Sekhon, J.@mdashThis judgment will dispose of income tax Reference 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 accounting year ending on 31st August. The assessee-company paid to Yamuna Syndicate Ltd., sole selling agency, commission of Rs. 16,97,870 in the assessment year 1975-76 and Rs. 20,30,659 in the assessment 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 assessment year 1976-77 noted that Yamuna Syndicate Ltd. was appointed by the assessee-company as 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 20 per cent of the equity shares of the assessee-company and, therefore, the said selling agent was a person which had substantial interest in the assessee-company within the meaning of section 2(32) of the income tax Act, 1961 (''the Act'') and thus, the expenditure in excess of Rs. 72,000 by the assessee-company on payment to the said selling agent was disallowable u/s 40(c) of the Act. The ITO was of the view that ''person'' in section 2(31) included a company and selling agent being a company was covered by section 40(c) and that both sections 40(c) and 40A(2) of the Act applied to the present case, but because of legislative injunction embodied in the proviso to section 40A(2)(a), only section 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 19-11-1976 and 27-7-1978 for the assessment years 1975-76 and 1976-77 claiming applicability of section 40A(2) and not section 40(c). The ITO, however, rejected the assessee''s contentions and added back the commission of Rs. 16,97,870 in the assessment year 1975-76 and Rs. 20,30,639 in the assessment year 1976-77. The Commissioner (Appeals) deleted the addition by relying upon the decision of the Tribunal, Chandigarh Bench in Avon Cycles (P.) Ltd. [IT Appeal No. 73 of 1975, dated 3-4-1975] as well as of the Karnataka High Court in
"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 assessment years 1975-76 and 1976-77?"
2. The assessee-company also moved reference applications before the appellate authority for these very assessment years contending that the ITO had allowed 10 per 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 15 per cent depreciation on account of the corrosive effect of these chemicals. On appeal by the assessee, the Commissioner allowed 15 per cent depreciation on this account, but the Tribunal on appeal by the revenue, restored the order of the ITO allowing 10 per 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 Commissioner 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 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 10 percent depreciation and not 15 per cent depreciation in assessment 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 assessment year 1976-77?"
3. We have heard the learned counsel for the parties, besides perusing the order of the Tribunal as well as the statement of facts.
4. 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 assessment years 1975-76 and 1976-77, is fully settled by the decision of the Division Bench of this Court in Avon Cycles (P.) Ltd.''s case (supra). Simply because Avon Cycles (P.) Ltd.''s case (supra) is the sole selling agency being 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 the legal terminology a 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 u/s 40(c)(i), because such commission paid to the selling agency company by the assessee-company in lieu of the services rendered by the former in the business activities after incurring some expense, 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 the Division Bench judgment of this Court in Avon Cycles (P.) Ltd.''s case (supra). In that case, the controversy regarding the application of section 40(c) was dealt as under, as is apparent from the head note:
"Section 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 agent 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 section 40(c). The speech of the Finance Minister and the note to section 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 u/s 40(c). The provisions of section 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 u/s 40(c)." (p. 449)
Thus, the question at the instance of the revenue is answered in the affirmative, i.e., in favour of the assessee.
5. The controversy whether the assessee''s Sugar Mill company is entitled to 10 per cent depreciation on machinery and not 15 per cent depreciation on account of corrosive effect of the chemicals on the metal machinery also stands fully settled by the decision of the Division Bench of this Court in
"As noticed above, the Tribunal allowed depreciation at the rate of 15 per cent because it was of the view that the term ''corrosive chemicals'' would cover not only free chemicals but also non-free chemicals. To elucidate this view, the learned counsel for the assessee argued that sugarcane juice, which comes into contact with the machinery, contains lime and sulphuric acid, which are corrosive chemicals and the fact that they were mixed with sugarcane juice would be of no consequence. We are unable to subscribe to this view. Lime and sulphuric acid are mixed with the sugarcane juice to filter and purify the juice but by their mixture, the juice itself is not converted into a chemical.
According to Webster''s Dictionary, the word ''chemical'', when used as noun, means a substance, as an acid, alkali, salt, synthetic, organic compound, obtained by a chemical process prepared for use in a chemical manufacture or used for producing a chemical effect. It is obvious from the dictionary meaning of the word ''chemical'' that the sugarcane juice cannot be covered by this term simply because some acid has been mixed with it for its filtration. Moreover, the acid and the lime is mixed in the sugarcane juice for the purpose of its filtration and once the chemical reaction has been caused, most of its effect would be lost and whatever remains, settles down along with the sediments at the bottom. Thereafter, the filtered sugarcane juice which comes into contact with the machines before it is converted into crystallised sugar cannot be said to be a corrosive chemical by any stretch of reasoning." (p. 760)
Thus, this question is answered in the affirmative, i.e., in favour of the revenue.
The controversy whether the Tribunal had rightly allowed an expenditure of Rs. 7,119 for supplying refreshments, etc., in the meetings of the Company''s Board of Directors and General Body meetings, also stands settled by the decision of this Court in CIT v. Haryana Financial Corpn. Ltd. 1989 Tax LR 611. In that case, it was held that the expenditure incurred by the assessee on the refreshment of the customers or its directors, even during the course of business would be covered as expenditure u/s 37(2A) and would be allowable except to the extent permissible by that provision. Thus, this question is also answered in the affirmative, i.e., in favour of the revenue.
