Commissioner of Income Tax vs Rohit Mills Ltd.

Rajesh Balia, J.—At the instance of the revenue the Tribunal, Ahmedabad Bench ''C'' referred the following question of law arising out of its appellate order dated 2-12-1982 in relation to the assessment year 1977-78 in the case of the respondent-assessee:

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in coming to the conclusion that the liability of Rs. 15,58,399 for Payment of Bonus Act, 1965 (as amended) was allowable under the provision of the income tax Act, 1961 in the assessment year under consideration?

Having heard the learned counsel appearing for the parties at some length, in our opinion, the question is of academic importance as will appear from the facts to be stated hereinafter and need not be answered. As a result of coming into force of the Bonus (Amendment) Act, 1977, the 1977 Act which came into force with effect from 3-9-1977, the assessee incurred additional liability of Rs. 15,58,399 for payment of bonus. The assessee follows the mercantile system of accounting. His accounting year commences on 1st January every year and closed on 31st December, that is to say, a calendar year is the accounting year for the assessee. According to section 2 of the 1977 Act, the Payment of Bonus Act, 1965 was to have effect in respect of the accounting year commencing on any day in the year 1976 as if the amendment specified in sections 3 to 20 of the 1977 Act had been made in that Act. As by this provision, modification in computation of bonus on account of the 1977 Act was made effective specifically in respect of accounting year commencing within the calendar year 1976. As the assessee was keeping his accounts for the calendar year for him accounting year commencing from 1-1-1976 was the accounting year to which the modification applied. As the accounting year 1976 closed on 31-12-1976, relevant to the assessment year 1977-78, notwithstanding the fact that when the accounting year closed, the assessee had not incurred any liability for the payment of additional bonus when as a result of statutory provision contained in the 1977 Act it became the liability in respect of the accounting year 1976, the assessee claimed deduction of the said amount for the purpose of computing profits and gains of his business relying on the provisions of section 43(c) read with section 36(1)(ii) of the income tax Act, 1961.

The ITO as well as the Commissioner (Appeals) hold that the liability having arisen only on account of coming into force of 1977 Act on 3-9-1977, no liability can be said to have accrued or arisen prior to that date and, therefore, the assessee cannot claim deduction in the assessment year 1977-78, previous year of which ended prior to 3-9-1977. However, the Tribunal was of the view that as a logical consequence of statutory provision referred to above when the liability of additional bonus became the liability of the accounting year commencing on any day in the year 1976, and the previous year in question corresponded to that provision, the liability also must be deemed to have accrued or arisen during the previous year relevant to assessment year in question and allowed the deduction claimed by the assessee.

During the course of argument, it was brought to the notice of the Court that when the ITO has disallowed the deduction for the assessment year 1977-78, the assessee had claimed as a measure of abundant caution the said amount of deduction for the succeeding assessment year 1978- 79 and that claim of the assessee was accepted. However, when the claim was allowed by the Tribunal for the year 1977-78, for giving effect to this order, the assessment order of 1978-79 was rectified and the amount allowed in the assessment year 1977-78 was deleted from the computation of income for that year and consequently, the benefit of deduction was given in respect of the assessment years 1977-78. The assessee is a corporation which is subjected to a flat rate of taxation which undisputedly was the same for the assessment years 1977-78 and 1978-79. The total income after disallowing deduction claimed by the assessee in the assessment year 1978-79 came to be Rs. 34 lakhs and odd and for the assessment year 1977-78 the total income after disallowing deduction came to Rs. 23,37,000. There being no dispute about the allowability of the aforesaid sum as deduction from the income and the only dispute is about the year in which the deduction should be allowed. It is apparent that whether the allowance is to be made in 1977-78 or in 1978-79, it is not going to affect the revenue in any manner and the assessee is also not going to be affected in any manner. In that event, in our opinion, the question of law raised in this case is of sheer academic value which need not be answered. We decline to do so.

At the instance of the assessee also the Tribunal has referred the following two questions for our decision:

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the commission paid to the three Directors of the company should be included in the remuneration for the purpose of determining the disallowance u/s 40(c) of the Act?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the disallowance of Rs. 22,468 being the additional payment made on account of difference in foreign exchange, as capital expenditure?

Question No. 1 relates to inclusion of commission paid to three of the Directors of the company for the purpose of computing the maximum ceiling up to which the remuneration, etc., paid to the Directors can be allowed as deduction in computing the profits and gains of the assessee- company. The term ''remuneration'' is obviously had a wider import than the salary. What is to be calculated in respect of Director while computing the ceiling of allowable expenditure within the meaning of section 40(c) is ''remuneration'' or the benefit or amenity provided for the Director by the company. Therefore, the question whether commission falls in remuneration or benefit has to be looked from that point of view and not from the point of view as to whether commission payable to a Director is salary payable to an employee within the meaning of section 40A(5) of the income tax Act. A commission paid to a Director is undoubtedly a remuneration paid to him for the service rendered by him. Even if it is not covered by the definition of remuneration, it would be covered any benefit resulting directly or indirectly to such Director at the cost of the company. We are, therefore, of the opinion that the Tribunal was right in holding that the commission paid to three Directors of the company should be included in the remuneration for the purpose of determining disallowance u/s 40(c). Accordingly, this question is answered in affirmative in favour of the revenue and against the assessee.

Question No. 3 relates to the sum claimed by the assessee as revenue expenditure on account of additional payment made in terms of rupee on account of difference in exchange rate when the liability was incurred and when the liability was discharged for the purpose of purchasing asset from foreign country, price of which was payable in foreign currency. This Court has taken a view in New India Industries Ltd. Vs. Commissioner of Income Tax, . Keeping in view the provisions of section 43A that such an increase in liability is an expenditure of capital nature inasmuch as by statutory provision such increase or decrease in the liability arising on account of difference in exchange rate of Indian currency vis-a-vis foreign currency in which the payment is to be made becomes part of the cost of acquisition of the asset acquired by the assessee and is not a revenue expenditure. Accordingly, we answer question No. 3 also in affirmative, in favour of the revenue and against the assessee. There shall be no order as to costs.