TMI Blog1993 (9) TMI 77X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case, the Tribunal ought to have held that the provisions of section 40(c) could apply only where, in the first instance, some part of the expenditure was found to be excessive and not otherwise ?" The assessee is a private limited company engaged in the business of dealing in paper and allied products. It has only two shareholders, namely, Shri T. S. N. Swamy and his wife, Mrs. S. Swamy, both of whom were the directors in the relevant previous year ended on March 31, 1975, corresponding to the assessment year 1975-76. Messrs. International Paper Co. which was a sole proprietary concern of the late T. S. N. Swamy, was acting as a selling agent of the assessee-company. For the relevant previous year ending March 31, 1975, commission was payable to Messrs. International Paper Co. for the period from April 1, 1974, to June 30, 1974, as per the terms of an agreement dated May 18, 1973, and according to the amended agreement with effect from July 1, 1974. According to clause 5 of the agreement dated May 18, 1973, International Paper Co. was entitled on all sales effected by it on resale basis to customers to a discount of five per cent. and where the orders were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated under section 40(c) was confined to payment for services rendered by a director managing the affairs of the company. It was further held by the Tribunal that the mere fact that managing director acted as the selling agent by using a trade or business name does not, in law, create a legal entity or an independent person divorced from the individual managing director and hence, while considering the payment of selling agency commission, it was not possible to regard Messrs. International Paper Co., which was a sole proprietary concern of the managing director, as a person different from the managing director himself. It further held that what is contemplated by section 40(c) is not the remuneration or benefit or amenity to a director or any person mentioned therein but the expenditure which would bring about such remuneration, benefit or amenity to a director, etc. The Tribunal rejected the contention of the assessee that section 40(c) only contemplated such expenditure which resulted in remuneration to a director or managing director in his capacity as director or managing director. Hence this reference at the instance of the assessee. Section 40(c) of the Act, as it stood a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... within its sweep all expenditure incurred by a company which results directly or indirectly in any benefit or remuneration to a director or to a person who had a substantial interest or such other persons specified therein. The contention of the Revenue was that what is material to bring an expenditure within the ambit of section 40(c) is that such expenditure results in the provision of any remuneration or benefit, etc., to a director or such other person and the purpose of the payment and the capacity in which the payment is made is immaterial. Once the payment is made to the director or persons mentioned therein or the benefit from such expenditure can be said to accrue to the director or such other persons, it would fall within section 40(c) and will have to be taken into account for the purposes of the ceiling prescribed therein. The stand of the assessee, on the other hand, had been that section 40(c) applies only to expenditure which results in any remuneration or benefit to a director in his capacity of director. According to the assessee, section 40(c) cannot be interpreted so widely as to bring within its ambit any and every payment to a director or the specified persons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on undoubtedly was to discourage and disallow 'payment of high salaries and remuneration which go ill with the norms of an egalitarian society'. The provision was of course, not confined to directors. It took in relatives of directors, persons having substantial interest in the company and their relatives. The clause vested in the Income-tax Officer the power to determine whether any such expenditure or allowance as is mentioned in the said clause was excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. In addition to it, a ceiling was also prescribed beyond which such expenditure or allowance could not go in any event. " In the case before the Supreme Court, payments were made to partnership firm. The argument of the Revenue was that the partnership firm was not a separate entity and so the payment made to the partnership should be treated as payment made to the partners and the partners were none else but the directors of the assessee-company and in that view of the matter, the payments to the partnership firm should be construed as payment to the directors and brought within the ambit of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 72,000 can be allowed to be deducted in computing the income of the company in any one year. We do not think that Parliament ever intended that such a result should follow. The goods, services and facilities referred to in section 40A(2)(a) are those which have a market value and which are commercial in character. Many of the services and facilities referred to above are those which are nowadays provided by independent organisations. " We are of the clear opinion that the above decision of the Supreme Court is a clear answer to the controversy sought to be raised in regard to the scope and ambit of section 40(c) of the Act. It stands concluded now that only payments made to directors as directors (qua director) fall within section 40(c). Payments made in consideration of a valuable right parted with by the directors of the assessee-company in favour of the assessee-company are outside the scope of the said section. Turning to the facts of the present case, it is pertinent to note that in the case before us, there is no controversy in regard to the factum of genuineness of the payment or the reasonableness thereof having regard to the legitimate business needs of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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