Hindustan Cocoa Products Ltd. vs Commissioner Of Income-Tax
2001 Latest Caselaw 300 Bom

JUDGMENT

S. H. Kapadia, J.

1. The following three questions have been referred to this court under Section 256(1) of the Income-tax Act, 1961, for our opinion :

"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in holding that the liability for the payment of surtax is not an admissible deduction in the computation of the total income under the Income-tax Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the applicant was not a company in which the public are substantially interested within the meaning of the Finance Act, 1976 ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the commission payments made to a director are to be treated as remuneration for the purposes of computing the disallowance under Section 40(c) of the Income-tax Act, 1961 ?"

2. In view of the judgment of the Supreme Court in the case of Smith Kline and French (India) Ltd. v. CIT , question No. 1 is answered in the affirmative, i.e., in favour of the Revenue and against the assessee.

3. In view of the judgment of the Bombay High Court in the case of Pet-rosil Oil Co. Ltd. v. CIT [1999] 236 ITR 220, question No. 2 is answered in the negative, i.e., in favour of the assessee and against the Department.

4. As far as question No. 3 is concerned, the facts are as follows :

Facts :

The assessee paid an amount of Rs. 14,600 to each of its directors. The Assessing Officer disallowed the aforestated amount under Section 40(c) of the Act on the ground that the two directors were in receipt of salary of Rs. 97,900 and in addition to the said salary each of the two directors received commission payment of Rs. 14,600. The Assessing Officer disallowed the a forestated amount in view of the decision of the Tribunal in the case of Sapt Textiles Products (India) Ltd. Being aggrieved, the assessee went in appeal. The Commissioner of Income-tax (Appeals) took the view that the commission of Rs. 14,600 paid to the two directors was a part of remuneration. The Commissioner of Income-tax (Appeals) came to the conclusion that in view of the decision of the Tribunal in Nav Ketan International Films Pot. Ltd. and in view of the decision of the Tribunal in the case of Put Paper and Allied Industries Pvt. Ltd., the commission of Rs. 14,600 paid to the directors constituted part of the remuneration and, accordingly, applied Section 40(c) of the Act. Being aggrieved by the decision of the first appellate authority, the matter was carried in appeal to the Tribunal which followed the decision in Pai Paper and Allied Industries Pvt. Ltd. and Nav Ketan International Films Pvt. Ltd. Accordingly, the Tribunal dismissed the appeal preferred by the assessee. Being aggrieved, the matter has come to this court under Section 256(1) of the Income-tax Act for our opinion.

Findings on question No, 3 :

At the outset, it may be mentioned that the decision of the Tribunal in Pai Paper and Allied industries Put. Ltd. and Nav Ketan International Films Pvt. Ltd. came to be reversed by the judgments of the Bombay High Court in the case of Pai Paper and Allied Industries Pvt. Ltd, v. CIT [1994] 207 ITR 410 and in the case of Nav Ketan International Films Pvt. Ltd. v. CIT [1994] 209 ITR 976. In the aforestated two judgments, this court has ruled that Section 40(c) of the Income-tax Act would be attracted only to those cases where the director of a company is paid remuneration or where an expenditure is incurred to provide benefits or amenities to him in his position as a director. In Nav Ketan International Films Pvt. Ltd. v. CIT [1994] 209 ITR 976 (Bom), the assessee carried on business of producing motion pictures. Mr. Dev Anand, the famous film actor, was a permanent director of a company. The assessee-company produced two motion pictures. In the said two pictures, Mr. Dev Anand was the writer, director and the leading man. He was paid remuneration of Rs. 50,000 which was payable in annuity instalments from 1974 up to 2003 for which the asses-see-company undertook to purchase a single premium policy for Rs. 7.77 lakhs from the LIC. Similarly, for the second picture, the assessee paid Rs. G.33 lakhs for purchase of the policy from the LIC. Thereafter, the assessee debited a total amount of Rs. 14 lakhs against the cost of production of the above two pictures. The Assessing Officer did not accept the deduction in view of Section 40(c). He, therefore, disallowed the deduction to the extent of Rs. 13 lakhs in the computation of the total income. It was held by the Bombay High Court that the payments which have been made by the assessee-company for the purchase of annuities in favour of Dev Anand who was one of the directors of the company was not covered by Section 40(c) because Section 40(c) applies only to cases where the director is paid remuneration or where any expenditure is incurred to provide benefits to him in his position as a director. Since the expenditure was incurred to provide him with benefits in his position as an actor and as a writer, Section 40(c) was held to be not applicable. The ratio of the judgment of this court in Pai Paper and Allied Industries Pvt. Ltd. [1994] 207 ITR 410, is also to the same effect. In view of the a fore stated two judgments of the Bombay High Court in the cases of Pai Paper and Allied Industries Pvt. Ltd. [1994] 207 ITR 410 and Nav Ketan International Films Pvt. Ltd. [1994] 209 ITR 976, there is no dispute regarding the legal position. However, in ihe present case, it is not clear from the decision of the Tribunal as to on what account the commission was paid. It is not clear as to whether the commission was paid to the director as part of his remuneration or whether it was paid for some other services rendered by him. It is not clear whether the expenditure incurred by the assessee-company was to provide any benefit to the two directors as directors or whether the

payment was made by the assessee-company for some other services rendered by the two directors. In this reference, we are concerned with the assessment year 1976-77. In the circumstances, we answer question No. 3 in the negative, i.e., in favour of the assessee and against the Department, on the footing that the decisions of the Tribunal in Pai Paper and Allied Industries Pvt. Ltd. and Nav Ketan International Films Pvt. Ltd. delivered earlier have been rightly overruled by the Bombay High Court in the aforestated cases reported in Pai Paper and Allied Industries Pvt. Ltd. v. CIT [1994] 207 ITR 410 and Nav Ketan International Films Pvt. Ltd. v. CIT [1994] 209 ITR 976.

5. Accordingly, the reference is disposed of.