By TIOL News Service

MUMBAI, MAY 25, 2015: THE issue before the Bench is - Whether a lumpsum comission or one time payment made to the Director of a company does not attract the mischief of Sec 40(c). YES is the answer.

Facts of the case

The assessee during the relevent year, had paid commission and salary to two of its directors, namely A.K. Jaiswal and M.K. Jaiswal. Upon verification of returns filed by assessee, the AO after applying Section 40[c][iii] held that the said commission amount to a reasonable figure was allowable. He however, disallowed the excess. On appeal, the disallowance was upheld by the CIT(A) and the Tribunal.

Having heard the parties, the High Court held that,

++ a perusal of the order passed by the CIT(A) shows that it has relied upon two Special Bench judgments. However, it is seen that the judgments of Special Bench in case of ITO. vs. Sapt Textile Products India Ltd., is examined by this Court and the appeal of the assessee has been partly allowed. The expenditure on payment of retirement gratuity to one of the Directors is allowed as not includible under either the provisions of Section 40[c] or Section 40A[5]. Other Division Bench judgment of this Court in case of CIT vs. Colgate Palmolive (India), again considers the issue of retirement gratuity. This judgment is delivered by same Bench on same day i.e. the day on which SAPT Textile Produces (India) Ltd .vrs. CIT, came to be decided. In this judgment, the Division Bench has examined the question whether retirement gratuity to a retiring director in the relevant previous year can be considered as an expenditure, which can be subjected to Section 40A[5][c]. After considering the various precedents, the Division Bench has found that any expenditure which can be computed in the manner laid down in said Sections would be covered by those provisions. By this analogy, it is observed that if the computation provisions contained u/s 40[c] and 40A[5] do not call for non-periodic payments not relatable to the previous year, such payments are not contemplated, as being covered by these sections. It is further observed that maximum ceiling in Section 40[c] is clearly in respect of periodic payments only;

++ the conclusion drawn is, therefore, payments in both these sections envisage only periodic payments. Again, the Division Bench judgment of this Court in Pai Paper and Allied Industries (P) Ltd .vrs. CIT, wherein, the commission paid to the Managing Director acting as selling agent fell for consideration and this Court has found that it does not fall u/s 40[c]. The Division Bench has held that the Apex Court has clearly answered the controversy about the scope and ambit of Section 40[c]. It has found that payments made to Directors, as Directors fall within Section 40[c]. Payment made in consideration of the 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. Thus, the precedents show that in order to attract ceiling u/s 40[c], the payment in dispute must be shown to be a periodical payment. A lumpsum payment or one time payment does not fall in it. Here the fact that commission was payable only if annual turn over exceeded Rs. 2 Crores, is not in dispute. Facts show that payment was thus contingent upon turn over and also not periodical. Hence, following this law, it is found that the commission on sales paid by the assessee could not have been subject to provisions of Section 40[c][iii]. Therefore, disallowance made by AO and CIT(A) u/s 40[c] not permissible.

(See 2015-TIOL-1329-HC-MUM-IT)