1981 (9) TMI 200 - AT - Income Tax

Summary

Issues:
1. Disallowance of expenditure under section 40(c)/40A(5).
2. Interpretation of the term 'remuneration' in section 40(c).
3. Application of section 40(c) in the case of a managing director's remuneration.
4. Analysis of the provisions of section 40(c) regarding expenditure and provision of remuneration or benefit.
5. Comparison with similar judgments on the interpretation of 'remuneration' under section 40(c).

Analysis:
The judgment by the Appellate Tribunal ITAT MADRAS-A deals with the disallowance of expenditure under section 40(c)/40A(5) concerning the remuneration of a managing director. The managing director was entitled to a salary, commission, and various perquisites as per a special resolution passed by the company. The Income Tax Officer (ITO) disallowed a portion of the remuneration, which was upheld by the AAC. The Tribunal considered the argument that the word 'commission' was not expressly included in section 40(c)(i) and hence should not be considered as part of remuneration. However, the Tribunal held that the purpose and scope of clauses (b) and (c) of section 40 are different, and the word 'remuneration' in section 40(c) should not be limited based on clause (b).

The Tribunal analyzed the provisions of section 40(b) and 40(c) to differentiate between payments to partners in a firm and expenses incurred by a company. It emphasized that remuneration for a managing director is distinct from the profit-sharing concept in a firm. The Tribunal upheld the disallowance under section 40(c) as the managing director's salary and commission were considered part of his remuneration for services rendered. The judgment highlighted that for section 40(c) to apply, there must be expenditure incurred by the company resulting in the provision of remuneration or benefit to a director.

Furthermore, the Tribunal referred to a similar case before a Special Bench in Bombay regarding the interpretation of 'remuneration' under section 40(c). The Tribunal aligned with the reasoning of the Special Bench, emphasizing that all payments made by a company as recompense for services to an employee-director fall under the scope of 'remuneration' in section 40(c). Ultimately, the Tribunal dismissed the appeal, affirming the disallowance of the expenditure under section 40(c)/40A(5) related to the managing director's remuneration.