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PETITIONER: COMMISSIONER OF INCOME TAX.  BOMBAY

       Vs.

RESPONDENT: INDIAN ENGINEERING AND COMMERCIAL CORPN.PVT.  LTD.

DATE OF JUDGMENT13/04/1993

BENCH: JEEVAN REDDY, B.P. (J) BENCH: JEEVAN REDDY, B.P. (J) VENKATACHALA N. (J)

CITATION:  1993 AIR 1540            1993 SCR  (3)  86  1993 SCC  (3) 246        JT 1993 (2)   683  1993 SCALE  (2)496

ACT: Income   Tax    Act.1961:-S.40(a)(v)/140(A)(5)--constitution sales  in  addition  to  salary  paid  to  Directors  at   a prescribed  percentage of sales-Held,is  not  "perquisite:"- Cash payment not contemplated by the provision.

HEADNOTE: The  respondent-assessee  was  a  private  limited   company trading in tractors and earth-moving equipment.  During  the relevant  the assessee pain commission on sales in  addition to salary to its directors at a prescribed percentage of the sales  effected  by the assessee.  The  Income  Tax  Officer treated   the  commission  on  sales  as  perquisites’   and disallowed the same applying section 40 (a) (v) for the year 1971-72 and section 40 (A) (5) for the assessment year 1972- 73.  Which  are the concerned assessment years  herein.   On appeal,  the  Appellate  Assistant  Commissioner  held  that commission  on sales cannot betreated as  perquisites.   The Tribunal dismissed the Revenue’s appeal. The  question  before this court was whether  commission  on sales  (paid  in  cash) falls within  the  four  corners  of section 40 (a) (v) ,Section 40 (A) (5). Dismissing the appeal, this court. HELD:     1.  Regarding Section 40 (1) (v) /40 (A) (5) as  a whole, the cash payment of the nature concerned in this case does   not  fall  within  any  of   the   situations/clauses contemplated by sub-section (5). (92-D) Payment  of  a certain cash amount by way of  commission  on sales,  directly to an employee cannot be said to fall  with the  words "where the assessee incurs an  expenditure  which results directly or indi- 87 rectly" in Section 40 (A) (5). (92-F) Nor can such a payment fall within a provision which  speaks of  an expenditure or allowance in respect of any assets  of the assessee used by the employee DE. (92-F)

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1583 &  1584

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(NT) of 1977. From  the Judgment and Order dated 22.11.1976 of the  Bombay High Court in I.T. Application No. 191 of 1976. S.C.  Manchanda, Dr. K.P Bhatnager, C. Ramesh,  T.V.  Ratham for P. Parmeswaran for the Appellant. Mrs.  A.K.  Verma,  S.V. Pathak, for J.B.D. &  Co.  for  the Respondent. The judgment of the Court was delivered by B.P.  JEEVAN  REDDY, J. These appeals are preferred  by  the Revenue against an order of the Bombay High Court  rejecting an application under section 256 (2) of the Income Tax  Act, By means of the said application the Revenue sought to raise the following three questions:               "  (1)  Whether,  on  the  fact  and  in   the               circumstances  of the case, the  Tribunal  was               right  in holding that the commission paid  by               the  assessee company to its directors was  an               additional   remuneration  forming  part   and               parcel of the salary allowed to them and  that               the said remuneration would not be covered  by               section  40 (a) (v) of the Income-tax Act  and               thereby  allowing  the  assessee’s  claim  for               allowing the deduction of the whole amount  of               commission paid to the directors ?               (ii)Whether  the Tribunal was right  in  their               view that the words "Whether convertible  into               money  or not" used in section 40 (a)  (v)  of               the Act postulated that ,the               88               benefit,   amenity  or  perquisite   mentioned               therein covers benefit, amenity or  perquisite               allowed in Kind but not in cash?               (iii)Whether the Tribunal was right in holding               that  the  expenditure of Rs. 19,386  for  the               assessment year 1971-72 and Rs. 29,283 for the               assessment  year  197273  did  not   represent               entertainment  expenditure within the  meaning               of section 37 (ii) of the Income-tax Act ?" The assessment years concerned here in are 1971-72 and 1972- 73.  The  first two questions go  together.   The  provision applicable  for  the  A.Y. 1971-72 was Section  40  (a)  (v) whereas  for the A Y. 1972-73, the provision  applicable  is Section 40 (a) (5) which is a successor provision to Section 40 (a) (v). The  respondent  is  a private limited  company  trading  in tractors and earth moving equipment.  During the  accounting years  relevant  to  the  aforesaid  assessment  years,  the assessee paid to three of its Directors commission on  sales in addition to salary as follows: ------------------------------------------------------------ Assessment        Director        Salary     Commission year ------------------------------------------------------------- 1971-72          Sh.S.B Lal         39,000     36,171                  Sh. S.B. Mathur    18,000      36,171                  Sh. A.B. Mathur     7,800      36,171 ------------------------------------------------------------- 1972-73          Sh. S.B Lal         39,000     40,792                  Sh. S.B. Mathur     18,000     40,792                  Sh. A.B. Mathur      7,800     40,792 ------------------------------------------------------------ The  ’commission’  in the above table means  the  commission paid  to  the said Directors on the sales  effected  by  the assessee,  at  a  prescribed  percentage.   The  Income  Tax Officer treated the commission on sales as "perquisites" and

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disallowed  the  same applying  Section 40 (a) (v)  for  the year 1971-72 and Section 40 (A) (5) for the assessment  year 1972-73. fie also disallowed the expenses referred to  89 in question No. (iii) as entertainment expenses.  On appeal, the   Assistant   Appellate  Commissioner  held   that   the commission on sales cannot he treated as "perquisites".   He also  held that the expenditure on dinner and tea cannot  be characterised as entertainment expenditure and ought not  to have been disallowed.  The Revenue preferred appeals  before the Tribunal against the orders of the A.A.C., which appeals were  dismissed  by the Tribunal following its  order  dated August  25,  1973 relating to assessment  years  1967-68  to 1968-70.   The order dated August 25, 1973 dealt anter  alia with the questions arising herein ind held the same  against the  Revenue.   An  application under section  256  (1)  was dismissed by the Tribunal. The  first  question  urged before  us-which  was  also  the question urged before the Tribunal-is whether commission  on sales   (paid  in  cash)  falls  within  the   fourcornersot Section40 (a) (v)/Section40(A) (5)" It Would be  appropriate to  set  out  the  said provisions in so  far  as  they  are relevant:               "  Section 40-Amounts not deductible:-Notwith-               standing  anytime, to the contrary in  section               30  to 38 the following amounts shall  not  be               deducted  in computing the  income  chargeable               under the head "Profits and gains of  business               or profession-               (a) in the case of any assessee.............               "  (v) any expenditure which results  directly               or indirectly in the provision of any  benefit               or amenity or perquisite. whether  convertible               into  money or not, to an employee  (including               any sum paid by the assessee in respect of any               obligation  which but for such  payment  would               have  been  payable by such employee)  or  any               expenditure  or  allowance in respect  of  any               assets  of the assessee used by such  employee               either wholly or partly for his own purpose or               benefit,  to  the extent such  expenditure  or               allowance  exceeds one-fifth of the amount  of               salary  payable to the employee. or an  amount               calculated at the rate of one thousand  rupees               for each month or part thereof com- 90 prised of his employment during the previous year, whichever is less:" Note:-(The two provisos and the two explanations are omitted as not necessary for the purpose of this case.) Section  40 (A) (5), which in so far as it is  material,  is substantially  in the same terms, reads as follows: "Section  40  (A) Expenses or payments  not  deductible  in certain circumstances.               (5)   (a) Where the assessee-               (i)   incurs  any  expenditure  which  results               directly or               indirectly in the payment of any salary to  an               employee or a former employee. or               (ii)  incurs  any  expenditure  which  results               directly or indirectly in the provision of any               perquisite (whether convertible into money  or               not)  to  an employee or  incurs  directly  or               indirectly  any expenditure or is entitled  to               any allowance in respect of any assets of  the

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             assessee used by an employee either wholly  or               partly for his own purposes or benefit.               then, subject to the provisions of clause (b),               so much of such expenditure or allowance as is               in  excess of the limit specified  in  respect               thereof in clause (c) shall not be allowed  as               a deduction:"               Explanation 2: In this sub-section-               (b)   "perquisite" means-               (i)   rent-free accommodation provided to  the               em-               ployee by the assessee;               (ii)  anv  concession  in the matter  of  rent               respecting any               91               accommodation provided to the employee by  the               assessee:               (iii)any   benefit  or  amenity   granted   or               provided free of cost or at concessional  rate               to the employee by the assessee:                (iv)payment  by  the assessee of any  sum  in               respect of any obligation which, but for  such               payment,  would  have  been  payable  by   the               employee. and               (v)   payment  by  the  assessee  of  any  sum               whether directly or through a fund. other than               a  recognised  provident fund or  an  approved               superannuation fund. to effect an assurance on               the  life  of  the employee  or  to  effect  a               contract for in annuity." Incidentally Section 40 (A) (5) which was inserted repealing section 10 (a) (v) his itself been deleted with effect  from April 1, 1989 by the Direct Tax Laws (Amendment) Act,  1987. The  sister provision contained in sub-clauses (i) and  (ii) of  clause (c) of’ section 40. applicable to directors of  a company (and other persons mentioned therein) has also  been deleted by the very same enactment with effect from April 1. 1989. Since  the relevant provisions in section 40 (a) (v) and  40 (A)  (5)  are substantially similar. we smile  consider  the language  employed in the latter provision.  Sub-clause  (5) of section 40 (A) is applicable in the following Situations: (1)  Where the assessee incurs any expenditure which results directed  or indirectly in the payment of any salary  to  in employee or it former employee or (2)  Where the assessee incurs any expenditure which results directly  or indirectly in the provision of’ any  perquisite (whether convertible into money or not to an employee; (3)  (it)  Where the assessee incurs directly or  indirectly any 92 expenditure  or  provides  an allowance in  respect  of  any assets of the assessee used by the employee either wholly or partly for his own purpose or benefit; (b)Where  an  employee  of the assessee  is  provided  any allowance  ("entitled to any allowance") in respect  of  any assets  of the assessee used by such employee either  wholly or partly for his own purposes or benefit. In  either of these situations, so much of such  expenditure or  allowance as is in excess of the limits  specified  will not be allowed as a deduction.  The question is whether  the commission  paid  to its directors/employees  on  the  sales effected   by   the  assessee  falls  within  any   of   the situations/clauses mentioned above.  The Revenue relies upon the   second  one  among  them.   According  to  them,   the

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commission paid is a ’perquisite. which submission they  say is  borne  out by the words within the  brackets  "  whether convertible  into  money or not" immediately  following  the word "perquisite".  On the other hand the contention of  the assesses   which  his  been  accepted  by  the  A.A.C.   and situations/clauses  contemplated  by sub-section  5.  Having regard  to  the  language  employed in  clause  (c)  we  are inclined  to agree with the assessee.  The language of  sub- section (5) is significant.  The first two situations, as we have  called them start with the words "where  the  assessee incurs   any   expenditure   which   results   directly   or indirectly.................It  is difficult to  say  that payment of a certain cash amount by wayof   commission   on sales directly to an employee can be said to fall within the  words "where the assessee incurs any expenditure  which results directly or indirectly".  Such a payment cannot also fall  within  the  two  sub-clauses of  clause  (3)  in  our analysis-since they speak of an expenditure or allowance  in respect of’ any assents of the assesee used by the employee. Learned counsel for the Revenue.  Shri Manchanda argued that the words "whether convertible into money or not" bring  out the intention of the Parliament and support his  contention. He  says,  there is no reason not to  include  cash  payment within  the ambit of sub-section(5) to Section 40  (A).   We are,  however.  not concerned with the  generality  of  cash payments  but  only  with  the  payment  concerned   herein. Reading, the Sub-section as a whole and having regard to the language  employed  therein, the the Tribunal is  that  Such cash payment does not fall    within any of the 93 payment concerned herein does not fit into it. The employees concerned herein also happen to be  directors. The  provision  in  clause  (c) of  Section  40  applies  to directors  among  others. Of course. Section 40 (A)  (5)  is applicable only to companies where as Section 40 (A) (5)  is applicable to employees whether of companies or others.   In the  case  of directors, who are also  employees,  both  the provisions will be attracted- the higher of the two ceilings has to be applied. The  learned counsel for the respondent-assessee brought  to our notice it circular issued by the Central Board of direct Taxes  which  inter  alia  say.  "its  read  is  payment  of commission  to the employees the question whether  it  forms part of salary or perquisite has to he decided on the  ’acts of  each case.  If the terms and conditions of  service  are such that commission is paid not as a bounty or benefit  but is  paid  ,is part and parcel of’the  remuneration  for  the service  renders by the employees. such payment partake  the nature  of  salary rather than as a benefit  or  perquisite. If, however, on terms and conditions of service either there is  no obligation for the employer to pay the commission  or it  is  a matter purely in the discretion of  the  employer, such  payment  should  he treated ,is a benefit  by  way  of addition  to salary rattler thin in lieu of salary."  It  is not  necessary  for  us  to make any  comment  on  the  said circular. For the above  reasons. we are of the opinion that the  High Court was justified refusing to direct the Tribunal to state question (1) and (2) under section 256 (2). So  far  its  question No.3 is concerned, it  his  not  been seriously  pressed before us having regard to the  smallness of  the  amount involved.  It is also stated that  the  said question  is  pending consideration is a  batch  of  appeals before this Court.  We do not propose to express any opinion on question No. 3 for the reason that the amount involved is

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quite  small  having regard to the income of  the  assessee- respondent. The appeals accordingly fail and are dismissed.  No costs. Appeal dismissed. 94