1993 (11) TMI 47 - HC - Income Tax

Summary

Issues:
Interpretation of section 40(c)(i) of the Income-tax Act, 1961 regarding the deduction of expenditure made by a company for the purchase of annuities for a director.

Detailed Analysis:

The case involved the interpretation of section 40(c)(i) of the Income-tax Act, 1961, which restricts certain deductions for companies related to payments made to directors or individuals with substantial interest. The primary issue was whether the expenditure incurred by the assessee-company for purchasing annuities for a director fell under the purview of section 40(c)(i) and the subsequent restriction on deductions. The Tribunal initially held that the restrictions under section 40(c)(i) applied to the payments made for the purchase of annuities. This decision led to the reference of the question to the High Court for determination.

The High Court analyzed the provisions of section 40(c)(i) in detail. It emphasized that the expenditure covered under this section must result in the provision of remuneration, benefit, or amenity to a director. The court noted that the payments made to the director in this case were for specific services rendered by him, such as acting and directing in motion pictures, and were not related to his role as a director of the company. Therefore, the court concluded that the payments did not constitute remuneration or benefits provided to the director in his capacity as a director, as envisaged under section 40(c)(i).

The High Court referred to a Supreme Court case, Bharat Beedi Works P. Ltd. v. CIT, which dealt with a similar issue regarding payments made to directors for the use of a trademark. The Supreme Court's decision in that case highlighted that payments made for specific rights or services, unrelated to the director's position, do not fall within the scope of section 40(c)(i). Drawing parallels from this precedent, the High Court determined that the payments made by the assessee-company for purchasing annuities did not fall under section 40(c)(i) as they were for services rendered by the director in capacities other than his role as a director.

Furthermore, the Revenue argued that the payments could be considered special remuneration under the company's articles of association. However, the High Court rejected this argument, stating that the special remuneration provision in the articles applied to services rendered by a director in his capacity as a director, not for separate obligations or functions undertaken through independent agreements. Therefore, the court held that the provision for special remuneration did not apply to the payments made for the annuities.

In conclusion, the High Court answered the referred question in the negative and in favor of the assessee, ruling that the expenditure incurred by the company for purchasing annuities for the director was not subject to the restrictions under section 40(c)(i). The court also decided that there would be no order as to costs in the circumstances of the case.