McDowell and Co. Ltd. vs Commissioner of Income Tax Commissioner of Income Tax Vs McDowell and Co. Ltd.

N.V. Balasubramanian, J.—It is a consolidated reference both at the instance of the assessee and at the instance of the Revenue for the

assessment year 1979-80. The questions of law referred at the instance of the assessee read as under :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the surtax liability was not an allowable

deduction in the computation of the income ?

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the commission paid to the directors was part

of the remuneration for the purpose of computation u/s 40(c) of the Income Tax Act of the admissible expenditure ?

The questions of law referred at the instance of the Department read as under :

Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in holding that the subsidy received from SIPCOT should

not be deducted from the cost of assets for purposes of allowing depreciation ?

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the value of work-in-progress and

the goods in transit should be included in computing the capital employed for the purpose of allowing the relief u/s 80J ?

In so far as the first question of law referred at the instance of the assessee is concerned, the issue raised in the question is whether the surtax

paid is an allowable deduction. The Supreme Court in the case of Smith Kline and French (India) Ltd. and Others Vs. Commissioner of Income

Tax, , held that the surtax liability is not an allowable deduction in the computation of business income of the assessee. Following the decision of the

apex court, we are of the opinion that the Tribunal was right in holding that the surtax liability was not an allowable deduction. Accordingly, we

answer the first question of law referred at the instance of the assessee in the affirmative and against the assessee.

In so far as the second question of law referred at the instance of the assessee is concerned it relates to the determination of ceiling u/s 40(c) of

the Income Tax Act in respect of the remuneration paid to the directors. The assessee-company paid certain commission to the directors and

claimed that the commission paid to the directors was not a part of remuneration as the directors were not paid fixed salaries, but were paid

commission on the turnover basis. Mr. Janarthana Raja, learned counsel for the assessee, relied upon a decision of the Supreme Court in the case

of Commissioner of Income Tax, Bombay Vs. M/s. Indian Engineering and Commercial Corporation Pvt. Ltd., , and submitted that in so far as the

commission paid to the directors at a percentage of sale by the assessee is concerned, the provisions of Section 40(a)(v) and Section 40A(5) do

not apply. We are of the opinion that the decision of the Supreme Court relates to the interpretation of Sections 40A(5) and 40(a)(v) of the Act.

But, we are now concerned with the provisions of Section 40(c) of the Act and the wording of Section 40(c) of the Act are materially different

from those found either in Section 40A(5) or in Section 40(a)(v) of the Act. u/s 40(c) of the Act, if a company incurred any expenditure directly or

indirectly to the provision of any remuneration or benefit or amenity to a director or a person substantially interested in the company such

remuneration, benefit or amenity to the director or such person would be subject to the ceiling limit prescribed u/s 40(c) of the Act The commission

paid, in our opinion, would fall either as remuneration or benefit to the director and, therefore, the ceiling limit prescribed u/s 40(c) of the Act

would apply to the commission paid by the assessee to its directors as it was paid for the work done and can be claimed as of right by the

director. A similar question of law whether the commission paid to the directors would be subject to the ceiling limit prescribed u/s 40(c) of the Act

was considered by this court in T. C. No. 1136 of 1983 Metal Powder Co. Ltd. Vs. Commissioner of Income Tax, and this court, by judgment

dated November 7, 1997, held that the commission paid to the director should be taken into account for the purpose of determining the ceiling u/s

40(c) of the Act. We are, therefore, of the opinion that the Tribunal was correct in holding that the commission paid to the directors should be

regarded as a part of the remuneration for the purpose of computing the ceiling u/s 40(c) of the Act was an admissible expenditure. Accordingly,

we answer the question of law referred at the instance of the assessee in the affirmative and against the assessee.

In so far as the first question of law referred at the instance of the Revenue is concerned, Mr. C. V. Rajan, learned counsel for the Revenue,

fairly submitted that the first question of law referred is liable to be answered against the Department in view of the decision of the apex court in the

case of Commissioner of Income Tax, Hyderabad Vs. M/s. P.J. Chemicals Ltd., , wherein the apex court held that the subsidy granted by the

Government should not be deducted in computing the actual cost of assets. Following the decision of the Supreme Court, we are of the opinion

that the subsidy received from SIPCOT should not be deducted from the cost of assets for the purpose of allowing depreciation. Accordingly, we

answer the first question of law referred to at the instance of the Department in the affirmative and against the Department.

In so far as the second question of law referred at the instance of the Department is concerned, it is also covered against the Department by a

decision of the Supreme Court in Commissioner of Income Tax v. Alcock Ashdown and Co. Ltd., (1997) 224 ITR 353 (SC) , wherein the apex

court held that the value of work in progress and the goods-in transit should be included as a part of the capital employed for the purpose of

granting deduction u/s 80J of the Act. We find no error in the view taken by the Appellate Tribunal and so hold that the said two amounts should

be taken as a part of the capital employed for the purpose of determining the relief u/s 80J of the Act. Accordingly, we answer the second question

of law referred to at the instance of the Revenue in the affirmative and against the Revenue. In T. C. No. 149 of 1986, the Revenue is entitled to

costs of Rs. 1,000 and in T. C. No. 150 of 1986, the assessee is entitled to costs of Rs. 1,000.