Mahavir Spinning Mills Limited vs Commissioner of Income Tax

Rajesh Bindal, J.—By this order, we shall dispose of two references bearing income tax References Nos. 102 and 103 of 1992. The income tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short "the Tribunal"), vide its common order dated May 22, 1990, arising out of I.T A. No. 683/Chandi/88 and I.T.A. No. 734/Chandi/88 has referred the following questions of law u/s 256(1) of the income tax Act, 1961 (for short "the Act"), for the assessment year 1981-82 for the opinion of this court :

In I T.R. No. 102 of 1992:

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that, although the provisions of section 40(c) are specific, the provision of section 40A(5) are applicable for the purpose of disallowance out of the director''s remuneration ?

Whether, on the facts and circumstances of the case, the Tribunal was right in treating the amount of commission paid to the director and the amounts of rent, electricity, water and fuel bills paid by the directors as forming part of the remuneration for the purpose of disallowance u/s 40A(5)/40(c)."

In I T.R. No. 103 of 1992:

"Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in law in allowing deduction u/s 80HH of the income tax Act, 1961, before deducting investment allowance which is itself against the provisions of section 80AB of the income tax Act, 1961 ?"

I.T.R. No. 102 of 1992:

In this reference, the dispute is with regard to disallowance of the remuneration paid to the director. An amount of Rs. 12,000 was paid as commission to the executive director, Shri S. L. Sehgal and was said not to be a part of remuneration within the meaning of section 40A(5) of the Act. As per the assessee, the payment of commission should not be considered for taking the overall limit of remuneration at Rs. 72,000.

Further, as per the assessee, the amount of rent, electricity, water and fuel bills did not form part of remuneration within the meaning of section 40A(5) of the Act and no disallowance could be made on account of the same. The assessee relied upon the order dated January 29, 1986, passed by the Tribunal in I. T. A. No. 378/Chandi/84 for the assessment year 1980-81 in the case of the Vardhman Spinning and General Mills Ltd., Ludhiana, whereby it was held that for determining the disallowance out of the remuneration, etc., paid to the directors, section 40(c) of the Act was relevant. The Commissioner of income tax (Appeals) rejected both the contentions of the assessee and held that the company would be entitled to a deduction of Rs. 72,000 per annum in respect of salary remuneration paid to its directors under sub-section (5)(a) of section 40A of the Act. It was also held that since the assessee''s case is covered u/s 40A(5) of the Act, the amount of rent, electricity bill, water bill and fuel bill would be treated as perquisite in the hands of the director. The computation of the total salary as made by the Inspecting Assistant Commissioner (Appeals) was correct. The Tribunal also agreed with the findings recorded by the Commissioner of income tax (Appeals).

As far as consideration of the commission paid to the director on the turnover is concerned, the issue has already been considered by the hon''ble Supreme Court in Commissioner of Income Tax, Bombay Vs. M/s. Indian Engineering and Commercial Corporation Pvt. Ltd., , and it was opined that the same cannot be held to be a perquisite for the purpose of the limits prescribed u/s 40A(5) of the Act. It was further held therein that in the case of directors, both sections 40A(5) and 40(c) are attracted and the higher of the two ceiling has to be applied. The same views were expressed by this court in CIT v. Saraswati Indl. Syndicate ITR No. 34 of 1987, decided on September 9, 2004. Accordingly, following the dictum of law laid down by the Hon''ble Supreme Court in Indian Engineering and Commercial Corporation P. Ltd. [1993] 201 ITR 723, the issue regarding treatment of commission as perquisite for the purpose of section 40A(5) of the Act is decided in favour of the assessee and against the Revenue.

As far as the issue regarding the payment of rent, electricity, water and fuel bills is concerned, this court in H.M.M. Ltd. Vs. Commissioner of Income Tax, , following an earlier judgment of the hon''ble Supreme Court in Commissioner of Income Tax, Bombay, etc. Vs. M/s. Mafatlal Gangabhai and Co. (P) Ltd., has already considered the issue regarding payment of amount of group insurance scheme, cash payments on "account of electricity, gas and water charges and held the same to be not in the kind of perquisites for the purpose of section 40A(5) of the Act. Accordingly, for the reasons stated in H.M.M. Ltd. Vs. Commissioner of Income Tax, it is held that the payment of account of rent, electricity, water and fuel bills shall not be considered as perquisite for the purpose of section 40A(5) of the Act.

I.T.R. No. 103 of 1992:

The facts in details on this issue are not required to be mentioned as an identical issue has been considered by this court in the assessee''s own case for the assessment year 1980-81 in CIT v. Mahavir Spinning Mills Ltd. [2007] 293 ITR 492 (P&H) and following the earlier judgment of the Rajasthan High Court in Commissioner of Income Tax Vs. Vishnu Oil and Dal Mills, the issue was answered in favour of the Revenue and against the assessee.

Accordingly, for the reasons stated in Mahavir Spinning Mills Ltd. [2007] 293 ITR 492 (P&H), the question referred is answered in favour of the Revenue and against the assessee. The references are disposed of accordingly.