J.K. Synthetics Ltd. vs Commissioner of Income Tax

Madan B. Lokur, J.—The following five questions of law have been referred for our opinion u/s 256(1) of the Income Tax Act, 1961:

Whether on the facts and in the circumstances of the case, the tribunal was justified in upholding the disallowance of 50% of the assessor�s share of the expenditure on maintenance of Kamla retreat.

On the facts and in the circumstances of the case, whether the Learned Income Tax Appellate Tribunal was correct in law in holding that only 50% of depreciation is admissible in respect of the assets installed in the premises of JKCM and that no depreciation is admissible at all in respect of the assets installed in the premises of PPL, the amounts of disallowance confirmed being Rs. 30,234/- and Rs. 11,943/- respectively in each case.

Whether on the facts and in the circumstances of the case, the tribunal was justified in holding that the limit of Rs. 5000/- prescribed in proviso to Section 80VV is an overall limit and not relating to and in each proceeding that view in confirming a part of the disallowance of legal expenses.

On the facts in the circumstances of the case, whether the Learned ITAT was justified in upholding an amount of Rs. 8,18,000/- paid to the directors as not admissible u/s 40(c) of the I.T. Act.

On the facts and in the circumstances of the case, whether the Learned ITAT was justified in holding that an amount of Rs. 9,00,744/- out of interest claimed is inadmissible under the provisions of Section 40A(8) of the Act

In so far as question nos. 1, 2 and 3 are concerned, learned Counsel does not press these questions in view of the smallness of the amount involved.

So far as question No. 5 is concerned, the admitted position is that in view of the decision of this Court in Commissioner of Income Tax Vs. Bhandari Machinery Co. (P.) Ltd., the question of law is required to be answered in the affirmative in favor of the Revenue and against the Assessee.

What Therefore survives for consideration is only question No. 4.

At the relevant time, Section 40(c) of the Income Tax Act was as follows:

Amount not deductible - Notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business of profession"

xxx xxx

(c). in the case of any company-

(i) Any 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 a substantial interest in the company or to a relative of the director or of such person, as the case may be.

(ii) Any expenditure or allowance in respect of any assets of the company used by any person referred to in Sub-clause (i) either wholly or partly for his own purposes or benefit,

if in the opinion of the Income Tax Officer any such expenditure or allowance as is mentioned in Sub-clauses (i) and (ii) is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it there from, so, however, that the deduction in respect of the aggregate of such expenditure and allowance in respect of any one person referred to in Sub-clause (i) shall, in no case, exceed-

(A) Where such expenditure or allowance relates to a period exceeding eleven months comprised in the previous year, the amount of seventy two thousand rupees;

(B) Where such expenditure or allowance relates to a period not exceeding eleven months comprised in the previous year, an amount calculated at the rate of six thousand rupees for each month or part thereof comprised in that period:

Provided that in a case where such person is also an employee of the company for any period comprised in the previous year, expenditure of the nature referred to in Clauses (i), (ii), (iii) and (iv) of the second proviso to Clause (a) of Sub-section (5) of Section 40A shall not be taken into account for the purposes of Sub-clause (A) or Sub-clause (B), as the case may be.

It has been brought to our notice from the statement of the case that the amounts paid to the Directors of the assessed by way of commission in the period relevant to the assessment year under consideration were as follows:

(i) Shri Gopal Krishan Singhania Rs. 1,62,500/- (ii) Shri Bhim Singh Rs. 50,000/- (iii) Shri C.L. Jhunjhunwala Rs. 50,000/- (iv) Shri V.B.L. Mathur Rs. 50,000/- (v) Shri L.N. Ladha Rs. 50,000/- (vi) Shri Shripat Singhania Rs. 1,62,500/- (vii) Shri Sohanlal Singhania Rs. 2,75,000/- (viii) Shri Hari Shanker Singhania Rs. 1,00,000/- (ix) Shri Gaur Hari Singhania Rs. 3,87,500/- (x) Shri Vijaypat Singhania Rs. 1,62,500/- (xi) Dr. R.C. Vaish Rs. 50,000/-

The total of amount of commission comes to about Rs. 15 lakhs and according to the Assessing Officer, wherever payment was made over and above the ceiling amount of Rs. 72,000/- it was required to be disallowed. Therefore, the disallowance was to the extent of Rs. 8,18,000/-.

What is required to be considered is whether the disallowance of Rs. 8,18,000/- was permissible in view of the Section 40(c) of the Act or not.

Learned Counsel for the assessed has brought to our notice that commission was paid to the Directors in terms of the Special Resolution passed by the assessed on 30th August, 1974. This Special Resolution reads as follows:

As Special Resolutions:

(1) Resolved that subject to the approval, if required, of the Central Government and pursuant to the provisions of Section 309 of the Companies Act, 1956 and the relevant provisions of the Articles of Association of the Company, the Directors be and are hereby authorized to continue to receive jointly for a further period of five years commencing from 1st January, 1973 a commission to be divided between them in such proportion as the Board may determine up to 3% of the net profits of the company in each year computed in the manner laid down in Section 349 and 350 of the Companies Act, 1956 or such lesser amount as the Board of Directors may determine the amount of such commission or the proportion of such commission to be received by each director shall be determined by the Board.

Resolved further that the Board of Directors be and is hereby authorized to decide that for any year of years such payment by way of commission be not made or be foregone or rejected in respect of all the directors or in respect of an individual director or directors.

(2) xxx xxx

(3) xxx xxx

A perusal of the first part of the Special Resolution makes it clear that the quantum of commission is to be determined at the discretion of the Board of Directors of the Assessee. The commission that may be paid in terms of the Special Resolution is up to a maximum 3% of the net profits of the company. In other words, there is no fixed commission that is paid to any of the Directors and the amount of commission may vary depending upon the decision of the Board. What are the factors that the Board is required to take into consideration have not been spelt out but we have to proceed on the basis of the decision of the Board as it is presuming that the commission payable to the Directors is determined on the basis of services rendered by them or some similar requirement.

It is under these circumstances that different amounts were paid to different Directors and no fixed amount was paid or determined.

According to learned Counsel for the Revenue, the commission is actually "remuneration" within the meaning of Section 40 of the Act. There is no definition of remuneration that has been pointed out by learned Counsel either from any statute or from any case law. But from the cases cited by her, it does appear that "remuneration" must have at least one fixed peg to hang on.

Learned Counsel relied upon the decision of the Supreme Court in Gestetner Duplicators Pvt. Ltd. Vs. Commissioner of Income Tax, West Bengal, to contend that the commission paid to the Directors of the assessed is salary. We are of the opinion that this decision does not advance the case of learned Counsel for the Revenue. In the decision cited by her, the employee was paid remuneration or recompense at a fixed percentage of the turnover achieved by him. It is under these circumstances that the remuneration or recompense was held to partake the character of salary.

In the case that we are concerned with, the percentage by way of commission to be paid to the Directors is not a fixed percentage and it can be varied by the Board of Directors. It is possible that the percentage may have a nexus with the turnover achieved (which is also variable) or the amount of business given by the Director to the assessed (which is also variable). As mentioned above, the factors to be taken into consideration for determining the percentage of commission have not been spelt out in the Special Resolution. So long as the percentage is not fixed and is variable, it cannot partake the nature of salary and Therefore cannot partake the nature of remuneration which, according to learned Counsel for the Revenue, is similar to salary.

Learned Counsel for the Revenue has also referred to Hira Lall and Sons Vs. Commissioner of Income Tax, but again that decision would not be of any assistance to her because the commission paid to the employee in that case was a fixed 2% of the sales made by the assessee.

While arriving at our decision, we have taken into consideration several situations that may arise such as where the percentage of commission is fixed or where the quantum is fixed but none of these situations arises in the present case. There is no fixed pey to hang on since the percentage of commission payable to the Directors is not fixed nor is the quantum fixed and the net profit of the assessed are also variable.

Consequently, we are of the opinion that the commission paid to the Directors cannot be said to be remuneration as contemplated by Section 40(c) of the Act.

In view of the above, we answer the question referred to us in the negative in favor of the assessed and against the Revenue.

The reference is disposed of.