Alkali Metals Ltd. vs Commissioner of Income Tax

Y.V. Anjaneyulu, J.—Pursuant to the directions of this court u/s 256(2) of the Income Tax Act, 1961 (in short "the Act"), the Income Tax Appellate Tribunal referred the following two questions of law for the opinion of this court :

"(1) Whether the Tribunal was correct in law in placing a restriction on the interpretation of the expression ''promoters ?

(2) Whether the Tribunal was justified in holding that there was no evidence to support the fact that M/s. Y. S. R. Krishna Rao, A. L. Narasimha Rao and Y. Joga Rao also rendered service to the assessee-company ?"

The Income Tax assessments involved are for the years 1971-72, 1972-73 and 1973-74. The assessee is a private limited company. The Andhra Pradesh Industrial Development Corporation has given assistance to the assessee in the manufacture of sodium metal by subscribing to 50% of the equity capital. Initially, the promoters of the assessee-company were : (1) Y. V. S. S. Murthy, (2) Smt. Y. Annapurnamma, (3) Smt. Y. V. Lalitha Devi, and (4) Dr. Y. B. V. Janardhana Rao. The aforementioned four persons were signatories to the memorandum and articles of association. After the assessee-company was established, four more persons also subscribed to the shares of the company. They are : (1) Y. S. R. Krishna Rao, (2) A. L. Narasimha Rao, (3) Y. Joga Rao, and (4) Smt. A. Chellayamma. Pursuant to a resolution dated June 18, 1969, it was decided that a commission calculated at 2.5% on the net price realised on the company''s products should be given to the promoters in proportion to their individual shareholdings. It is claimed in connection with the Income Tax assessments for the years 1971-72, 1972-73 and 1973-74, that the assessee-company paid commission, in terms of the aforementioned resolution, to all the eight persons mentioned above aggregating in all to Rs. 36,759.74. The Income Tax Officer disallowed the claim for payment of commission to all the eight persons. The grounds for disallowing this claim were two-fold. Firstly, it was held that Y. S. R. Krishna Rao, A. L. Narasimha Rao, Y. Joga Rao and Smt. A. Chellayamma were not "promoters" for the purpose of payment of the commission in accordance with the resolution paid to them was not allowable. The second ground was that, in any event, there was no evidence to show that any of the eight persons rendered service to the assessee-company and consequently no part of the remuneration paid to them was allowable. When the matter went up in appeal, the appellate Assistant Commissioner allowed the payment of commission by the assessee to Y. V. S. S. Murthy, Y. S. R. Krishna Rao, A. L. Narasimha Rao and Y. Joga Rao. He upheld the disallowance of commission claimed to have been paid to Smt. Y. Annapurnamma, Smt. Y. V. Lalitha Devi, Dr. Y. B. V. Janardhana Rao and Smt. A. Chellayamma. Aggrieved by the order of the Appellate Assistant Commissioner, the Revenue was aggrieved against the allowance of commission Y. V. S. S. Murthy, Y. S. R. Krishna Rao, A. L. Narasimha Rao and Y. Joga Rao, while the assessee reiterated its claim for payment of commission to Smt. Y. Annapurnamma, Smt. Y. V. Lalitha Devi, Dr. Y. B. Janardhana Rao and Smt. A. Chellayamma.

After considering the rival claims, the Tribunal upheld the allowance of commission only to Y. V. S. S. Murthy, managing director. The Tribunal held that commission is not payable to any of the remaining persons basically on the ground that there was no evidence that they rendered any service. The assessee sought for a reference u/s 256(1) of the Act of the two questions of law referred to in paragraph 1 supra. The Tribunal rejected the application u/s 256(1). Pursuant to the directions of this court on the petition filed by the assessee u/s 256(2), as already observed, the aforesaid questions are referred for our consideration.

Sri S. Dasaratharama Reddy, learned counsel for the assessee, contends that all the persons hereinabove referred to should be considered as "promoters" for the purpose of payment of commission in accordance with the resolution dated June 18, 1969. It is contended that although, initially, the memorandum and articles of association were signed only by four persons, later on, the remaining four persons also, who had already subscribed to the equity capital of the assessee-company, joined in the promotional agreement executed between the assessee-company on the on hand and the Andhra Pradesh Industrial Development Corporation on the other, and, therefore, all the eight persons should have been considered as "promoters" becoming entitled to the payment of commission in terms of the resolution dated June 18, 1969. Learned counsel also pointed out that there is evidence on record indicting that services were rendered by the aforementioned persons and, therefore, the Tribunal was not justified in rejecting the claim for payment of commission.

Learned standing counsel for the Revenue, Sri. M. Suryanarayana Murthy, supported the order of the Tribunal that no services were rendered by the aforementioned persons to the assessee, being essentially a finding of fact, the court ought not to interfere with that finding.

Having heard learned counsel for both sides, we think it unnecessary to enter into the controversy whether the second batch of four shareholders came within the expression "promoters" for purpose of the resolution dated June 18, 1969. The facts in this case would show that the payment of commission to all the eight persons is nothing dispute. It may also be pointed out that the finding of the Tribunal that Smt. Y. Annapurnamma, Smt. Y. V. Lalitha Devi, Smt. Chellayamma and Dr. Y. B. V. Janardhana Rao were not entitled to the payment of commission is not questioned by the assessee in this reference. What is claimed as deduction is only the payment of commission to Y. S. R. Krishna Rao, A. L. Narasimha Rao and Y. Joga Rao. We have already mentioned that the payment made to Y. V. S. S. Murthy was allowed by the Tribunal. It is pointed out that Y. S. R. Krishna Rao and A. L. Narasimha Rao are directors of the assessee-company, while Y. Joga Rao is the brother of the managing director, Y. V. S. S. Murthy. Therefore, all the three of them cam within the terms of section 40(c) of the Income Tax Act, 1961. The payment of commission to them will have to be examined with reference to the specific terms of section 40(c) of the Act as the payment was admittedly made to either directors or their relations. Whether or not these three persons come within the meaning of the expression "promoters", there could be little dispute that the commission paid to them will have to be considered for the purpose of allowance if the ingredients of section 40(c) are satisfied. The resolution dated June 18, 1969, does not, in the aforesaid view, gain any significance because the payment of commission will have to be determined solely on the basis of the requirements of section 40(c) of the Act.

While we find that cases referred to by the Tribunal had a bearing upon the provisions of section 40(c), there is no specific reference to the aforementioned section while considering the question relating to the allowability of commission. Our attention has been invited by learned counsel to the evidence placed before the Appellate Assistant Commissioner concerning the services rendered by Shri. Y. S. R. Krishna Rao, Sri. A. L. Narasimha Rao and Sri Y. Joga Rao. This evidence is catalogued at pages 149 to 153 of the record of this court. The grievance of learned counsel for the assessee is that this evidence, which was there before the Appellate Assistant Commissioner, entirely escaped the notice of the Tribunal and there was no reference to it at all in the order of the Tribunal. It is, therefore, submitted that finding of the Tribunal that the aforementioned three persons did not render any services is vitiated by the omission to consider the evidence already on record. We are inclined to agree with this submission. A perusal of the Tribunal''s order does not indicate that it had occasion to scrutinise the evidence placed before it and come to a conclusion whether that evidence would show that the three persons concerned had rendered services in order to be entitled to the payment of commission. If the evidence indicated that they did render services, then the question regarding allowance of commission paid to them will have to be determined de hors the resolution dated June 18, 1969.

In the absence of findings on these questions, we are unable to answer the questions referred to us. We accordingly return this reference to the Tribunal without answering either of the two questions. It is open to the Tribunal to rehear and matter and consider the question regarding the allowability of commission paid to Y. S. R. Krishna Rao, A. L. Narasimha Rao and Y. Joga Rao in terms of section 40(c) of the Act, taking into consideration the evidence placed by the assessee on record and having regard to all the facts and circumstances of the case. Both the Revenue and the assessee may be given appropriate opportunity to prove their respective cases.

The reference is accordingly returned. Having regard to the facts and circumstances, the parties shall bear their own costs.