Holding

Cash commissions paid to directors do not fall within the scope of section 40(a)(v) or 40(A)(5) and are therefore deductible, not perquisites.

Summary

The assessee, a private limited company, paid cash commissions on sales to its directors in addition to their salaries. The Income Tax Officer treated these commissions as perquisites and disallowed them under section 40(a)(v) of the Income‑Tax Act for AY 1971‑72 and under section 40(A)(5) for AY 1972‑73. The Appellate Assistant Commissioner and the Tribunal held that the commissions were not perquisites and allowed the deduction. The Revenue appealed to the Supreme Court, raising three questions, the first two concerning whether such cash commissions fall within the ambit of sections 40(a)(v) / 40(A)(5) and whether the phrase "whether convertible into money or not" limits perquisites to in‑kind benefits. The Court examined the language of the provisions and concluded that a cash commission paid directly to an employee does not satisfy any of the situations contemplated by the sections, and therefore is deductible. Consequently, the appeals were dismissed.

Issues considered

Whether cash commission on sales paid to directors is covered by section 40(a)(v) / 40(A)(5) of the Income‑Tax Act as a perquisite and thus non‑deductible
Whether the expression "whether convertible into money or not" confines the perquisite provision to in‑kind benefits only
Whether the expenses of Rs.19,386 (AY 1971‑72) and Rs.29,283 (AY 1972‑73) constitute entertainment expenditure under section 37(ii)

Legislation cited

Income Tax Act, 1961s. 256(2), s. 37(ii), s. 40(A)(5), s. 40(a)(v)

Subjects

Income TaxperquisitecommissiondirectorsdeductionSection 40Section 40Acash paymententertainment expense

Judgment

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 ofsales-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 corners of section 40 (a) (v) /section
40 (A) (5).

Dismissing the appeal, this courf.

G HELD: I. Regarding Section 40 (I) (v) /40 (A) (5) as a whole, the
cash payment of the nature concerned in this case does not fall within
any of the situations/clauses contemplated by sub-section (5). (92-D)

Payment of a certain cash amount by way of commission on sales,
directly to an employee cannot be said to fall with the words "where
H the assessee incurs any expenditure which results directly or indi-
86
C.l.T. BOMBAY.,._ ENGG. & COMMERCIAL. CORPN. [ JEEVAN REDDY J.] 87

rectly" in Section 40,(A) (5). (92-F) A

Nor can such a payment fall within a provision which speaks of
an expenditure or allowance in respect of any assets of the assessee
used b~· the employee DE. (92-F)
_,~ B
OVIL APPELLATE JURISDICTION: Civil Appeal Nos. 1583
& 1584 (NT) of 1977.

From the Judgment and Order dated 22. 11.1976 of the Bombay
High Court in I. T. Application No. 191 of 1976.
c
S.C. Manchanda, Dr. K.P Bhatnager, C. Ramesh, T.V. Ratham
for P. Parmeswaran for the Appellant.

Mrs. A.K. Verma, S.V. Pathak, for J.B.D. & Co. forthe Respon-
dent. D

The judgment of the Court was delivered by

B.P. JEEVAN REDDY, J. These appeals are preferred by the
Revenue against an order of the Bombay High Court rejecting an E
application under section 256 (2) of the Income Tax Act. By means of
the said application the Revenue sought to raise the following three
questions:

"(1) Whether, on the fact and in the circumstances of
F
the case, the Tribunal was right in holding that the
commission paid by the assessee company to its
directors was an additional remuneration forming part
and parcel of the salary allowed to them and that the
said remuneration would not be covered by section 40
(a) (v) of the Inconie-tax Act and thereby allowing the G
assessee's claim for allowing the deduction of the
whole amount of commission paid to the directors?

(ii) Whether the Tribunal was right in their view that
the words "Whether convertible into money or not" H
used in section40 (a) (v) of the Act postulated that the
88 SUPREME COURT REPORTS (1993) 3 S.C.R.

A benefit, amenity or perquisite mentioned therein cov-
ers benefit, amenity or perquisite allowed in Kind but
not in cash?

(iii) Whetherthe Tribunal was right in holding..l.t.1t,
expenditure of Rs. 19,386 for the assessment year
the

B
1971-72 and Rs. 29,283 for the assessment year 1972-
73 qid not represent entertainment expenditure within
the meaning of section 37 (ii) of the Income-tax Act?"

The assessment years concerned here in are 1971-72 and 1972- ~

c 73. The first two questions go together. The provision applicable for
the A.Y.1971-72 was Section40 (;1 l (v) whereas forthe AY.1972-73.
the provision applicable is Section 40 (a) (5) which is a successor
...
provision to Section 40 (a) (v).

D The respondent is a private limited company trading in tractors
and earth moving equipment. During the accounting years relevant to
the aforesaid assessment years. the assessce paid to three of its
Directors commission ~n sales in addition to salary as follows:

Assessment Director Salary Commission
E year

1971-72 Sh.S.B Lal 39,000 36, l 71
•
Sh. S.B. Mathur 18,000 36, l 71
Sh. A.B. Mathur 7.800 36.171
F
_,
1972-73 Sh. S.B Lal 39,000 40.792
Sh. S.B. Mathur 18,000 40,792
Sh. A.B. Mat11ur 7,800 40.792
G
The 'commission' in the above table means the conunission paid
to the said Directors on the sales effected by the assessee, at a
prescribed percentage. The Income Tax Officer treated the commis-
sion on sales as "perquisites" and disallowed the same applying -,
Section 40 (a) (v) for the year 1971-72 and Section 40 (A) (5) for the
H assessment year 1972-73. He also disallowed the expenses referred to
C.l.T. BOMBAY.,.. ENGG. & COMMERCIAL. CORPN. (JEEVAN REDDY .I.] 89

in question No. (iii) as entertainment expenses. On appeal, the A
Assistant Appellate Commissioner held that the commission on sales
cannot he treated as "perquisites". He also held that the expenditure
on dinner and tea cannot be characterised as entertainment expendi-
tun: and ought not to have been disallowed. The Revenue preferred
appeals before the Tribunal against the orders of the A.A.C.. which
appeals were dismissed by the Tribunal following its order dated B

-- August 25, 1973 relating to assessment years 1967-68 to 1968-70. The
order dated August 25. 1973 dealt inter afia with the questions arising
herein and held the same against the Revenue. An application under
si:ction 256 ( 1) was dismissed by the Tribunal.
c
The first 4uestion urged before us-which was also the question
urgi:d before the Tribunal-is whether commission on sales (paid in
cash) falls within the four corners of Section 40 (a) (v) /Section 40 (A)
(5 )'?It would be appropriate to si:t out the said provisions in so far as
they arc relevant:
D

"Section 4fJ-Amounts not deductible :-Notwith-
standing anything to the contrary in section 30 to 38
the following amounts shall not be deducted in com-
puting the income chargeable under the head "Profits
and gains of business or profession--'- E

.. (a) in the case of any assessee ............ .
I

•· (v) any expenditure which results directly or indi-
rectly in the provision of any benefit or amenity or F
perquisite. whether convertible into money or not, to

- an employee (including any sum paid by the assessee
in respect of any obligation which but for such
payment would have been payable by such em-
ployee) or any expenditure or allowance in respect of
any assets of the assessee used by such employee G
either wholly or partly for his own purpose or benefit.
to the extent such expenditure or allowance exceeds
one-fifth of the amount of salary payable to the
employee, or an amount calculated at the rate of one
thousand rupees for each month or part thereof com- H
90 SUPREME COURT REPORTS (1993) 3 S.C.R.

A prised of his employment during the previous year, ·
whichever is less:"

Note:-(The two provisos and the two explanations are
omitted as not necessary for the purpose of this case.)
B
Section 40 (A) (5) , which in so far as it is material, is substantially
in the same terms, reads as follows:

"Section 40 (A) -Expenses or payments not deduct-
ible in certain circumstances .
.c
(5) (a) Where the assessee-

(i) incurs any expenditure which results directly or
indirectly in the payment of any salary to an employee
D or a former employee. or
.,·\

· (ii) incurs any expenditure which results directly or
indirectly in the provision of any perquisite (whether
convertible inlO money or not) to an employee or
incurs directly or indirectly any expenditure or is
E
entitled to any allowance in respect of any assets of
the assessee used by an employee either wholly or
partly for his own purposes or benefit,
•
then. suhject to the provisions of clause (b), so much
F of such expenditure or allowance as is in excess t if thl.'
limit specified in respect thereof in clause (c) shall Ill 11
be allowed as a deduction:"

Explanation 2: In this sub-sl.!ction-
·G
(b) "perquisite" means-

(i) rent-free accommodation provided to the em-
ployee hy the assessee;
--
H
(ii) any\.'( mcession in the matter of rent respecting any
C.l.T. BOMBAY. I'. El\OG. & COMMERCIAL. CORPN. (JEEV AN REDDY J.] 91

accommodation provided to the employee by the A
asses see;

(iii) any bendit or amenity granted or provided free of
cost or at concessional rate to the employee by the
assessee;
B
(iv) payment by the assessee of any sum in respect of
any obligation \vhich, hut for such payment. would
have heen payable by the ci.nployee; and

- (v) payment by the asscssec of any sum. whether
directly or through a fund. other ihan a recognised
c

provident fund or an appnwed superannuation fund.
to effect an assurance on the life of the employee or to
effect a contract for an annuity."
D
·Incidentally. Section 40 (A) (.5) which was inserted repealing
section 40(a) (v) has itself been dektcd with effect from April I, 1989
.. by the Direct Tax Laws (Amendment) Act. 1987. The sister provision
contained in sub-clauses (i) and (ii) of clause (c) or section 40.
applicable to directors of a company (and other persons mentioned
therein) has also been dektcd hy the very same enactment with effect E
-. from April I. 1989.

Since the relevant provisions in section 40 (a) (v) and 40 (/\) (5)
arc substantially similar. we shall consider the language employed in
the latter provision. Sub-clause (5) ofscction40(A) is applicable in the F
following situations:

(I) Where the asscssce incurs any expenditure which results
directly or indirectly in the payment of any salary to an employee or
a forma employee or
G

(2) Where the assessee incurs any expenditure which results
dircl·tJy or indirectly in the provision of any perquisite (whether
conyertible into money or not ) to an employee;

< 3) (a) Where the assesscc incurs directly or indirectly any H
92 • SUPRE:-.1E cot:RT REPORTS (I '19~ I 3 S.C.R.

A expenditure or provides an allow;l!lce in respect of any assets or the
assessec used by the employel! either wholly or partly for his own
purpose or benefit;

(h) Where an employee <>fthe asscssee is provided any allowance
("entitled to any allowance") in respect of any assets or lhl! asst:ssec
B
used hy such employt:e either wholly or partly for his own purposes or
henefit.

In either or these situations, so much of such expenditure or
allowance as is in eXCi!SS of the limits specified will not he allowed as
C a deduction. Thc: question is whcth..:r the commission paid 10 i1s
din.:ctors/cmployecs on the saks d'fccted by the asst:sst:e falls within --
any of the situations/clauses mentioned ahove. The Revenut: relies
upon the second one amcing tht:m. According to them. the c< immission
paid is a 'pcrquisik ·. which submission. they say. is home 0111 hy the
words withi!1 the brackets "whelher convcrtihlc into money or not''
D
immediately following the word ··perquisite". On the other hand. the
contention ufthc asscssee which has been accepted hy tht: A.A.C. and

E
the Tribunal is thal such cash payment dPcs not rail wilhin any or the
situations/clauses contemplated by suh-sectiun (5). Having n.:gard to
the language employed in clause (c). we are inclined to agn:e with the
assessee. The language of suh-section (5) is significant. The first two
..
situations, as we have called them. start with the wprds ''\\'hen.: the
asscssec incurs any expenditure which resul1s directly or indi-
rectly .............. ". It is difficult 10 say that payment pf a cc11ai11 cash •
amount hy way of co111missio11 on sales. directly 11 i :111 employee. ca11
F be said to fall within the \\'Ords "where tht: assessce incurs any
expenditure which results directly or indirectly''. Such a payment
cannot also fall within the two sub-clauses of clause (3) - in our .
analysis-sine..: they speak ur an expenditure or allowance in n:spect of
any assets nfthe asscssee used hy the employee. Learned counsel for
the Revenue. Shri Manchanda. argued that the words "whether con-
G vertiblc into money or not" hring out the intention of the Parliament
and support his contention. I le says, then~ is no reason not to include
cash pay1m:nt within the amhit of suh-scction (5) of Section 40 (A). \Ve
arc, however. not concerned with the generality of cash payments but
only with the payment concerned herein. Reading the suh-section as a
H whole and having regard to the language employed therein. the
-"
-
C.l.T.RO'.\WA Y.1·.ENCiG.&COMMERCIAL.CORP:'-1. (JEEVAN REDDY J.] 93

payment concerned herein does not fit into it. A

The employees conccrne·d herein also happen to be directors. The
provision in clause (c) of Section 40 applies to directors among others.
Of course. Section 40 (A) (5) is applicable only to companies where
us Section 40 (A) (5) is applicable to employees whether of companies
B
or others. In the case of directors, who are also employees, both the
pni\'isions will be attracted- the higher of the two ceilings has to be
applied.

The karned counsel for the rcspondent-asscssee brought to our
notice a circular issued by the Central Board of direct Taxes which C
i111er afia says. '"as n:g.ards payment of commission to the employees
the question whether it forms part of salary or perquisite has to be
<.kdded on the facts of each case. If the terms and conditions of service
arc such that cnmmission is paid not as a bounty or benefit but is paid
as part and parcel of the remuneration for the sl:rvice renders by the D
e mph 1yees. such payment partake the ~ature of salary rather than as a
benefit or perquisite. If. however, on terms and conditions of service
l!itht:r there is no obligation for the employer to pay the commission or
it is a matter purely in the discretion of the employer, such payment
should he treated as a benefit hy way of addition to salary rather than
in lieu of sulary." It is not necessary for us to make any comment on E
the said circular.

- For the above reasons. we are of the opinion that the High Court
was justi ried in n:fusing to direct the Tribunal lo state question (I) and
(2) under section 256 (2). F

So far as question No.3 is concerned, it has not bec:n seriously
pressed before us having regard to the smallness of the· amount
involved. It is als() stated that the said question is pending consideration
is a batch of appeals hefore this Court. We do not propose to express G
any upinion on question No. 3 for the reason that the amount involved
is quite small having. regard to the income of the assessee-r:espondent.

ll1c appeals accordingly fail and arc dismissed. No costs.

U.R. Appeal dismissed.