D.K. Kapur J.
1. The Department has sought a reference of the following question for the assessment years 1975-76 and 1976-77 :
'Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the commission payment made to the directors of the assessed company was an allowable deduction under section 37 of the I.T. Act, 1961, despite the fact that the payment of commission was not approved by the Government of India, Company Law Board ?'
2. The Tribunal came to the conclusion on the facts that commission was paid to the directors for collecting empty ACC cement bags and selling the same. The total profit made by the company for the two assessment years resulting from this sale was Rs. 4,75,000. The Tribunal held that there was no doubt that the commission was paid by the assessed company to the directors for adequate services rendered by them in furthering the business of the company. It was held that the infringement of the provisions of the Companies Act was no ground for disallowing the deductions under section 37 of the Income-tax Act, 1961. In this respect, two decisions of the Madras High Court in CIT v. Ramakrishna Mills (Coimbatore) Ltd. : 93ITR49(Mad) and CIT v. Sree Rajendra Mills Ltd. : 93ITR122(Mad) were followed. The very fact that this point had been referred to the Madras High Court in the above two cases would go to show that a question of law did arise. In opposing the reference, learned counsel for the respondent has submitted a number of points based on the fact that the question of law had already been decided by the Madras High Court and was also covered directly or indirectly by a certain Supreme Court judgment to which he referred. No doubt, these submissions have force. However, there is no direct judgment of the Supreme Court on the point and there is no judgment of this court and so these submissions are no sufficient to hold that the reference can be disallowed.
3. Some other submissions made by him appear to have some greater force. Firstly, it was submitted that the approval of the Company Law Board had been applied for regarding payment of the commission, and the permission had not been granted or rejected by the time the accounts were completed; hence, the entry had to be made in the accounts, which were maintained on the mercantile system of accounting. It was submitted on instructions that later on some refund had been made in accordance with the decision of the Company Law Board and the same had been taxed in the year of refund. It was accordingly stated that the expenditure was incurred in this year as a legitimate expenditure and the amount returned later was subjected to tax in the proper year. It was pointed out that this was the situation also in the case decided by the Madras High Court in CIT v. Sree Rajendra Mills Ltd. : 93ITR122(Mad) just referred to. The learned counsel referred to a passage at page 126 of the Report which reads as follows :
'The amount has really been paid out by the company to the said person. It is true that the provision in section 163 of the Companies Act makes him a trustee in respect of that amount, but as and when the amount is recovered from him on the basis of section 363, the Revenue can invoke section 10 and proceed to treat the amounts recovered as income of the company. As a matter of the fact, in this case, the said amounts have been recovered from Chockalingam Chettiar under section 363 by the company and those amounts have also been taxed by the revenue under section 10(2A) in the years in which they have been recovered. We are not inclined to agree with contention of the Revenue that as Chockalingam Chettiar becomes a trustee for the amounts received by him by virtue of section 363 of the Companies Act, it has to be taken that there is no expenditure in this case, and it is only by virtue of section 363 of the Companies Act that the amounts are liable to be recorded from the person concerned.'
4. This passage is appropriate to the situation in the present case. As the commission was paid to the directors, and this is the finding of the Tribunal, in case it is returnable, because of the lack of approval by the Company Law Board, it has to be taxed in the year in which it is returned as a revenue receipt. It is, thereforee, submitted by the learned counsel that no question of law arises on the facts of this case. No doubt, learned counsel has a strong point out, if there was no other question involved in this case, we would still be inclined to call for a reference as the facts could be ascertained by reference to subsequent developments.
5. It is the last submission made by the learned counsel for the respondent that has the greatest force. It was submitted that the tax authorities in this case had not determined as a fact as to what was the excess, if any, under the Companies Act. It was further submitted that no reference could be asked for regarding the question reproduced earlier. This is a question of the utmost importance. Normally, a reference has to be asked for on the basis of the record before the court. We find that the submission of the learned counsel is borne out from the facts on record. For this purpose, we have examined the case in some greater detail. According to the assessment order, the commission paid to the three directors in the accounting period corresponding to the assessment year 1974-75 was Rs. 62,491, in which year it seems to have been allowed as a deduction. In the assessment year 1975-76, the amount was Rs. 80,090 and in 1976-77, it was Rs. 1,31,877. In the assessment order, the Income-tax Officer disallowed the whole amount on the ground that approval was required from the Central Government under section 198(2A) of the Companies Act, 1956. Learned counsel for the assessed submits that section 198(2A) does not state that the whole amount has to be disallowed and actually the Income-tax Officer should have determined what was the amount to be disallowed, if any. It is submitted that in the absence of any such determination, the Commissioner of Income-tax (Appeals) merely stated that the addition was in order, as the deductions were not in accordance with the Companies Act. However, when the matter went to the Tribunal, the Tribunal held that the deductions were to be permitted. None of the authorities determined what was the actual amount which was to be permitted and which amount had not to be permitted.
6. On an examination of the Companies Act, it would appear that the total managerial, i.e., maximum managerial remuneration, is fixed by section 198 at eleven per cent. of the net profit. Leaving aside the question whether the commission on the business of AAC cement empty bags can be deemed to be managerial remuneration, it would appear that the Income-tax Officer had to determine the amount of commission that was permissible under section 198.
7. However, the reference to section 198(2A) in the assessment order is incorrect as there is no such provision. Learned counsel for the Department urged that the reference to section 198 by the Income-tax Officer was wrong and the relevant section was section 309. This section provides that the remuneration of the directors of the company is to be determined in accordance with and subject to the provisions of section 198 and section 309 read with the articles of the company or a resolution of the company. This section provides that the services rendered by a director in any other capacity is to be included in the limit, but in other services are provided in some other capacity, they may not be included if the services provided in some other capacity, they may not be included if the services are of a professional nature or the director possesses the requisite qualifications. Sub-section (4) of section 309 states the limit regarding the commission that is payable to a director. The relevant sub-section as far as the present case is concerned is section 309(5A). It reads :
'If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section or without the prior sanction of the Central Government, where it is required, he shall refund such sums to the company and until such sum is refunded, hold it in trust for the company.'
8. A noteworthy feature of this provision is that the excess above the prescribed limit is to be held in trust. Learned counsel for the Department submitted that there was no prior sanction of the Central Government. But, the provision shows that this prior sanction is necessary only when it is required and it clearly appears to us that the Income-tax Officer has not examined the correct provisions of law when deciding to add back the entire commission paid to the directors in the present case. In fact, the Income-tax Officer seems to have looked at some other provision and thought that the entire commission had to be added back. It, thereforee, appears to us that if we call for a reference in this particular case, we will be unable to answer it because we will not be able to determine what is the excess involved under section 309(5A) of the Act which is to be held in trust.
9. It may be that the entire commission is in excess but section 309 is quite a complex section. The legal position appears to be as follows. The total remuneration payable to all the directors taken together cannot exceed eleven per cent. of the net profits. The method for determining this would be to determine the net profits and then find the maximum remuneration. It is only the excess amount that can be added back and not the entire amount. It is thus only the excess above eleven per cent. which is to be added back, in case the approval of the Company Law Board is not granted.
10. Learned counsel for the Department submitted that if we call for the question and answer it, the Department can work out the excess for the purpose of working out the method by which our answer is to be given effect to. But, we think, this cannot be done for the simple reason that this will enable the Income-tax Officer's order to be revised or reviewed which is not possible at this stage. It was the duty of the Income-tax Officer to have worked out the excess and added back only the excess amount. Only then could be the facts have given rise to the proper question which would be as to whether the excess over and above the permissible managerial remuneration fixed by section 198 of the Companies Act, paid without approval of the Central Government, is to be permitted as a deduction or is to be disallowed.
11. As this question does not arise on the present facts, we have to decline to call for a reference. The application is accordingly dismissed leaving the parties to bear their own costs.