Law: Income Tax Act, 1961

Section: 40(a)(v),40A(5)

Income-tax-----Business expenditure---Company---Director or employee--¬Remuneration---Limit to allowance---Does not apply to commission paid at a percentage on sales effected by assessee---Indian Income Tax Act, 1961, Ss.40(a)(v) & 40-A(5). During the accounting years relevant to the assessment years 1971-72 and 1972-73, the respondent, a private company, paid in cash to its directors in addition to their salary, a "commission" at a percentage on the sales effected by the respondent. The Appellate Tribunal held that the commission was not a "perquisite" and the limits prescribed for allowance under section 40(a)(v) and section 40-A(5) of the Income Tax Act, 1961, were respectively not applicable to those payments and no part of the commission could be disallowed in the computation of the respondent's profits. Both the Tribunal and the High Court dismissed the applications of the Department for a reference. On appeal to the Supreme Court: Held, dismissing the Department's appeals, that section 40-A(5) started, with reference to the two situations, with the words "where the assessee incurs any expenditure which results directly or indirectly". Any payment of a cash amount by way of commission on sales, directly to an employee could not be said to fall within those words and such a payment could not also fall within the contemplation of the later part of section 40-A(5)(a)(ii) since that part spoke of an expenditure or allowance in respect of any assets of the assessee used by the employee. On a reading of section 40-A(5) as a whole and having regard to the language employed therein, the payment of commission on sales directly to the employee concerned did not fit into it. The position under section 40(a)(v) was substantially similar. The High Court was, therefore, justified in refusing to direct the Tribunal to call for a reference. Having regard to the smallness of the amount involved, the Department did not seriously press the appeal in regard to another question regarding entertainment expenditures and the Supreme Court did not express any opinion on that question. Decision of the Bombay High Court affirmed. JUDGMENT B.P. JEEVAN REDDY, J.---These appeals…

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