JAI SINGH SEKHON, J. - (1.) THIS judgment will dispose of IT Ref. Nos. 23 to 27 of 1984, as these involve the same factual and legal controversy and arise out of the same order of the Tribunal. The factual matrix of the case contained in the statement of facts is that the assessee company is running a sugar mill. It follows the accounting year ending on 31st August. The assessee company paid to the Yamuna Syndicate Ltd. sole selling agency commission of Rs. 16,97,870 in the asst. yr. 1975 76 and Rs. 20,30,659 in the asst. year 1976 77. The ITO, vide para 1 of the assessment order for 1975 76 after detailed discussion in para 15 of the assessment order for the asst. year 1976 77, noted that Yamuna Syndicate Ltd. was appointed by the assessee company as its sole selling agent up to July, 1975, and thereafter was only a selling agent for sale of sugar, The ITO noted that the said Yamuna Syndicate Ltd. held more than 20per cent of the equity shares of the assessee company and, therefore, the said selling agent was a person who had substantial interest in the assessee company within the meaning of S. 2(32) of the IT Act and thus the expenditure in excess of Rs. 72,000 by the assessee company on payment to the said selling agent was disallowable under S. 40(c) of the IT Act. The ITO was of the view that "person" in S. 2(31) included a company and selling agent being a company was covered by S. 40(c) and that both ss. 40(c) and 40A(2) applied to the present case, but, because of legislative injunction embodied in the proviso to S. 40A (2)(a), only S. 40(c) was applicable according to the ITO. The ITO, accordingly, gave notices to the assessee on this point for both the years and the assessee filed replies dated November 19, 1976, and July 27, 1978, for the asst. years 1975 76 and 1976 77 claiming applicability of S. 40A(2) and not S. 40(c). The ITO, however, rejected the assessee's contentions and added back the commission of Rs. 16,97,870 in the asst. year 1975 76 and Rs. 20,30,639 in the asst. year 1976 177. The CIT (A) deleted the addition by relying upon the decision of the Tribunal, Chandigarh Bench, in order dated April 3, 1975, in IT. A. No. 73 in Avon Cycles (P) Ltd., as well as of the Karnataka High Court in T. T. (P) Ltd. vs. ITO (1979) 8 CTR (Ker) 298 : (1980) 121 ITR 551 (Ker). The Revenue being aggrieved against the order of the CIT went in appeals. Both these appeals were dismissed by the Tribunal in view of the ratio of the decision of this High Court in CIT vs. Avon Cycles (P) Ltd. (1980) 18 CTr (P&H) 231 : (1980) 126 ITR 448 (P&H) and of the Karnataka High Court in T T. (P) Ltd.'s case (supra). The Revenue then filed an application before the Tribunal for making a reference to the High Court, mainly on the ground that in Avon Cycles' case (supra), the selling agent was a partnership firm and it was held that the payment by the manufacturing company to the sole selling agency partnership did not amount to direct or indirect remuneration or benefit to directors and relatives of directors as there was no nexus between the services rendered by the partners of the firm and payment of commission by the company to the firm, whereas, in the case in hand, the payment was made by the manufacturing company to the selling agency company which had a substantial interest in the manufacturing company and, therefore, remuneration or benefit or amenity accrued to a person who had a sub stantial interest in the manufacturing company and thus the case in hand was distinguishable from Avon Cycles' case (supra). The appellate authority then referred the following question for the opinion of this Court: "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that selling agency commission of Rs. 16,97,870 and Rs. 20,30,639 paid by the assessee to Yamuna Syndicate Ltd. was an allowable expenditure for the asst. years 1975 76 and 1976 77 ?" The assessee company also moved reference applications before the appellate authority for these very assessment years, contending that the ITO had allowed 10per cent depreciation on plant and machinery as the chemicals were mixed with sugarcane juice to filter and purify the juice, although the assessee had claimed 15per cent depreciation on account of the corrosive effect of these chemicals. On appeal by the assessee, the CIT (A) allowed 15per cent depreciation on this account, but the Tribunal on appeal by the Revenue, restored the order of the ITO allowing 10per cent depreciation only. The ITO also disallowed Rs. 44,251 out of the staff welfare expenditure on account of refreshments in office work by treating the same as entertainment expenditure. The CIT disallowed Rs. 39,751 out of the same but upheld the disallowance of Rs. 4,500 in the absence of details. Both the Revenue and the assessee came up in appeals before the Tribunal. The Tribunal allowed Rs. 7,119 as expenditure spent on providing refreshments in the meetings of the company's board of directors and general body meetings. On both these counts, the following two questions were referred at the instance of the assessee for the opinion of this Court: " 1, Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that sugar mill machinery was entitled to 10per cent depreciation and not 15per cent depreciation in the asst. years 1975 76 and 1976 77 ?
(2.) WHETHER , on the facts and in the circumstances of the case, the Tribunal was right in holding that the expenditure of Rs. 7,119 for supplying refreshments, etc., in the meetings of the company's board of directors and general body meeting was in the nature of entertainment expenditure for the asst. year 1976 77?" We have heard learned counsel for the parties, besides perusing the order of the Tribunal as well as the statement of facts.
(3.) THE controversy whether the selling agency commission of Rs. 16,97,870 and Rs. 20,30,659 paid by the assessee to Yamuna Syndicate Ltd. was allowable expenditure for the asst. years 1975 76 and 1976 77 is fully settled by the decision of the Division Bench of this Court in Avon Cycles' case (supra). Simply because in Avon Cycles' case, the sole selling agency is a partnership concern while, in the present case, the sole selling agency being a company, it cannot be said that the ratio of the above referred Division Bench judgment is not attracted to the facts of the case in hand, because, in legal terminology, company stands on a better footing and is in itself a corpus juris, whereas a firm does not enjoy that legal status. Under these circumstances, even if the sole selling agency company had substantial interest in the assessee company, it cannot be said that the benefit which they got from the assessee company would fall under S. 40(c)(i) of the Act, because such commission paid to the selling agency company by the assessee company is in lieu of the services rendered by the former in the business activities after incurring some expense and would not amount to payment of remuneration. Under these circumstances, it will make no difference whether the sole selling agency is a firm or a company. Thus, the present case is fully covered by the decision of a Division Bench judgment of this Court in Avon Cycles' case (supra). In that case, the controversy regarding the application of S. 40(c) of the Income tax Act, 1961 (hereinafter referred to as "the Act"), was dealt with as under, as is apparent from the headnote: "Sec. 40(c) will apply only if the expenditure by a company results directly or indirectly in the provision of 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 such other person, as the case may be. Where a company pays commission to a firm as its sole selling agent and the partners of the firm are directors of the company and their relatives there is no nexus between the services rendered by the partners of the firm and the payment of commission by the company to the firm. The firm which takes the responsibility for sale of the products of the company enters into a business activity. The selling agency firm has to incur expenditure on many items for performing the duties entrusted to it under the agreement between the company and the firm. The activity of the firm is in the nature of business. The directors of the company or their relatives who are partners of the firm if they get shares from the profits of the firm get the same as partners of the firm and this money cannot be said to be remuneration paid by the company to the directors or their relatives directly or indirectly. The word 'remuneration', in its ordinary meaning, connotes 'reward, recompense, pay, wages or salary for services rendered'. The commission paid to the firm in lieu of services rendered by the firm in its business activity cannot be said to be payment of reward, recompense, pay, wages or salary for the services rendered by a director or a relative of his. The payment of commission cannot also fall within the ambit of the word 'benefit' used in S. 40(c). The speech of the Finance Minister and the note to S. 40(c) on its amendment in 1972 show that the provision was amended to discourage the payment of high salaries and remuneration to the persons mentioned in the section. There is no indication that the payment of commission made to a firm by a company in discharge of the contractual obligations for the services rendered by the firm in its business activity is to be covered under S. 40(c). The provisions of S. 40(c), as amended in 1972, do not cover payments of commission by a company to a sole selling agency firm, the partners of which are directors of the company or relatives of the directors and the payments cannot be disallowed under S. 40 (c). " ;