TaxTMI 
TaxTMI 
1993 (5) TMI 1
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....nt ). Since the facts in all the appeal are identical, it would be sufficient to notice the facts in C. A. Nos. 6092 and 6092A of 1990 (Prakash Beedies (P.) Ltd. v. CIT). Prior to July 15, 1972, a partnership firm called K. M. Ananda Prabhu and Sons, Mangalore, consisting of three partners, K. M. Vishnudas Prabhu, K. M. Ramdas Prabhu and K. M. Shankar Prabhu, was engaged, inter alia, in the business of manufacture and sale of beedies under the brand name "Mangalore Prakash Beedies". On May 20, 1972, a private limited company called Prakash Beedies Ltd. (the assessee-appellant herein), was incorporated with its registered office at Mangalore. One of its objects was to take over the business of the aforesaid firm. Under an agreement dated July 18, 1972, between the firm and the company, the firm sold its rights and assets to the company on the terms and conditions set out therein. Clause 4(a) of the agreement which alone is material for the purposes of these appeals reads ( see [1986] 161 ITR 241, 243 ) : " (a) For the use of the trade name, the company shall pay royalty to the vendor at the rate of 10ps. for every thousand beedies sold by the company by using the trade name of....
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....ectness of the view taken by the High Court. They submitted first that the payments were made not to the directors of the assessee but to a firm which was a separate entity. A payment to a firm is not ipso facto a payment to the partners, directly or indirectly. In a firm, there may be other partners besides the directors of the assessee-company. It may also happen that the firm has no income to distribute because of the losses incurred by it which are set off against the income so received. The High Court was in error in holding that a payment to a firm is a payment to the partners. Assuming that a partnership firm is not a separate juristic entity distinct from its partners, even so the payments were made to the said three persons not in their capacity as directors (qua directors) but in consideration of a valuable right parted with by them in favour of the assessee-company. Such payments do not and cannot fall within the mischief of section 40(c). Section 40(c) was never intended to take in such payments. A company may take on lease the house of its director for its legitimate business purposes and pay rent which is reasonable, having regard to the market conditions, or it may p....
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.... derived by or accruing to it therefrom, so, however, that the deduction in respect of the aggregate of such expenditure and allowance in respect of any one person referred to in sub-clause (i) shall, in no case, exceed (A) where such expenditure or allowance relates to a period exceeding eleven months comprised in the previous year, the amount of seventy-two thousand rupees ; (B) where such expenditure or allowance relates to a period not exceeding eleven months comprised in the previous year, an amount calculated at the rate of six thousand rupees for each month or part thereof comprised in that period : Provided that, in a case where such person is also an employee of the company for any period comprised in the previous year, expenditure of the nature referred to in clauses (i), (ii), (iii) and (iv) of the second proviso to clause (a) of sub-section (5) of section 40A shall not be taken into account for the purposes of sub-clause (A) or sub-clause (B), as the case may be ;...... Explanation. -The provisions of this clause shall apply not withstanding that any amount not to be allowed under this clause is included in the total income of any person referred to in sub-clause ....
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.... their relatives among others. Clause (b) also takes in any payment to any company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee. In short, the net is cast very wide to ensure that excessive or unreasonable payments are not made to the persons in control of the affairs of the assessee in the name of paying for the goods, services and facilities rendered, supplied or extended by them, as the case may be. That the payments made by the assessee-company to the firm on account of royalty in terms of clause 4(a) of the agreement fall within the meaning of the expression " expenditure " in sub-clause (i) of clause (c) is not disputed. The observations in CIT v. Indian Engineering and Commercial Corporation P. Ltd. (Civil Appeals Nos. 1583 and 1594(NT) of 1977) decided on April 13, 1993, by us - reported in [1993] 201 ITR 723 do not say otherwise. That case arose under section 40A(5). The payments in question were made to the directors by way of commission on sales. The question was whether the said payments fell within sub-clause (ii) of clause ....
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....o in section 40A(2)(a). It is argued that the proviso thereto suggests that any expenditure incurred for any kind of service which is referred to in the main part of section 40A(2)(a) and the expenditure referred to in section 40(c) belong to the same category. This contention is not correct. The expression 'services' in section 40A(2)(a) is an expression of wider import.... If the remuneration, benefit or amenity referred to in section 40(c) is treated as the same as what is paid in return for 'the goods, services or facilities' then irrespective of the fair market value of the goods, services and facilities provided by a person who may be a director or a person who has a substantial interest in the company or a relative of the director or of such person, as the case may be, only a maximum of Rs. 72,000 can be allowed to be deducted in computing the income of the company in any one year. We do not think that Parliament ever intended that such a result should follow. The goods, services and facilities referred to in section 40A(2)(a) are those which have a market value and which are commercial in character. Many of the services and facilities referred to above are those which are n....