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TMI Blog1985 (7) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... to the test laid down in section 40A(2) of the Income-tax Act, 1961 ? " The assessee is M/s. Ayurvedic Sevashram (P) Ltd., Udaipur. It previously had as managing agents, M/s. Jamnalal Sons Pvt. Ltd. After the abolition of the managing agency, it entered into an agreement dated July 20, 1960, with five persons: (1) Shri Ram Krishna Bajaj, who was previously chairman and managing director of the managing agents, Manalal Sons (P) Ltd.; (2) Smt. Vimladevi Bajaj, who was a joint managing director of the managing agents and wife of Ramkrishna Bajaj; (3) Jankidevi Bajaj, who was the mother of Ramkrishna Bajaj ; (4) Smt. Suman Jain, who was the director of managing agents, Jamnalal Sons (P) Ltd., and daughter of the brother of Ramkrishna Bajaj ; and (5) Bharatkumar who was Ramkrishna Bajaj's sister's son, for arrangement of finance to the assessee in consideration of guarantee commission. Subsequently, there was a supplementary agreement by which the original terms between the assessee and the five persons were modified on February 6, 1965. By this, Shri Ramkrishna Bajaj and Smt. Vimladevi Bajaj withdrew and Smt. Mohinidevi Soni and Smt. Rupa Rani Bajaj were introduced in their place. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner and the order of the Tribunal. The following facts are relevant in order to decide the questions referred to us. For the assessment year 1969-70, relevant previous year ending on June 30, 1968, the guarantee commission was paid to the following persons : " Assessment year : 1969-70 Amount of commission paid 1. Shri Ramkrishna Bajaj He is the father of Shri Shishir Bajaj, director of the company Rs. 19,999 2. Smt. Vimladevi Bajaj She is the mother of Shri Shishir Bajaj and Shri Shekhar Bajaj, director of the company-Rs. 19,999 3. Smt. Suman Jain She is a married sister of Shri Shishri Bajaj Shekhar Bajaj, director of the company-Rs. 19,999 4. Smt. Janki Devi Bajaj She is the grandmother of Shishir Bajaj Shekhar Bajaj, directors of the company-Rs. 19,999 5. Shri Bharat Narayan Agarwal This guarantor did not strictly fall within the definition of " relative " as per section 2(41) of the Income tax Act, 1961. He was also paid guarantee commission-Rs.19,999 Similarly, in respect of the assessment year 1970-71, previous year for which ended on June 30, 1969, the names of the persons who were paid guarantee commission are as under: " Assessment year: 1970-71 Amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ily of the association or family, or any relative of such director, partner or member; (iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual...... ; (v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; ...... Explanation:- For the purposes of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if (a) in a case where the business or profession is carried on by company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent. of the voting power; and (b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent. of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause (i)." Section 40(c) is applicable to a company. According to section 40(c) some items of expenditure are not to be deducted in computing the income as stated in the main para of section 40. This provision is applicable to an assessee which is a company. It empowers the Income-tax Officer to disallow the whole or part of any expenditure incurred by a company which results directly 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, if in the opinion of the Income-tax Officer any such expenditure is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom with a further limit or ceiling on the expenditure permissible as a deduction. The deduction, in the present case, regarding which there is no dispute has resulted in the provision of remuneration paid to the relatives of the directors. The provisions of section 40(c), thus, apply to the payments in so far as they are to the relatives of the directors. Section 40A(2), clause (b)(ii), refers to an expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee could be treated as revenue expenditure and if so, to what extent ? It was held that the payments made to the selling agents by the company fell within section 40A(2)(a) and not section 40(c). It may be stated that the payments in that case were made by the company to its selling agents. In ClT v. Avon Cycles (P) Ltd. [1980] 126 ITR 448 (P H), T. T. (P) Ltd.'s case [1980] 121 ITR 551 (Kar) was relied on. It was held that the firm which took the responsibility for the selling of the products of the company was the selling agents and was not covered by section 40(c) of the Act. The question was, therefore, of the applicability of section 40(c) of the Act. It was held that a perusal of the provisions of section 40(c) showed that in case the provisions of section 40(c) were applicable, the provision of section 40A would not apply. As stated above, here the question involved in the case was with respect to the payment of guarantee commission by the company to the directors for the services rendered by them for securing finances for the company to the extent of Rs. 30 lakhs. Both the decisions relied on by the learned counsel for the Revenue are, therefore, distinguish ..... X X X X Extracts X X X X X X X X Extracts X X X X
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