Commissioner of Income Tax vs Patiala Flour Mills Co. (P.) Ltd.

Bhopinder Singh Dhillon, J.—The assessee is a private limited company engaged in the production of wheat flour and allied products at Patiala and Delhi and also maintains a cold storage. Shri Harmukh Rai Modi was paid managerial remunerations amounting to Rs. 93,878, Rs. 1,23,835 and Rs. 81,492 in the three years, namely, 1972-73, 1973-74 and 1974-75, respectively. These remunerations included salary at the rate of Rs. 2,000 per month and commission at the rate of 4% of the net profit of the company. Whereas, according to the assessee, the provisions of Section 40A(5) of the Income Tax Act, 1961 (hereinafter called " the Act "), permitted salary and other remunerations in respect of a director to the tune of Rs. 72,000 per annum, according to the ITO, the maximum permissible salary was actually Rs. 60,000 per annum. The Tribunal allowed a deduction of the sum of Rs. 72,000 to the assessee.

In respect of the dispute regarding relief u/s 80J of the Act pertaining to assessment year 1973-74, it was accepted by the parties that the judgment of this court in COMMISSIONER OF Income Tax, PATIALA Vs. PATIALA FLOUR MILLS CO. (P.) LTD., covered the issue in favour of the assessee. However, since the revenue thought that the acceptance of the appeal by the Supreme Court might reverse the view, the revenue got the second question referred to this court with regard to the deduction u/s 80J of the Act.

On a submission made by the revenue, the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh, has referred the following questions to this court for its opinion:

Assessment years 1972-73 to 1974-75.

" Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee-company is entitled to deduction of Rs. 72,000 per annum in respect of salary/ remuneration paid to Shri Harmukh Rai Modi under Sub-section (5)(a) of Section 40A of the Income Tax Act, 1961 ? "

Assessment year 1973-74.

" Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in allowing the deduction of Rs. 79,744 u/s 80J of the Income Tax Act, 1961 ? "

The answer to the first question primarily depends on the interpretation to be given to the provisions of Sub-section (5)(a) of Section 40A of the Act. The provisions of the said Act are as follows:

" 40A. (1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head '' Profits and gains of business or profession ''......

(5) (a) Whether 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 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 :

Provided that where the assessee is a company, so much of the aggregate of-

(a) the expenditure and allowance referred to in Sub-clauses (i) and (ii) of this clause, and

(b) the expenditure and allowance referred to in Sub-clauses (i) and (ii) of Clause (c) of Section 40,

in respect of an employee or a former employee, being a director or a person who has a substantial interest in the company or a relative of the director or of such person, as is in excess of the sum of seventy two thousand rupees, shall in no case be allowed as a deduction :

Provided further that in computing the expenditure referred to in Sub-clause (i) of the expenditure or allowance referred to in Sub-clause (ii) of this clause or the aggregate referred to in the foregoing proviso, the following shall not be taken into account, namely:--

(i) The value of any travel concession or assistance referred to in Clause (5) of Section 10 ;

(ii) passage moneys or the value of any free or concessional passage referred to in Sub-clause (i) of Clause (6) of Section 10 ;

(iii) any payment referred to in Clause (iv) or Clause (v) of Sub-section (1) of Section 36 ;

(iv) any expenditure referred to in Clause (ix) of Sub-section (1) of Section 36."

A bare reading of the provisions referred to above would show that where the assesse incurs any expenditure which results directly or indirectly in the payment of any salary to the employee or a former employee or incurs any expenditure which results directly or indirectly in the provision of any perquisite to the employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purpose 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 deduction. The proviso has been made whereby it has been provided that where the assessee is a company, in that case so much of the aggregate of the expenditure and allowance referred to in Sub-clauses (i) and (ii) of Sub-section (5)(a) and the expenditure and allowance referred in Sub-clauses (i) and (ii) of Clause (c) of Section 40 of the Act in respect of an employee or a former employee, being a director or a person who has a substantial interest in the company or a relative of the director or of such person, as is in excess of the sum of seventy-two thousand rupees, shall in no case be allowed as deduction. It is, therefore, very clear from the plain reading of the language of the section that, as regards the companies, the maximum limit prescribed under this section is Rs. 72,000 per annum. We may, however, observe that under the provisions of Section 40(c) of the Aet some limit for reduction has been provided.

In view of the clear provisions referred to above, question No. 1 referred to us has to be answered in favour of the assessee and against the revenue, that is, in the affirmative.

As regards question No. 2, it is not disputed that the same has to be answered in favour of the assessee and against the revenue in view of the decision of this court in COMMISSIONER OF Income Tax, PATIALA Vs. PATIALA FLOUR MILLS CO. (P.) LTD., and the said view has been affirmed by their Lordships of the Supreme Court in CIT v. Patiala Flour Mills Co. P. Ltd. : [1978]115ITR640(SC) . This question is, therefore, answered in affirmative that is against the revenue and in favour of the assessee. There will be no order as to costs.

S.S. Dewan, J.

I agree.