Appeal Nos
1583  1584 NT of 1977
From the Judgment and Order dated 22111976 of the Bombay High Court in IT Application No 191 of 1976
SC Manchanda Dr KP Bhatnager C Ramesh TV Ratham for P Parmeswaran for the Appellant
Mrs AK Verma SV Pathak for JBD  Co for the Respondent
The judgment of the Court was delivered by BP JEEVAN REDDY J
These appeals are preferred by the Revenue against an order of the Bombay High Court rejecting an application under section 256 2 of the Income Tax Act By means of the said application the Revenue sought to raise the following three questions  1 Whether on the fact and in the circumstances of the case the Tribunal was right in holding that the commission paid by the assessee company to its directors was an additional remuneration forming part and parcel of the salary allowed to them and that the said remuneration would not be covered by section 40 a v of the Income tax Act and thereby allowing the assessee s claim for allowing the deduction of the whole amount of commission paid to the directors  iiWhether the Tribunal was right in their view that the words Whether convertible into money or not used in section 40 a v of the Act postulated that the 88 benefit amenity or perquisite mentioned therein covers benefit amenity or perquisite allowed in Kind but not in cash iiiWhether the Tribunal was right in holding that the expenditure of Rs 19386 for the assessment year 1971 72 and Rs 29283 for the assessment year 197273 did not represent entertainment expenditure within the meaning of section 37 ii of the Income tax Act  The assessment years concerned here in are 1971 72 and 1972 73
The first two questions go together
The provision applicable for the AY 1971 72 was Section 40 a v whereas for the A Y 1972 73 the provision applicable is Section 40 a 5 which is a successor provision to Section 40 a v
The respondent is a private limited company trading in tractors and earth moving equipment
During the accounting years relevant to the aforesaid assessment years the assessee paid to three of its Directors commission on sales in addition to salary as follows Assessment Director Salary Commission year 1971 72 Sh
SB Lal 39000 36171 Sh
SB Mathur 18000 36171 Sh
AB Mathur 7800 36171 1972 73 Sh
SB Lal 39000 40792 Sh
SB Mathur 18000 40792 Sh
AB Mathur 7800 40792 The commission  in the above table means the commission paid to the said Directors on the sales effected by the assessee at a prescribed percentage
The Income Tax Officer treated the commission on sales as perquisites and disallowed the same applying Section 40 a v for the year 1971 72 and Section 40 A 5 for the assessment year 1972 73
fie also disallowed the expenses referred to 89 in question No iii as entertainment expenses
On appeal the Assistant Appellate Commissioner held that the commission on sales cannot he treated as perquisites
He also held that the expenditure on dinner and tea cannot be characterised as entertainment expenditure and ought not to have been disallowed
The Revenue preferred appeals before the Tribunal against the orders of the AAC which appeals were dismissed by the Tribunal following its order dated August 25 1973 relating to assessment years 1967 68 to 1968 70
The order dated August 25 1973 dealt anter alia with the questions arising herein ind held the same against the Revenue
An application under section 256 1 was dismissed by the Tribunal
The first question urged before us which was also the question urged before the Tribunal is whether commission on sales paid in cash falls within the fourcornersot Section40 a vSection40A 5 It Would be appropriate to set out the said provisions in so far as they are relevant  Section 40 Amounts not deductible Notwith standing anytime to the contrary in section 30 to 38 the following amounts shall not be deducted in computing the income chargeable under the head Profits and gains of business or profession a in the case of any assessee    v any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite
whether convertible into money or not to an employee including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee or any expenditure or allowance in respect of any assets of the assessee used by such employee either wholly or partly for his own purpose or benefit to the extent such expenditure or allowance exceeds one fifth of the amount of salary payable to the employee
or an amount calculated at the rate of one thousand rupees for each month or part thereof com 90 prised of his employment during the previous year whichever is less Note The two provisos and the two explanations are omitted as not necessary for the purpose of this case
 Section 40 A 5 which in so far as it is material is substantially in the same terms reads as follows Section 40 A Expenses or payments not deductible in certain circumstances
5 a Where the assessee i incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee
or ii incurs any expenditure which results directly or indirectly in the provision of any perquisite whether convertible into money or not to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit
then subject to the provisions of clause b so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in clause c shall not be allowed as a deduction Explanation 2 In this sub section b perquisite means i rent free accommodation provided to the em ployee by the assessee ii anv concession in the matter of rent respecting any 91 accommodation provided to the employee by the assessee iiiany benefit or amenity granted or provided free of cost or at concessional rate to the employee by the assessee ivpayment by the assessee of any sum in respect of any obligation which but for such payment would have been payable by the employee
and v payment by the assessee of any sum whether directly or through a fund
other than a recognised provident fund or an approved superannuation fund
to effect an assurance on the life of the employee or to effect a contract for in annuity
 Incidentally Section 40 A 5 which was inserted repealing section 10 a v his itself been deleted with effect from April 1 1989 by the Direct Tax Laws Amendment Act 1987
The sister provision contained in sub clauses i and ii of clause c of  section 40
applicable to directors of a company and other persons mentioned therein has also been deleted by the very same enactment with effect from April 1 1989
Since the relevant provisions in section 40 a v and 40 A 5 are substantially similar
we smile consider the language employed in the latter provision
Sub clause 5 of section 40 A is applicable in the following Situations 1 Where the assessee incurs any expenditure which results directed or indirectly in the payment of any salary to in employee or it former employee or 2 Where the assessee incurs any expenditure which results directly or indirectly in the provision of  any perquisite whether convertible into money or not to an employee 3 it Where the assessee incurs directly or indirectly any 92 expenditure or provides an allowance in respect of any assets of the assessee used by the employee either wholly or partly for his own purpose or benefit bWhere an employee of the assessee is provided any allowance entitled to any allowance in respect of any assets of the assessee used by such employee either wholly or partly for his own purposes or benefit
In either of these situations so much of such expenditure or allowance as is in excess of the limits specified will not be allowed as a deduction
The question is whether the commission paid to its directorsemployees on the sales effected by the assessee falls within any of the situationsclauses mentioned above
The Revenue relies upon the second one among them
According to them the commission paid is a perquisite
which submission they say is borne out by the words within the brackets  whether convertible into money or not immediately following the word perquisite
On the other hand the contention of the assesses which his been accepted by the AAC and situationsclauses contemplated by sub section 5
Having regard to the language employed in clause c we are inclined to agree with the assessee
The language of sub section 5 is significant
The first two situations as we have called them start with the words where the assessee incurs any expenditure which results directly or indirectly   It is difficult to say that payment of a certain cash amount by wayof commission on sales directly to an employee can be said to fall within the words where the assessee incurs any expenditure which results directly or indirectly
Such a payment cannot also fall within the two sub clauses of clause 3 in our analysis since they speak of an expenditure or allowance in respect of  any assents of the assesee used by the employee
Learned counsel for the Revenue
Shri Manchanda argued that the words whether convertible into money or not bring out the intention of the Parliament and support his contention
He says there is no reason not to include cash payment within the ambit of sub section5 to Section 40 A
We are however
not concerned with the generality of cash payments but only with the payment concerned herein
Reading the Sub section as a whole and having regard to the language employed therein the the Tribunal is that Such cash payment does not fall within any of the 93 payment concerned herein does not fit into it
The employees concerned herein also happen to be directors
The provision in clause c of Section 40 applies to directors among others
Of course
Section 40 A 5 is applicable only to companies where as Section 40 A 5 is applicable to employees whether of companies or others
In the case of directors who are also employees both the provisions will be attracted the higher of the two ceilings has to be applied
The learned counsel for the respondent assessee brought to our notice it circular issued by the Central Board of direct Taxes which inter alia say
its read is payment of commission to the employees the question whether it forms part of salary or perquisite has to he decided on the acts of each case
If the terms and conditions of service are such that commission is paid not as a bounty or benefit but is paid is part and parcel of the remuneration for the service renders by the employees
such payment partake the nature of salary rather than as a benefit or perquisite
If however on terms and conditions of service either there is no obligation for the employer to pay the commission or it is a matter purely in the discretion of the employer such payment should he treated is a benefit by way of addition to salary rattler thin in lieu of salary
 It is not necessary for us to make any comment on the said circular
For the above reasons
we are of the opinion that the High Court was justified refusing to direct the Tribunal to state question 1 and 2 under section 256 2
So far its question No3 is concerned it his not been seriously pressed before us having regard to the smallness of the amount involved
It is also stated that the said question is pending consideration is a batch of appeals before this Court
We do not propose to express any opinion on question No 3 for the reason that the amount involved is quite small having regard to the income of the assessee respondent
The appeals accordingly fail and are dismissed
No costs
Appeal dismissed


Summary:
On 2851984 the High Court intimated the government of ten vacancies in the category of Munsifs and requested it to initiate appropriate steps for selection of candidates
Written test was held in the year 1985 and viva voce was also held by the Public Service Commission
On 10121985 the High Court requested the Government to select twenty candidates in the place of ten
On 27121885 the Government requested the public Service Commission to select twenty candidates
On 1131986 the public service commission sent three select lists one containing twenty candidates the other containing three Scheduled castes candidates and a waiting list of ten candidates
The Government received several complaints against the pro cess of selection
It was toying with the idea of scrapping the entire list and asking for a fresh selection
95 On 23121986 as the High Court said that there was urgent need for at least thirteen Munsifs the government approved the name of thirteen persons out of the list recommended by the Public Service commission and published the same
They were appointed on 3012
Meanwhile a writ petition had been riled in the High Court for a direction to the Government to approve and publish the list recommended by the Public Service Commission
On 30121986 the State stated before the High court that it has already approved thirteen names and approval of the remaining seven persons was under its active consideration
The High Court dismissed the writ petition as settled
The Government did not approve any other names in the list in view of the complaints against the selection process by the Public Service Commission
The candidates in the select list below serial No 13 were pressing the Government to approve and publish the list and the High Court was also pressing the Government to approve the list in view of the vacancies
Another writ petition was riled to direct the Government to approve the remaining seven names from the select list
The High Court Single judge allowed the writ petition and directed the Government to approve and publish the list of the remaining candidates submitted by the Public Service Commission to it for appointment as Munsifs immediately in accordance with the Jammu and Kashmir Civil Services judicial Recruitment Rules 1967 and to consider the appointment of the candidates including the writ petitioner  as Munsifs in the vacancies existing or likely to arise in accordance with the recommendations to he made by the High Court
On appeal the division Bench of the High Court reversed the decision of the Single Judge
The present appeals by special leave were flied against the 96 decision of the Division Bench
contending that once the Public Service Commission prepared and recommended a select list the Government had no power to sit in judgment over it that the Government was bound to approve the list as recommended that the function of the Government under Rule 39 of the 1967 Rules was merely ministerial and formal that the Government s action was arbitrary and capricious and vitiated by any admissible and extraneous consideration
The State Government submitted that the function of the Gov ernment under Rule 39 was not merelY formal or ministerial that the Government being the appointing authority was entitled to scrutinies the list open to the Government either to approve or disapprove the list either whollY or in part  that a number of complaints were received bY the Government against the selection and many of them were found to he not without substance that in view of the pressing need expressed by the High Court the first thirteen candidates in the list were approved in the interest of judicial administration that refusal to approve the remaining seven names inasmuch as no vacancies were available at that time was a valid and bonafide exercise of power and discretion ton the part of the Government that the appellants had no legal right to be appointed just because their names were included in the select list prepared by the Public Service Commission
Dismissing the appeals
this Court
HELD 11
It is true that the Government is the appointing authority for the munsifs but it is misleading to assert that in the matter of selection and appointment the Government has an absolute power
Such an argument does violence to the constitutional scheme
102 F 12
Rule 39 does not confer an absolute power upon the Government to disapprove or cancel the select list sent by the Public Service Commission Where however the Government is satisfied after due enquiry that the selection has been vitiated either on account of violation of a fundamental procedural requirement or is vitiated by consideration or corruption
favourtism or nepotism
it can refuse to 97 approve the select list
In such a case the Government is bound to record the reasons for its action and produce the same before a Court if and when summoned to do so apart from placing the same before the Legislature as required by clause 2 of Article 323
103 F H 13
article 323 2 is meant as a check upon the power of the Government
The provision militates against the theory of absolute power in the Government to disapprove or reject the recommendations of the commission
For the same reason it must he held that the Government cannot pick and choose candidates out of the list
It is equally not open to the Government to approve a part of the list and disapprove the balance
104 B 14
Where is respect of any particular candidates an material is discovered disclosing his involvement in any criminal activity the Government can always refuse to appoint such person but this would not he a case touching the select list prepared and recommended by the commission
104 C 15
In this case the Government itself had asked for a list of twenty and the commission had sent a list of twenty
It could not have been approved in part and rejected in part
The number of vacancies available on the date of approval and publication of the list is not material
By merely approving the list of twenty there was no obligation upon the Government to appoint them forthwith
Their appointment depended upon the availability of vacancies
The list remains valid for one year from the date of its approval and publication if within such one year any of the candidates therein is not appointed the list lapses and a fresh list has to be prepared
104 E F 16
If the Government wanted to disapprove or reject the list it ought to have done so within a reasonable time of the receipt of the select list and for reasons to be recorded
Not having done that and having approved the list partly thirteen out of twenty names they cannot put forward any ground for not approving the remaining list
Indeed when it approved the list to the extent of thirteen it ought to have approved the entire list of twenty or to have disapproved the 98 entire list of twenty
The objection the Government have pertains to the very process of selection ie to the entire list and not individually to any of the remaining seven candidates
104 G 17
Mere inclusion in the select list does not confer upon the candidates included therein an indefeasible right to appointment
104 H State of Haryana vs Subhash Chandara Marwaha   M section Jain vs State of Haryana  AIR 1977 SC and State of Kerala vs A Lakshmikutty AIR 1987 SC 331 referred to
111 E 18
The other aspect is the obligation of the Government to act fairly
The whole exercise cannot be reduced to a more farce
Having sent a requisitionrequest to the commission to select a particular number of candidates for a particular category in pursuance of which the commission issues a notification holds a written test conducts interviews prepares a select list and then communicates to the Government the Government cannot quietly and without good and valid reasons nullify the whole exercise and tell the candidates when they complain that they have no legal right to appointment
105 B C Shankarsan Dash vs Union of India
  referred to
The Government s action In not approving the rest of the seven names in the select list is unsustainable but there are certain circumstances which induce the Court not to interfere in this matter
They are 1 During the period of one year from the date of approval of thirteen names 2312198630121986 no vacancy had arisen which means that even if the list of twenty had been approved and published on December 23 or December 30 1986 none of the seven persons would have been appointed
At the end of one year the list lapses and becomes inoperative
II When the Government failed to act within a reasonable period from the date of the order December 30 1986 of the High Court in writ petition 131684 which was disposed of recording the statement of the Advocate General the petitioners ought to have moved in the matter
They did not do so
They waited for more than twenty months and approached the High Court only on 99 September 14 1988
This delay disentitles the petitioners from any relief in the facts and circumstances of the case
106 C G