1993 (9) TMI 77 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Tribunal erred in holding that the disallowance of Rs. 1,83,842 as commission on sales paid to International Paper Company was rightly made under section 40(c) of the Income-tax Act.
2. Whether the Tribunal erred in holding that the entire expenditure of Rs. 1,83,842 was disallowable under section 40(c) without considering the expenditure incurred by the selling agent.
3. Whether the Tribunal should have held that section 40(c) applies only when some part of the expenditure is found to be excessive.

Detailed Analysis:

Issue 1: Disallowance under Section 40(c)
The assessee, a private limited company dealing in paper and allied products, had paid a commission of Rs. 1,95,842 to Messrs. International Paper Co., a sole proprietary concern of its managing director, Shri T. S. N. Swamy. The Income-tax Officer disallowed Rs. 1,83,842 of this amount under section 40(c) of the Income-tax Act, 1961, considering it as further remuneration to the managing director. The Tribunal upheld this disallowance, interpreting that the remuneration under section 40(c) includes payments made to a director's proprietary concern, as they are not independent from the director himself.

Issue 2: Entire Expenditure Disallowable
The Tribunal held that the entire expenditure of Rs. 1,83,842 was disallowable under section 40(c) without considering the expenditure incurred by the selling agent in discharging his obligations. The Tribunal's interpretation was that section 40(c) covers all expenditures resulting in any benefit or remuneration to a director, regardless of the purpose of the payment.

Issue 3: Application of Section 40(c)
The Tribunal rejected the assessee's contention that section 40(c) applies only to expenditures resulting in remuneration to a director in his capacity as a director. The Tribunal maintained that the section encompasses any expenditure resulting in remuneration or benefit to a director, irrespective of the capacity in which the payment is made.

Legal Interpretation and Supreme Court Ruling:
The Supreme Court in Prakash Beedies P. Ltd. v. CIT clarified the interpretation of section 40(c), stating that it applies only to payments made to directors in their capacity as directors (qua directors). Payments made for valuable rights parted with by directors are outside the scope of section 40(c). This interpretation was aligned with the decision of the Karnataka High Court in T. T. Pvt. Ltd. v. ITO, which held that commission payments to a selling agent acting as an independent entrepreneur do not fall under section 40(c).

Conclusion:
Based on the Supreme Court's ruling, the Bombay High Court concluded that the payments made to Messrs. International Paper Co. did not fall within the ambit of section 40(c) as they were not payments to the director in his capacity as a director. Consequently, the first question was answered in the affirmative, in favor of the assessee. Given this conclusion, the other two questions became academic and were not addressed. The reference was disposed of accordingly, with no order as to costs.