1. The facts are in a narrow compass. Shri R.V. Ramani, a well qualified engineer, is the managing director of the assessee-company since its inception. He is entitled to a salary of Rs. 5,000 per month plus commission at the rate of 1 per cent of the net profits of the company, subject to the ceiling of Rs. 30,000 per annum and other perquisites, such as, company's contribution to provident fund, reimbursement of actual medical expenses, subject to the ceiling of Rs. 5,000 and rent-free residential accommodation in terms of special resolution passed by the company at its extraordinary general meeting held on 18-2-1970 and the approval by the Company Law Board vide order dated 18-4-1970 as amended by its letter dated 17-8-1970.
The break-up of the remuneration to Shri Ramani for the year is : Rs. 2. The ITO has considered that out of the aforesaid amount of Rs. 1,08,290 the contribution by the assessee-company of Rs. 4,800 towards provident fund required to be excluded. Out of the remaining amount of Rs. 1,03,490, he has disallowed a sum of Rs. 31,490 under Section 40(c)/40A(5), being the amount of expenditure in excess of the ceiling of Rs. 72,000. The disallowance was challenged before the AAC who has, for the reasons stated in para 5 of his order, confirmed the disallowance.
3. It is pertinent that a similar issue had come up for consideration before a Bombay Bench of the ITAT in the case of S.B. Ltd. [IT Appeal No. 317 (Bom.) of 1979 decided on 23-1-1980]. When this appeal was called out for hearing originally before a Division Bench, the said order of the Tribunal was relied upon but the Members of the Division Bench felt that the said decision required reconsideration. Reference was made to the President for constituting a Special Bench. It is in these circumstances that the President constituted a Special Bench and the appeal has come up for hearing before the Special Bench.
4. Strongly relying on the aforesaid Tribunal's decision, Shri C.V.Mahalingam, the learned counsel for the assessee, has reiterated that the word 'commission' wherever the Legislature intended to rope in, has been expressly used and that was evident from the fact that in the just preceding clause, i.e., Clause (b), the word 'commission' has been specifically used in addition to the words 'interest, salary, bonus, remuneration, etc.'. However, the word 'commission' is conspicuously absent in Section 40(c)(i). According to the learned counsel this could not be without significance. It could only mean that the Legislature did not intend to consider commission as a part of the remuneration for the purpose of computing the disallowance under Section 40(c). The departmental representative has, on the other hand, submitted that the purpose and scope of Clauses (b) and (c) of Section 40 are different.
They deal with different situations. Remuneration always includes anything that is paid as a recompense for services and, in any event, in this the company's Special Resolution clearly shows it. He also contended that such a ground did not arise out of the order of the AAC.5. We have considered the rival contentions. It is found that the assessee has challenged the disallowance of Rs. 31,490 before the AAC who has dealt with the ground in para 5 of his order as already mentioned by us in para 2 supra. It is true that the argument advanced before us has not been dealt with by the AAC as such. However, this does not mean that the dispute was not there before him. In the circumstances, we proceed on the basis that it is available to the assessee to contend the inclusion of commission amounting to Rs. 30,000 in the remuneration of Shri Ramani for the purpose of computing the disallowance under Section 40(c)/40A(5).
6. For merits, we consider it desirable to refer to the provisions of Section 40(b) and 40(c) which are as under: 40. Notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head 'Profits and gains of business or profession,'- (b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm ; (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, It is evident from the above provisions that their purport and scope are different. For instance, while Clause (b) applies in the case of a 'firm' Clause (c) applies in the case of a 'company'. While Clause (b) contemplates disallowances out of payments of certain types by the firm to its partners, Clause (c) contemplates disallowances out of expenses incurred by the company if the expenditure has resulted directly or indirectly in the provision of any remuneration, or benefit or amenity to the director or to a person, etc. It is pertinent that a person becomes a partner in a firm essentially for sharing the profits of the firm and interest, salary, bonus, commission, etc., are towards his share of profit. On the other hand, a director or an employee in a limited company gets nothing but remuneration as a recompense for the services rendered by him to the company as a director or an employee, except that in some cases he may be entitled to some other benefits or amenities also in that capacity. In the premises, the rent-free accommodation provided by a firm to a partner or the rent paid by the firm to a partner in respect of the partner's premises taken by the firm on rent does not fall within the provisions of Section 40(6) as while in the former case there is no payment, in the latter the payment is not of the type specifically mentioned in that Section. In the case of a company, however, such item of expenditure or payment would also come for consideration subject to the other conditions as the first condition for applying Section 40(c) is incurring of the expenditure and not any payment of it. Accordingly, we accept the submission made on behalf of the departmental representative that the purpose and scope of Clauses (b) and (c) of Section 40 are different and the word 'remuneration' used in Clause (c) need not take its colour from the same expression used in Clause (b).
7. That apart, it has to be noted that Clause (b) not only uses the word 'commission' but also uses the word 'salary' in addition to remuneration. However, it is not even suggested by the assessee's counsel that because of the specific use of the expression 'salary' in Clause (b) and omission of it in Clause (c), Clause (c) should not include the salary also. In fact, the salary and commission paid to Shri Ramani, managing director, in the assessee's case are nothing but a part of the remuneration for the services rendered by him as the managing director of the company. This will be quite evident from the manner in which the resolution was passed authorising such payment of remuneration. The resolution reads as under: (2) Commission : A commission of 1 per cent of the net profit of the company computed as per Section 309(5) of the Companies Act, subject to a ceiling of Rs. 30,000 per annum, plus (3) Perquisites : (a) Company's contribution to Provident Fund at rates as per the company's Provident Fund Rules calculated on the basis of the above salary.
(b) Actual medical expenses incurred by him for himself, his wife and minor children subject to a ceiling of Rs. 5,000 per annum.
(c) Provision of rent-free furnished residential accommodation or house rent allowance not exceeding Rs. 9,000 per annum or in case he is occupying a bungalow of his own, maintenance assistance of Rs. 9,000 per annum.
(d) Use of the company's car with driver for official and personal purposes, personal use not exceeding the monetary value of Rs. 3,000 per annum.
(e) Gratuity as admissible under the company's rules calculated on the basis of the above salary.
(f) Personal accident insurance consisting not more than Rs. 1,150 per annum.
The above remuneration is payable to him in addition to the usual sitting fees receivable by him for attending Board or Committee Meeting.
In the circumstances, we uphold the order of the AAC that the entire amount paid to the managing director by the assessee is remuneration out of which disallowance has and can be made under Section 40(c).
8. That apart on a careful examination of the provisions of Section 40(c), it appears to us that Section 40(c) has two important limbs, namely : 2. Such an expenditure must have resulted directly or indirectly in the provision of any remuneration, benefit or amenity to a director, etc.
In response to a query from the Bench, it must be said in fairness to the assessee's learned counsel that he admitted that the payment of commission represented an expenditure incurred by the assessee-company and that such expenditure has resulted in the provision of a benefit to the managing director, if not, remuneration. Once both the conditions are satisfied, we have no hesitation to hold that the provisions of Section 40(c) are attracted in this case and that there being no other argument advanced, the disallowance maintained by the AAC at Rs. 31,490 is justified.
9. It may be observed that a similar issue had indirectly come up for consideration before a Special Bench of the Tribunal at Bombay in the case of ITO v. Sapt Textile Products India Ltd.  7 Taxman 40. The question involved was whether the gratuity paid to an employee-director was to be taken into account for the purpose of computing disallowance under Section 40(c). By its order dated 20-4-1981, the Special Bench held that all payments made by a company as recompense for services to an employee-director were covered by the expression 'remuneration' as used in Section 40(c) and were, in any event, caught within the mischief of Section 40(c). We, respectfully, adopt the line of reasoning given by the aforesaid Special Bench in coming to its conclusion in addition to the reasons we have given hereinabove.