1993 (4) TMI 6 - SC - Income Tax

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the commission paid by the assessee company to its directors was an additional remuneration forming part and parcel of the salary allowed to them and that the said remuneration would not be covered by section 40(a)(v) of the Income-tax Act and thereby allowing the assessee s claim for allowing the deduction of the whole amount of commission paid to the directors

Summary

Issues:
1. Interpretation of provisions of section 40(a)(v) and section 40A(5) of the Income-tax Act regarding commission paid to directors.
2. Determination of whether commission on sales constitutes a perquisite or salary.
3. Assessment of entertainment expenses disallowed by the Income-tax Officer.

Analysis:
The Supreme Court judgment dealt with appeals by the Revenue against the Bombay High Court's rejection of an application under section 256(2) of the Income-tax Act. The primary issues revolved around the interpretation of sections 40(a)(v) and 40A(5) concerning the treatment of commission paid to directors as perquisites or salary. The case involved a private limited company trading in tractors and earth-moving equipment that paid commission to its directors in addition to their salaries during the assessment years 1971-72 and 1972-73.

The Income-tax Officer disallowed the commission on sales as perquisites under section 40(a)(v) for 1971-72 and under section 40A(5) for 1972-73. Additionally, the Officer disallowed entertainment expenses. The Appellate Assistant Commissioner disagreed, holding that the commission was not a perquisite and the entertainment expenses were legitimate. The Tribunal upheld this decision based on a previous order. The central question was whether the commission paid to directors fell within the scope of section 40(a)(v)/section 40A(5).

The Court analyzed the relevant provisions of section 40(a)(v) and section 40A(5) and emphasized the language used in defining perquisites and allowances. It concluded that the commission paid did not fit within the situations outlined in the provisions. The Court also noted that the circular issued by the Central Board of Direct Taxes highlighted the distinction between commission as part of salary or as a benefit. The judgment highlighted that the provisions applied to directors who were also employees, with the higher ceiling of the two provisions to be applied.

Regarding the entertainment expenses, the Court found the issue insignificant due to the small amount involved and its pending consideration in other appeals. Consequently, the Court upheld the High Court's decision to reject the application under section 256(2) and dismissed the appeals by the Revenue without costs.

In conclusion, the judgment clarified the treatment of commission paid to directors under the Income-tax Act, emphasizing the specific language and intent of the relevant provisions. It also highlighted the significance of distinguishing between salary and perquisites in such cases, providing clarity on the tax treatment of such payments.