COMMISSIONER OF INCOME TAX. BOMBAY vs. INDIAN ENGINEERING AND COMMERCIAL CORPN. PVT. LTD.

CIVIL APPEAL No. 1583/1977Supreme Court[1993] 3 S.C.R. 8613 April 1993Bench: 2 JudgesAuthor: B.P. JEEVAN REDDY, N. VENKATACHALA COMMISSIONER OF8 pages
AI SummaryDismissed

What were the facts?

The assessee, Indian Engineering and Commercial Corporation Pvt. Ltd., paid commission on sales to its directors in addition to their salaries. For Assessment Year (AY) 1971-72, Section 40(a)(v) was applicable, and for AY 1972-73, Section 40(A)(5) was applicable. The Income Tax Officer treated this commission as 'perquisites' and disallowed it as a deduction. The Appellate Assistant Commissioner held that commission on sales could not be treated as perquisites. The Tribunal dismissed the Revenue's appeal. The Revenue sought to raise questions before the High Court regarding the disallowance of commission and entertainment expenditure.

What did the Supreme Court hold?

The Supreme Court held that the cash payment of commission on sales made by the assessee to its directors did not fall within the scope of Section 40(a)(v) or Section 40(A)(5) of the Income-tax Act. The Court reasoned that the language of Section 40(A)(5), particularly the opening phrases of the relevant clauses, did not encompass a direct cash payment of commission on sales to an employee. Such a payment could not be construed as expenditure resulting directly or indirectly in the provision of a perquisite in the manner contemplated by the section, nor did it relate to the use of the assessee's assets by the employee. The Court found the assessee's argument, that the cash payment did not fit the statutory language, to be more persuasive. Regarding the third question concerning entertainment expenditure, the Court did not express an opinion due to the smallness of the amount involved and its pendency in other appeals. The appeals were dismissed.

What were the issues?

1. Whether, on the facts and in the circumstances, the Tribunal was right in holding that the commission paid by the assessee company to its directors was an additional remuneration forming part of the salary, and not covered by Section 40(a)(v) of the Income-tax Act, thereby allowing the deduction of the whole amount of commission? 2. Whether the Tribunal was right in their view that the words 'Whether convertible into money or not' used in Section 40(a)(v) of the Act postulated that the benefit, amenity or perquisite mentioned therein covers benefits, amenities, or perquisites allowed in kind but not in cash? 3. Whether the Tribunal was right in holding that the expenditure of Rs. 19,386 for AY 1971-72 and Rs. 29,283 for AY 1972-73 did not represent entertainment expenditure within the meaning of Section 37(ii) of the Income-tax Act? Assessee's Contention: The commission paid in cash on sales does not fall within the situations/clauses contemplated by Section 40(A)(5). The cash payment of commission on sales cannot be said to fall within the words 'where the assessee incurs any expenditure which results directly or indirectly' or within provisions speaking of expenditure or allowance in respect of assets used by the employee. Revenue's Contention: The commission paid is a 'perquisite', supported by the words 'whether convertible into money or not' following the word 'perquisite' in Section 40(A)(5), implying that cash payments should be included within the ambit of the section.

Which sections of the Income-tax Act were involved?

Section 40(a)(v),Section 40(A)(5),Section 37(ii)

AI-generated summary — verify with the full judgment below

A COMMISSIONER OF INCOME TAX. BOMBAY v. INDIAN ENGINEERING AND COMMERCIAL CORPN. PVT. LTD. B APRIL 13, I 993 [B.P . .JEEVAN REDDY AND N. VENKA TACHALA, ,J.J.] .. /11"come Tax Act, 1961 :-S. 40(a) (v) 140 (A) (5)-Commission 011 sales in addition to salary paid to Directors at a prescribed percentage C of sales-Held. is not "perquisite :·-cas/J payment 11mco11templated by tile provision. The respondent-assessee was a prirnte limited com pan~: trading in tractors and earth-mm·ing equipment. During the relernnt years, D the assessee pain commission on sales in addition to salaQ' to its directors at a prescribed percentage of the sales effected hy the assessee. The Income Tax Officer treated the commission on sales as 'perquisites' and disallowed the same applying section 40 (a) (v) for the J'ear 1971-72 and section 40 (A) (5) for the_ assessment year 1972-

73.

Which are the concerned assessment years herein. On appeal, the E Appellate Assistant Commissioner held that commission on sales cannot betreated as perquisites. The Tribunal dismissed the Revenue's appeal. The question before this court was whether commission on sales F (paid in cash) falls within the four

The order continues below.

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