FILTRONA INDIA LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) BY this reference under section 256(1) of the Income -Tax Act, 1961 ('the Act'), made at the instance of the assessee the Income -tax Appellate Tribunal has referred the following question of law to this court for opinion :

(2.) THE assessee, Messrs. Filtrona India Ltd., is a limited company and belongs to the Killick Nixon Group of companies. This reference pertains to the assessment years 1973 -74, 1974 -75, and 1975 -76. In the relevant previous years, the assessee paid a remuneration of Rs. 2,00,000 per year to Messrs. Killick Nixon Ltd., for working as its secretaries. Messrs. Killick Nixon Ltd. held more than 20% of the equity shares of the assessee -company during those previous years, and, as such, it was a person having substantial interest in the company within the meaning of section 2(32) of the Act. The above amount was claimed as deduction by the assessee in computation of its income for all the three assessment years. The claim was allowed by the Income -Tax Officer. However, later the Commissioner of Income -tax, in exercise of his powers of suo motu revision under section 263 of the said Act, set aside the order of the Income -tax Officer so far as it related to the allowance of the above claim and directed the Income -tax Officer to restrict the claim on that account to Rs. 72,000 for each year as contemplated by section 40(c) of the Act. Before the Commissioner it cases where the recipient of the remuneration was an individual and not where it is a corporate body. This contention of the assessee did nit find favour with the Commissioners who was of the opinion that the expression 'a person who has a substantial interest in the company' in section 40(c) cannot be interpreted in a restrictive manner to confine it to individuals only, more so in the light of the definition of the expression of 'person' given in section 2(31) of the Act. The assessee appealed to the Tribunal. Before the Tribunal also the contention of the assessee was the same as before the Commissioner that section 40(c) of the Act applies only where the recipient is an individual 'capable of being an employee'. It was contended by the assessee before the Tribunal that as a company can neither have a relative nor is it capable of being an employee, it cannot fall within the purview of section 40(c) of the Act and, as such, any payment made to the company will not attract the ceiling put by the section even through it may be a person substantially interested in the assessee. It was of the opinion that section 40(c) was wide enough to take within its sweep all types of persons including company and that the person referred to in section 40(c) was not restricted to individuals. The Tribunal, therefore, dismissed the appeal of the assessee and confirmed the order of the Commissioner. Aggrieved by the order of the Tribunal, the assessee sought for reference to this court under section 256(1) of the Act and the Tribunal, on being satisfied that a question of law did arise, has referred the above question to this court.

(3.) FROM a reading of section 40(c), it is clear that it applies to an expenditure which results directly or indirectly in the provision of remuneration or benefit or amenity to the following categories of persons :