COMMISSIONER OF INCOME-TAX VS K.P.V. SHAIK MOHAMED ROWTHER & COL (P.) LTD.
2002 P T D 1351
[242 I T R 245]
[Madras High Court (India)]
Before N. V. Balasubramanian anal P Thangavel, JJ
COMMISSIONER OF INCOME-TAX
versus
K.P.V. SHAIK MOHAMED ROWTHER & COL (P.) LTD.
Tax Case No. 786 of 1989 (Reference No. 402 of 1989) decided on /01/.
rd
December, 1997. (a) Income Tax----
---Business expenditure----Disallowance of expenditure above prescribed limit------Traveling expensed of employee or any other person Meaning of any other person in R. 62(2) ----Any other person would include a director or Managing Director----Traveling expenses of Director or Managing Director above prescribed limit can be disallowed-----Indian Income Tax Rules, 1962, R.6D.
(b) Income-tax---
----Business expenditure---Disallowance of expenditure---Commission paid to employees Shipping agent---Finding that employees canvassed for orders for their employer--Extent of allowance of commission paid would depend on the facts of relevant previous year.
Sub-rule (2) of rule 6D of the Income-tax Rules, 1962 places a ceiling on the traveling expenses incurred by an employee or any other person to be allowed as expenditure. In view of the expression any other person used in the4 sub-rule even if a director or aManaging Director is not an employee of the company, the ceiling prescribed by sub-rule (2) of rule 6D applies. A Director or a Managing Director of a company will come within the expression "any other person" mentioned in rule 6D(2) and deduction can be allowed for the traveling expenses incurred by them within the ceiling prescribed there under.
CIT v. Autofin Ltd. (1985) 151 ITR 741 (AP) fol.
The assessee was a private limited company carrying on business as agents of various shipping companies for the ports of Madras, Kakinada and Nagapattinam. The employees of the assessee used to canvass for cargo, etc., for various ships of their principal and for such canvassing, the assessee was making payment either as commission or service charges to its employees, for which deductions were claimed for the assessment years 1975-76 to 1979-80., Part of the commission paid had been allowed. For the assessment year 1980-81, the assessment was set aside by the Commissioner of Income-tax with a direction to make a fresh assessment after disallowing the commission/service charges paid by the assessee to its employees in toto. Accordingly, the entire commission/service charges paid by the assessee to its employees were disallowed by the Assessing Officer. The Appellate Assistant Commissioner considering the Appellate Tribunal's order in respect of the assessee for the earlier assessment years, sustained the disallowance to an extent of Rs. 40,000 with regard to the, commission/service charges payable to its employees. The Tribunal upheld the order. On a reference:
Held, that in CIT v. K.P.V. Shaik Muhammad Rowther & Co. (Pvt.) Ltd. (1999) 240 ITR 927 a Division Bench of the Madras High Court took note of the claim made by the assessee for deduction towards payment of commission/service charges for the assessment years 1975-76 to 1978-79 and also the order passed by the Appellate Assistant Commissioner as well as the Appellate Tribunal and sustained the order of the Appellate Tribunal. It observed that in each year what would be the expenditure incurred for commission payment depends upon the facts arising in that year. Considering the various facts as stated in the order of the Tribunal it had accepted the disallowance of Rs. 40,000 as made by the Commissioner of -Income-tax (Appeals) as reasonable This conclusion was arrived at on the basis of facts arising in the assessment year under consideration. In the present case also, the Revenue had not brought to the notice of the Court any change, in the circumstances to deviate from the conclusion arrived at by the Tribunal. Therefore, the order of the Appellate Tribunal had to be sustained.
CIT v. Modipon Ltd. (No.l) (1995) 212 ITR 420 (Delhi) and CIT v. K.P. v. Shaik Muhammad Rowther & Co. (Pvt.) Ltd. (1999) 240 ITR 927 (Mad.) ref.
C.V. Rajan for the Commissioner.
P. P. S. Janarthana Raja for Messrs Subbaraya Iyer, Padmanabhan and Ramamani for the Assessee.
JUDGMENT
P. THANGAVEL, J.---At the instance of the Revenue, the following questions of law have been referred for the opinion of this Court by the Income-tax Appellate Tribunal, Madras Bench "D", under section 256(1) of the Income Tax Act, 1961, hereinafter referred to as "the Act":
"(1) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in holding that the disallowance should be reduced to Rs. 40,000 in respect of the commission paid by the assessee to its employees.
(2) Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in holding that rule 6D, of the Income-tax Rules does not apply to Directors and that no disallowance could be made under the said rule and consequently in sustaining the order of the Commissioner of Income-tax (Appeals) deleting the disallowance of Rs. 12,751 made b the Inspecting Assistant Commissioner"
The assessee, K.P. V Shaik Mohammed Rowther & Co. (P.) Ltd., Madras, is a non-industrial domestic trading company, in which public are not substantially interested. The assessment for the assessment year 1980-81 was completed by the Assessing Officer on July 19, 1983, but the same was set aside by the Commissioner of Income-tax; Tamil Nadu III, Madras, with a direction to make reassessment after disallowing the commission/service charges paid by the assessee to its employees in toto.
Notice under section 143(2) of the Act was issued by the Assessing Officer and revision of assessment was made. Disallowance of 20 per cent. out of the commission/service charges paid by the assessee to its employees was refused as was done in the earlier assessment years by the Assessing Officer on the ground of pendency of reference at the instance of the Revenue before this Court. Accordingly, the entire commission/service charges paid by the assessee to its employees were disallowed by the Assessing Officer. The Assessing Officer permitted deduction to an extent of Rs.3,66,449 paid as commission to outsiders out of Rs.8,16,208 for the assessment year 1980-81 and after deducting a sum of Rs.1,60,000 already ordered in the original assessment out of Rs.4,49,759, a sum of Rs.2,89.759 was brought to assessment-
Aggrieved by the order of the Assessing Officer, the assessee had preferred an appeal before the Appellate Assistant Commissioner of Income-tax', Madras. The assessee had disputed, inter alia, the disallowance of Rs.4,49,759, claimed a commission/service charges paid to its employees, and Rs. 12.791 towards disallowance under rule 6D of -the Income-tax Rules (hereinafter referred to as "the Rules"). The Appellate Assistant Commissioner, considering the Appellate Tribunal's order in respect of the assessee for the earlier assessment years, sustained the disallowance to an extent of Rs. 40,000 with regard to the commission/service charges, payable to its employees, apart from deleting the disallowance of Rs. 12,791 under rule 6D of the Rules.
Aggrieved by the order of the Appellate Assistant Commissioner, the Revenue preferred an appeal before the Appellate Tribunal and the Appellate Tribunal upheld the order of the Appellate Assistant Commissioner on the ground that there is no warranting circumstance to interfere with the order of the said appellate authority Aggrieved, the Revenue has sought for this reference for the opinion of this Court.
The rival submissions made by the Revenue as well as the assessee were carefully considered in the light of the materials placed before this Court. Learned counsel for the Revenue would contend that the commission./service charges paid to its employees and claimed by the assessee for the assessment year 1980-81 to an extent of Rs.4,49,759 was disallowed as per the order of the Commissioner of Income-tax under section 143(3) read with section 263 of the Act, that the assessee is not entitled to claim deduction with regard to the above said turnover and that, therefore, reduction of disallowance to an extent of Rs.40,000 by the Appellate Assistant Commissioner as sustained by the Appellate Tribunal has to be set aside.
The fact remains that the assessee is a private limited company, carrying on business as agents of various shipping companies for the ports of Madras, Kakinada and Nagapattinam. It is evident from the perusal of the records that the employees of the assessee used to canvass for cargo, etc., for various ships of their principal and for such canvassing, the, assessee was making payment either as commission or service charges to its employees, for which deductions were claimed during the previous assessment years and the matter went up to the Tribunal for appropriate relief. The details of the claim made by the assessee towards commission/service charges paid to its employees and the disallowance ordered by the authorities during the earlier assessment years are as follows:
| Assessment Year | Commission Paid | Disallowed by |
| ITO | CIT(A) | Tribunal |
| 1975-76 | 4,94,530 | 4,94,530 | 2,47,265 | 25,000 |
| 1976-77 | 5,11,741 | 4,94,530 | 25,000 | 25,000 |
| 1977-78 | 6,29,930 | 6,29,9311 | 35,000 | 35,000 |
| 1978-79 | 6,49,386 | 1.30,000 | 35,000 | 35,000 |
| 1979-80 | 6,85,356 | 1,20,000 | 10,000 | 40,000 |
For the assessment year in question also the dispute relating to the payment of commission/service charges went up to the Appellate Tribunal and the Appellate Tribunal sustained the disallowance to an extent of Rs.40,000 allowed by the Appellate Assistant Commissioner as against Rs.4,47,759 claimed. It is relevant to point out that the reference relating to disallowance of the claim of the assessee relating to payment of commission/service charges for the assessment year 1979-80 was pending before this Court and after considering the pendency of the said reference, the above said conclusion was arrived at by the authorities below. A Division Bench of this Court took note of the claim made by the assessee for deduction towards payment of commission/service charges for the assessment years 1975-76 to 197,8-79 and also the order passed by the Appellate Assistant Commissioner as well as the Appellate Tribunal and sustained the order of the Appellate Tribunal. In coming to the above said conclusion, the Division Bench of this Court in T C` No.1123 of 1985 (CIT v. K;P.V. Shaik Muhammad Rowther & Co. (Pvt.) Ltd. (1999) 240 ITR 927) by order; dated March 17, 1997, has observed as follows (page 928):
"In each year what would be the expenditure incurred for commission payment depends upon the facts arising in that year. Considering the various facts as stated in the order, the Tribunal has accepted the disallowance of Rs.40,000 as made by the Commissioner of Income-tax (Appeals) as reasonable. This conclusion was arrived -at on the basis of fact arising in the assessment year under consideration. Since, no change of circumstance was shown to us to deviate from the conclusion arrived at by the Tribunal, which was based upon the order passed by the Commissioner of Income-tax (Appeals), we do not want to interfere with the order of the Tribunal."
In the present- case also, the Revenue has not brought to the notice of this Court any change in the circumstances to deviate from the conclusion arrived at by the Tribunal, in the light of the decision of this Court referred to above. Therefore, we are of the opinion that the order of the Appellate Tribunal has to be sustained.
Learned counsel for the Revenue would contend that the deduction of Rs. 12,791 cannot be allowed under rule 6D of the Rules on the ground that the above said rule does apply to Directors. But, learned counsel for the assessee would contend that the assessee is entitled to claim the said deduction, that similar contentions of the Revenue have been negatived not only by the Appellate Assistant Commissioner, but also by the Appellate Tribunal during the earlier assessment years and that, therefore, there is no merit in the contention raised by learned counsel for the Revenue.
In CIT v. Autofin Limited (1985) 151 ITR 741, the Andhra Pradesh High Court has held that sub-rule (2) of rule 6D of the Rules places a ceiling on the traveling expenses incurred by an "employee" or "any other person" to be allowed as expenditure, that in view of the expression "any other person" used in the sub-rule, even if a Director or a Managing Director is not an employee of the Company, the ceiling prescribed by sub-rule (2) of rule 6D applies and that, therefore, the traveling expenses incurred by a Director or Managing Director in excess of the ceiling prescribed under rule 6D(2) are not allowable deduction. It is evident from the decision referred to above that a Director or a Managing Director of a company will come within the expression "any other person" mentioned in rule 6D(2) and deduction can be allowed for the traveling expenses incurred by them within the ceiling prescribed there under. Therefore, the contention raised by learned counsel for the Revenue that the Tribunal was not justified in sustaining the deduction of a sum of Rs. 12,791 under rule 6D for the Directors of the assessee-Company, is acceptable
The decision in CIT v. Modipon Ltd. (No. 1) (1995) 212 ITR 420 (Delhi), has no application to the facts and circumstances of this case as it deals, inter alia, with the question of law as to whether the provisions of rule 6D will apply to a foreign technician, who is not an employee of the assessee-company.
In view of the discussion made above, Question No.1, is answered in the affirmative and against the Revenue. Question No.2 is not correctly worded in the light of the facts set out by the Appellate Tribunal and, therefore, it is reframed as follows:
"Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in holding that rule 6D of the Income-tax Rules applies to Directors and that no disallowance could be made under the said rule and consequently in sustaining the order of the Commissioner of Income-tax (Appeals) deleting the disallowance of Rs.12,751 made by the Inspecting Assistant . Commissioner?"
Accordingly, Question No.2, as reframed, is answered in the negative and in favour of the Revenue. No costs.
M.B.A./691/FC
Reference answered.