1984 (9) TMI 32 - HC - Income Tax

High Court allows deduction of directors' commission under Income-tax Act despite lack of approval, criticizes disallowance under Companies Act.

The High Court determined that the commission payment to directors was deductible under section 37 of the Income-tax Act, despite lacking approval from ... Business Expenditure, Company, Directors, Reference Issues:1. Deductibility of commission payment to directors under section 37 of the Income-tax Act, 1961 without approval from Government of India, Company Law Board.2. Determination of excess commission payment under Companies Act for assessment years 1975-76 and 1976-77.Analysis:1. The High Court addressed the issue of deductibility of commission payment to directors under section 37 of the Income-tax Act, 1961 without approval from the Government of India, Company Law Board. The Tribunal found that the commission was paid for services rendered by the directors in furthering the business of the company, resulting in a profit of Rs. 4,75,000. The Court relied on decisions of the Madras High Court to support the deductibility of the commission despite the Company Law Board's non-approval. The Court noted that the lack of direct judgments from the Supreme Court or the High Court on the specific issue did not warrant disallowing the reference. The Court also considered the timing of the commission payment approval and subsequent refund, emphasizing that the expenditure was legitimate and subject to tax upon refund.2. The Court delved into the determination of excess commission payment under the Companies Act for the assessment years 1975-76 and 1976-77. The Income-tax Officer disallowed the entire commission amount, citing the need for approval under section 198(2A) of the Companies Act, 1956. However, the Court highlighted that the correct provision was section 309, which governs director remuneration. The Court pointed out that the Income-tax Officer failed to determine the specific excess amount to be disallowed, leading to inadequacy in the assessment order. The Court emphasized that only the excess above the permissible limit of managerial remuneration could be disallowed, not the entire amount. The Court noted that the Income-tax Officer's oversight in calculating the excess amount hindered the determination of the correct question regarding deductibility.3. The Court underscored the complexity of section 309 of the Companies Act, which limits director remuneration based on net profits. It clarified that only the excess amount above the prescribed limit could be held in trust, requiring prior sanction from the Central Government if necessary. The Court criticized the Income-tax Officer's failure to correctly apply the law by adding back the entire commission without determining the specific excess amount. The Court concluded that without a proper determination of the excess, it could not call for a reference to decide on the deductibility of the commission payment. Ultimately, the Court dismissed the application, leaving the parties to bear their own costs.