2015 (4) TMI 945 - HC - Income Tax

Disallowance under section 40(c) - Whether the commission on sales paid by the assessee constituted the provisions of any remuneration or benefit or amenity within the meaning of Section 40(c)(iii)? - Held that - In order to attract ceiling under Section 40 c of the Act, the payment in dispute must be shown to be a periodical payment. A lumpsum payment or one time payment does not fall in it. Here the fact that commission was payable only if annual turn over exceeded ₹ 2 Crores, is not in dispute. Facts show that payment was thus contingent upon turn over and also not periodical. Hence, following this law, we find that the commission on sales paid by the assessee could not have been subject to provisions of Section 40 c iii of the Income Tax Act, 1961. Here, we have to also take note of the finding reached by the CIT (Appeals), in paragraph no.4 that the commission paid was not excessive or unreasonable. Infact CIT (Appeals) has held that first limb of the counsel is arguments before it had succeeded. We therefore, find its disallowance under Section 40 c not permissible. - Decided in favour of the assessee

Summary

Issues:
Interpretation of Section 40(c)(iii) of the Income Tax Act, 1961 regarding commission on sales paid by the assessee and the permissibility of disallowance under the same section based on the reasonableness of the commission.

Analysis:

Issue 1: Interpretation of Section 40(c)(iii)
The applicant/assessee requested the ITAT to refer two questions to the Court regarding the commission paid to Directors, contending that it should not be subjected to Section 40(c) of the Income Tax Act. The counsel for the assessee argued that the commission was a lump sum payment contingent on annual turnover and thus not covered under Section 40(c). On the other hand, the revenue's counsel argued that since the Directors were already receiving remuneration, the additional commission falls under Section 40(c)(iii). The assessing officer disallowed a portion of the commission, a decision upheld by CIT (Appeals) and ITAT. The Court examined various judgments, including the one by the Karnataka High Court, to determine the applicability of Section 40(c) to non-periodic payments. The Court concluded that for Section 40(c) to apply, the payment must be periodic, and since the commission was contingent and not periodic, it did not fall under Section 40(c)(iii).

Issue 2: Permissibility of Disallowance under Section 40(c)
The CIT (Appeals) found that the commission paid was not excessive or unreasonable, and the disallowance under Section 40(c) was not permissible. The Court noted that the commission was contingent on turnover and not periodic, making it outside the scope of Section 40(c). Referring to precedents, including the Gujarat High Court judgment, the Court emphasized that a lump sum or one-time payment does not attract the ceiling under Section 40(c). Since the commission in question was not periodic and contingent on turnover, the Court ruled in favor of the assessee, holding that the commission on sales paid could not be subject to Section 40(c)(iii). Consequently, the Court answered the referred questions in favor of the assessee and against the revenue, disposing of the reference accordingly.

This detailed analysis of the judgment from the Bombay High Court provides a comprehensive understanding of the interpretation of Section 40(c)(iii) of the Income Tax Act and the permissibility of disallowance based on the reasonableness of the commission paid by the assessee.