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TMI Blog1996 (6) TMI 42X X X X Extracts X X X X X X X X Extracts X X X X ..... nished a return of income in response to the notice. The assessee is National Pharmaceuticals and Medical Services (P.) Ltd. As seen from the order passed in pursuance thereof on March 30, 1981, commission at the rate of 9 per cent. with regard to the amount of Rs. 21,71,963 was paid to one Shri P. G. Oommen as a selling agent. Shri P. G. Oommen was found to be the son of Shri. P. G. George who had a substantial interest in the assessee-company. Therefore, the Income-tax Officer resorted to the provisions of section 40(c) of the Act, because in the case of a company any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person and in case the amount is in excess of Rs. 72,000, the excess over the said limit is to be disallowed under the said statutory provision. Rs. 1,08,598 was found to be given by way of commission to this Shri P. G. Oommen and, therefore, the Income-tax Officer disallowed the excess over Rs. 72,000, following the statutory provisions of section 40(c) of the Income-tax Act, 1961. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the second contention that was taken up for consideration by the Tribunal that has direct connection with the question which we are called upon to answer. It was argued before the Tribunal that section 40(c) was not attracted to payment of commission to a sole selling agent. In regard to this submission reliance was placed on the decision of the Karnataka High Court in T. T. Pvt. Ltd. v. ITO [1980] 121 ITR 551, as well as on the decision of the Punjab and Haryana High Court in CIT v. Avon Cycles (P.) Ltd. [1980] 126 ITR 448. Following the earlier decision of the Karnataka High Court the Tribunal has observed in this connection that it is held therein that where a company pays commission to a firm as its sole selling agent and the partners of the firm are directors of the company and their relatives, there is no nexus between the services rendered by the partners of the firm and the payment of commission by the company to the firm, and, therefore, the commission paid to the firm in lieu of services rendered by the firm in its business activity cannot be said to be payment of reward, pay, wages or salary and that such payments will not be hit by section 40(c). It was urged before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxes took us through the statutory provisions of section 40 relating to situations showing amounts which are not deductible by reason thereof. The said statutory provision deals with four situations and are classified by clauses (a) to (d). Needless to state that section 40(c) is one of the said four provisions and it relates to the case of any company and specifically to any expenditure or allowance in regard to which the normal deduction is sought. The statutory key words would show that such items should directly or indirectly result with regard to any remuneration or benefit or amenity, to a director or to a person who has a substantial interest in the company or to a relative of the director of such person, with an addition that such expenditure allowance would not be deductible if the situation gets satisfied with regard to the requirements and even in a case whether such expenditure or allowance is either wholly or partly shown to have been used or received for his own purpose of benefit. After specifying that the requirements are available for application, certain further requirements are also available in the provision. The Income-tax Officer has to be of the opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act). In the process, learned counsel also took us through the recent decision of the Supreme Court in CIT v. Mafatlal Gangabhai and Co. (P.) Ltd. [1996] 219 ITR 644. A bare reading of the provisions of section 40A would arrest our attention to the proviso thereto. (proviso to section 40A(2)(a)). It would be apt to quote the said proviso ad verbatim and it is as follows : " Provided that the provisions of this sub-section shall not apply in the case of an assessee being a company in respect of any expenditure to which sub-clause (i) of clause (c) of section 40 applies. " It would at once be clear that when the assessee is a company and the question is of expenditure to which sub-clause (i) of clause (c) of section 40 applies, the situation would not be governed for application of section 40A of the Act. Apart from the above statutory provision learned senior standing counsel for taxes brought to our notice two decisions of the Supreme Court in CIT v. Indian Engineering and Commercial Corporation P. Ltd. [1993] 201 ITR 723 and Bharat Beedi Works P. Ltd. v. CIT and Prakash Beedies P. Ltd. v. CIT [1993] 201 ITR 1063. On the basis of the two decisions of the Supreme Court, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... situation of employees whether of companies or others and whether such employees may be directors, leading to a situation in regard to them that both the provisions would be attracted. The Supreme Court in the Bharat Beedi Works' case [1993] 201 ITR 1063, has in fact considered the object behind the said statutory provisions and it was to discourage and disallow payment of high salaries and remuneration which go ill with the norms of an egalitarian society. It has also observed that the said provision is not confined to the directors and it took in relatives of directors, persons having substantial interest in the company and their relatives and in regard thereto the Income-tax Officer is vested with the power to determine whether such expenditure or allowance was excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. It is also observed that a wide net is cast by reason of the two statutory provisions with the sole purpose of ensuring that excessive and 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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