1992 (9) TMI 177 - AT - Income Tax

Tribunal rules on commission for Managing Director under section 40(c), clarifying disallowance criteria.

Inspecting Assistant Commissioner. Versus Deccan Mechanical And Chemical Industries (Private) Limited.

The Tribunal held that the commission paid to the Managing Director falls within the purview of section 40(c) and should not be excluded from ... Actually Allowed, Capital Employed, Computation Of Capital Issues:Interpretation of provisions of section 40(c) and 40A(5) regarding commission paid to directors.Analysis:The appeals before the Appellate Tribunal ITAT Pune involved the interpretation of provisions of section 40(c) and 40A(5) concerning the commission paid to directors of a company. The primary issue was whether the provisions of section 40(c) or 40A(5) were applicable to the remuneration paid to the Managing Director. The Assessing Officer disallowed excess remuneration over the prescribed limit under section 40A(5), including the commission paid to the Managing Director. The CIT (Appeals) held that only section 40(c) was applicable, excluding commission from the purview of disallowance under section 40(c).The Tribunal considered conflicting judicial opinions on the applicability of section 40(c) to director-employees. It referenced the Avon Cycles and Saraswati Industrial Syndicate cases where it was held that commission paid to firms or companies could not be considered under section 40(c). However, these decisions were deemed inapplicable to the present case involving payments to a Managing Director who is an employee. The Tribunal also referred to the Saurashtra Cement case, which held that section 40A(5) did not apply to directors due to the existence of a specific provision under section 40(c).The Tribunal emphasized the distinction between sections 40(b) and 40(c), noting that remuneration in clause (c) need not be interpreted the same way as in clause (b). It cited the Mettur Chemical case, stating that commission paid to the Managing Director falls within the purview of section 40(c), and there is no basis for excluding it from disallowance. Consequently, the Tribunal reversed the CIT (Appeals) direction and instructed the Assessing Officer to include the commission paid to the Managing Director for the purpose of disallowance under section 40(c).In conclusion, the Tribunal clarified that section 40(c) exclusively applied to the case of the Managing Director, and commission paid to the Director should not be excluded from the purview of disallowance under section 40(c). The decision aligned with previous rulings and established the correct interpretation of the provisions in question.