MIHIR TEXTILES LTD vs. COMMISSIONER OF INCOME TAX

ITR/306/1987HC GujaratGJHC24012036198712 March 1998Author: HONOURABLE MR. JUSTICE R.K.ABICHANDANI,HONOURABLE MR. JUSTICE KUNDAN SINGH3 pages
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What were the facts?

This case concerns the assessment year 1980-81 and involves a reference to the High Court by the Income-tax Appellate Tribunal (ITAT) at the instance of both the assessee, Mihir Textiles Ltd., and the Revenue (Commissioner of Income Tax). The Income Tax Officer (ITO) had disallowed a portion of the remuneration paid to the Managing Directors under Section 40(c) of the Income-tax Act, 1961, and also included commission paid to them in the computation for disallowance. The ITO also added back house rent allowance, compensatory allowance, and conveyance allowance to the disallowance under Section 40A(5). The CIT (Appeals) confirmed these disallowances. The ITAT, however, took a different view on the allowances, holding they were not perquisites under Section 40A(5).

What did the High Court hold?

The High Court answered the first two questions in the affirmative against the assessee, holding that the Tribunal was right in applying Section 40(c) to the remuneration and commission paid to the Managing Directors. This was based on the High Court's previous decisions in Gujarat Steel Tubes Ltd. vs. CIT, CIT vs. Synpol Products Pvt.Ltd., and CIT vs. Raipur Manufacturing Co.Ltd., which held that the phrase "any remuneration, benefit or amenity" in Section 40(c)(i) has a wide ambit and covers benefits or amenities in cash or in kind. For the third question, the High Court answered in the affirmative against the Revenue. It held that cash payments by an assessee to its employees, such as house rent allowance, compensatory allowance, and conveyance allowance, do not fall within the ambit of Section 40A(5)(a)(ii) as they are not perquisites for the purpose of disallowance under that provision. This was based on the Supreme Court's decision in CIT vs. Mafatlal Industries. The reference was disposed of accordingly.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that provisions of section 40(c) of the Income-tax Act were applicable in respect of the entire remuneration paid to the Managing Directors of the Company even though the remuneration paid was in accordance with the business requirements of the Company? (Assessee's contention: Section 40(c) should not be invoked as remuneration was for business purposes. Revenue's contention: Not recorded.) 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that commission paid to the Managing Directors was includable in computing the total remuneration for purposes of section 40(c) of the I.T. Act? (Assessee's contention: Commission should be excluded from disallowance under Section 40(c). Revenue's contention: Not recorded.) 3. Whether, the Tribunal was right in law in holding that (a) house rent allowance, (b) compensatory allowance, and (c) conveyance allowance did not form part of "perquisites" for purposes of disallowance under section 40A(5) of the I.T. Act? (Assessee's contention: These cash allowances are not perquisites under Section 40A(5). Revenue's contention: These allowances should be added back for disallowance under Section 40A(5).)

Which sections of the Income-tax Act were involved?

Section 40(c),Section 40A(5)

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

INCOME TAX REFERENCE No 306 of 1987

For Approval and Signature:

Hon'ble MR.JUSTICE R.K.ABICHANDANI and MR.JUSTICE KUNDAN SINGH ============================================================ 1. Whether Reporters of Local Papers may be allowed to see the judgements?

2.

To be referred to the Reporter or not?

3.

Whether Their Lordships wish to see the fair copy of the judgement?

4.

Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 of any Order made thereunder?

5.

Whether it is to be circulated to the Civil Judge?

The order continues below.

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