was lifted and evasion of income‑tax prevented by paying regard to the economic realities behind the legal facade. No such exceptional circumstances are found in this case. Hence, we are of the opinion that section 40(c) is not attracted on the facts of this case. The amount also has been considered as reasonable. In the circumstances of the case, we hold that section 40(c) read with sections 2(31) and 2(32) of the Act is not attracted."
The factual situation prevailing in the assessment year 1978‑79 is the same as the facts found by the Appellate Tribunal, in its earlier order which was the subject‑matter of consideration by the Kerala High Court in the abovesaid decision. Since there is no difference in the facts, we are of the view that the Tribunal was correct in holding that the provisions of section 40(c) read with sections 2(31) and 2(32) of the Act are not attracted. It has been found by the Tribunal that the agreement was genuine and bona fide and it is not the case of the Department that the agreement was bogus or sham. The Tribunal also noticed the nature of the chit business, turnover of the chit business, compared to other business of the holding company and the nature of the work undertaken by the said five persons who are the employees or directors of the holding company. Considering all these aspects including the turnover of the chit business, compared to the other businesses, the Tribunal came to the conclusion that the payment was reasonable and it cannot be stated that the payment made to the holding company by the assessee was made on extra‑commercial considerations. The‑Kerala High Court has also taken the same view‑ holding that there is nothing to suspect in the payment which was a contractual one made to another company. In the absence of any exceptional circumstances, the Kerala High Court has also taken a view that the provisions of section 40(c) of the Act are not attracted. We are of the view, in the instant case, there are no materials to come to a different conclusion from the one that was arrived at by the Kerala High Court on the same facts. Following the decision of the Kerala High Court in the assessee's own case reported in CIT v. Sudarsan Chits (India) Ltd. (1990) 182 ITR 94, we hold that the Tribunal has come to a correct conclusion in holding that the provisions of section 40(c) of the Act are not attracted to the facts of the case. Accordingly, the first question is liable to be answered against the Revenue.
In so far as the aecond question of law is concerned, the point involved in the question was the subject‑matter of consideration before us in T.C. No.1519 of 1986 (CIT v. Sudarsan Chits (India) Ltd. (No.l) (1999) 239 ITR 170 (Mad.), and by a judgment of even date, we held that the contribution made by the assessee towards approved gratuity fund is an admissible deduction. Following our judgment in T.C. No. 1519 of 1986 CIT v. Sudarsan Chits (India) Ltd. (No. 1) (1999) 239 ITR 170 (Mad.), of even date, we hold that the second question of law is liable to be answered againstthe Revenue:
Accordingly, we answer the questions of law referred to us as under:
First question:It is answered in the affirmative and against the Revenue. Second question: It is answered in the affirmative andagainst the Revenue.
However, in the circumstances of the case, there will be no order as to costs.
M.B.A./328/FCOrder accordingly