Tractor Engineers Ltd. Vs. First Income-tax Officer - Court Judgment

Excerpt:
2. the assessee is a company carrying on business of manufacturing trailer tract parts of the tractors. the assessee paid rs. 1,20,761 to larsen & toubro ltd., which was holding company in relation to the assessee-company. on 12-2-1971 the board of directors of larsen & toubro ltd. passed a resolution in which it was observed that the said company had substantial interest in the assessee-company. it was resolved that the three directors of larsen & toubro ltd., viz., mr. h.holck-larsen, mr. n.m. desai and mr. gunnar hansen would serve as members of the committee as directors of the assessee-company and that the remuneration payable to them (exclusive of sitting fees as members of the committee) would be held by them in trust for the company (l & t) and shall be made over.....

Judgment:
2. The assessee is a company carrying on business of manufacturing trailer tract parts of the tractors. The assessee paid Rs. 1,20,761 to Larsen & Toubro Ltd., which was holding company in relation to the assessee-company. On 12-2-1971 the board of directors of Larsen & Toubro Ltd. passed a resolution in which it was observed that the said company had substantial interest in the assessee-company. It was resolved that the three directors of Larsen & Toubro Ltd., viz., Mr. H.Holck-Larsen, Mr. N.M. Desai and Mr. Gunnar Hansen would serve as members of the committee as directors of the assessee-company and that the remuneration payable to them (exclusive of sitting fees as members of the committee) would be held by them in trust for the company (L & T) and shall be made over by them to the said company. Those three directors acted as trustees of Larsen & Toubro Ltd., and received Rs. 1,20,761 as commission from the assessee-company in the capacity of such trustees. In fact cheque for that amount had been given direct to Larsen & Toubro Ltd. by the assessee-company. The stand of the assessee throughout this proceeding is that the said amount has been paid by the assessee-company to Larsen & Toubro Ltd., who admittedly came in the category of 'person who has substantial interest in the company', as defined in Section 2(32) of the Income-tax Act, 1961 ('the Act'). The ITO held that provisions of Section 40(c) of the Act, which are as under : Notwithstanding anything to the contrary in Sections 30 to 39, the following amount shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession',- (i) any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case may be, would apply. He applied the limit of Rs. 72,000 for allowance under the said provision and disallowed the balance of Rs. 48,761.

3. Against the said order, the assessee filed appeal before the Commissioner (Appeals). The Commissioner (Appeals) held that Larsen & Toubro Ltd. came within the category of 'person who has substantial interest in the company' and, as such, provisions of Section 40(c)(i) were applicable. He, accordingly, confirmed the disallowance under the said provision made by the ITO. The assessee has now come in appeal before us against confirmation of the said disallowance.

4. The contention of the assessee before us is that the words 'person who has substantial interest in the company' in Section 40(c)(i) refers to a living person and not to an incorporated company. This, according to the assessee, is because of the fact that in the last part of Sub-clause (i) of Section 40(c), there is reference to 'relative of such person'. According to the assessee, only a living person could have a relative ; a company could not have a relative. Accordingly, the assessee-company was excluded from the category of 'person who has substantial interest in the company' in Section 40(c)(i). According to the assessee no disallowance could be made under the said provision.

The learned departmental representative has relied on definition given in Section 2(32) and contended that the company would be included in the expression 'person who has substantial interest in the company'.

5. We have considered the rival submissions. We find that the expression 'person who has substantial interest in the company' has been specifically denned in Section 2(52). According to that definition such person in relation to a company means 'person' who is beneficial owner of shares carrying not less than 20 per cent of the voting power.

The word 'person' has been denned in Section 2(31) as including (i) an individual, (ii) HUF, (iii) a company, (iv) a firm, (v) an AOP or BOI, and (vi) a local authority and every artificial juridical person not falling within any of the preceding sub-clauses. When we read definition of 'person' in Section 2(31) in conjunction with definition of expression 'person who has substantial interest in the company' in Section 2(52), there is no doubt that a company is included in the latter expression. The context does not require that the said definition in Section 2(52), read with Section 2(57) should not be applied while construing the said expression as occurring in Section 40(c)(i). The expression 'relative of such person' in Section 40(c)(i) on which emphasis is laid on behalf of the assessee, has been used with a view to extend the operation of the provision regarding disallowance pertaining to expenditure resulting in the provision of remuneration or benefit or amenity to relatives of a living person who has substantial interest in the company and not for restricting the expression 'person having substantial interest in the company' to living individuals only by excluding company, firm, HUF, AOP, local body, etc. Larseti & Toubro Ltd. is holding company in relation to the assessee-company and, as such, it comes in the category of 'person who has substantial interest in the company' (assessee-company) with the result that provisions of Section 40(c)(i) would be applicable. We, therefore, reject the submission of the assessee on this point.

6. Before parting with this matter, we may point out that the learned representative of the assessee had referred to the order of the Bench 'D' of the Tribunal at Bombay dated 24-9-1980 in IT Appeal No. 1143 (Born.) of 1979. Perusal of the said decision indicates that the said Bench of the Tribunal had differed from the view taken by another Bench of the Tribunal in the case of Filtrona India Ltd. [IT Appeal Nos. 53 to 55 (Bom.) of 1977-78 dated 7-4-1978]. Thus, it is obvious that there is difference of opinion amongst two Benches of the Tribunal. We have already given our reasons for the view which we have taken. We do not find it necessary to discuss further the decision in IT Appeal No. 1143 (Bom.) of 1979. We may mention that in that case reference was made to another decision of the Tribunal in IT Appeal No. 73 (Bom.) of 1975-76 wherein it had been held that commission paid on account of sole selling agency would not attract provisions of Section 40(c). The Tribunal in that case followed the said decision and on that basis also it was held that Section 40(c) was not applicable. Besides, the Tribunal further observed that since the amount paid was not excessive, Section 40(c)(i) would not apply. Thus, provisions of Section 40(c)(i) were held to be not applicable on account of several reasons and not solely on the ground that the company did not come in the category of 'person who has substantial interest in the company'. The view expressed on this aspect must be regarded as obiter. In any case we have given our reasons and for those reasons, we hold that disallowance under Section 40(c)(i) was justified.

7. The issue which we have discussed was the subject-matter to ground No. 3 in memo of appeal. Ground Nos. 1 and 2 were not pressed by the learned representative of the assessee at the time of hearing of this appeal before us.