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TMI Blog1993 (5) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 1,79,742 could not be disallowed under section 40(c) of the Income-tax Act, 1961 ? " (The above question related to the assessment year 1974-75. The question referred for the assessment year 1975-76 was identical except in the matter of the amount ). Since the facts in all the appeal are identical, it would be sufficient to notice the facts in C. A. Nos. 6092 and 6092A of 1990 (Prakash Beedies (P.) Ltd. v. CIT). Prior to July 15, 1972, a partnership firm called K. M. Ananda Prabhu and Sons, Mangalore, consisting of three partners, K. M. Vishnudas Prabhu, K. M. Ramdas Prabhu and K. M. Shankar Prabhu, was engaged, inter alia, in the business of manufacture and sale of beedies under the brand name "Mangalore Prakash Beedies". On May 20, 1972, a private limited company called Prakash Beedies Ltd. (the assessee-appellant herein), was incorporated with its registered office at Mangalore. One of its objects was to take over the business of the aforesaid firm. Under an agreement dated July 18, 1972, between the firm and the company, the firm sold its rights and assets to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the payments made to the firm are in reality payments made to the directors. Such payments clearly attract and fall within the mischief of section 40(c). The Commissioner was right in saying so and the opinion of the Tribunal to the contrary is unsustainable in law. In these appeals, S/Shri Harish N. Salve and Rohinton Nariman assailed the correctness of the view taken by the High Court. They submitted first that the payments were made not to the directors of the assessee but to a firm which was a separate entity. A payment to a firm is not ipso facto a payment to the partners, directly or indirectly. In a firm, there may be other partners besides the directors of the assessee-company. It may also happen that the firm has no income to distribute because of the losses incurred by it which are set off against the income so received. The High Court was in error in holding that a payment to a firm is a payment to the partners. Assuming that a partnership firm is not a separate juristic entity distinct from its partners, even so the payments were made to the said three persons not in their capacity as directors (qua directors) but in consideration of a valuable right parted wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the company used by any person referred to in sub-clause (i) either wholly or partly for his own purposes or benefit, if in the opinion of the Income-tax Officer any such expenditure or allowance as is mentioned in sub-clauses (i) and (ii) is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom, so, however, that the deduction in respect of the aggregate of such expenditure and allowance in respect of any one person referred to in sub-clause (i) shall, in no case, exceed (A) where such expenditure or allowance relates to a period exceeding eleven months comprised in the previous year, the amount of seventy-two thousand rupees ; (B) where such expenditure or allowance relates to a period not exceeding eleven months comprised in the previous year, an amount calculated at the rate of six thousand rupees for each month or part thereof comprised in that period : Provided that, in a case where such person is also an employee of the company for any period comprised in the previous year, expenditure of the nature referred to in clauses (i), (ii), (iii) and (iv) of the second proviso to clause (a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. Clause (b) mentions the categories of persons to whom the provision in clause (a) applies. It includes directors of the company and their relatives among others. Clause (b) also takes in any payment to any company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee. In short, the net is cast very wide to ensure that excessive or unreasonable payments are not made to the persons in control of the affairs of the assessee in the name of paying for the goods, services and facilities rendered, supplied or extended by them, as the case may be. That the payments made by the assessee-company to the firm on account of royalty in terms of clause 4(a) of the agreement fall within the meaning of the expression " expenditure " in sub-clause (i) of clause (c) is not disputed. The observations in CIT v. Indian Engineering and Commercial Corporation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... close reading of the above provision shows that section 40(c) refers to an expenditure incurred by making periodical payments to a person mentioned in that clause apparently for any personal service that may be rendered by him. It cannot have any reference to payments made by the assessee for all kinds of 'services or facilities' referred to in section 40A(2)(a). It is argued that the proviso thereto suggests that any expenditure incurred for any kind of service which is referred to in the main part of section 40A(2)(a) and the expenditure referred to in section 40(c) belong to the same category. This contention is not correct. The expression 'services' in section 40A(2)(a) is an expression of wider import.... If the remuneration, benefit or amenity referred to in section 40(c) is treated as the same as what is paid in return for 'the goods, services or facilities' then irrespective of the fair market value of the goods, services and facilities provided by a person who may be a director or a person who has a substantial interest in the company or a relative of the director or of such person, as the case may be, only a maximum of Rs. 72,000 can be allowed to be deducted in computin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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