Appeal No 1452 of 1987
From the Judgment and Order dated 1071986 of the Kamataka High Court in ITRC No 198 of 1987
WITH CA Nos 446289 1822 1902 146587 675 658 446189 609390 6204 90 6092
and 6092 A of 1990
H Salve PH Parekh Ms Meenakshi Grover R Nariman Ms R Gill and Ms Simi Kr
for the Appellants
BB Ahuja Ranbir Chandra and Ms A Subhasini for the Respondent
The Judgment of the Court was delivered by BP JEEVAN REDDY J
These appeals are preferred against the judgment of the Karnataka High Court answering the question referred to it at the instance of the revenue in favour of the revenue and against the assessee
The question referred under section 256 of the Income Tax Act 196 1 read as follows Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the sum of Rs 1 79 742 could not be disallowed under section 40 c of the Income Tax Act 1961 The above question related to Assessment Year 1974 75
The question referred for AY 1975 76 was identical except in the matter of amount
Since the facts in all the appeals are identical it would be sufficient to notice the facts in CA Nos 6092 and 6092A90 Prakash Beedies P Lid
vs Commr
of Income Tax
Karnataka Bangalore
Prior to 1571992 a partnership firm called KM Anand Prabhu  Sons Mangalore consisting of three partners KM Vishnudas Prabhu KM Ramdas Prabhu and KM Shankar Prabhu was engaged inter alia in the business of manufacturing and sale of beedies under the brand name Mangalore Prakash Beedies 
On May 20 1972 a Private limited company called Prakash Beedies 609 Limited the assessee appellant herein was incorporated with its registered off ice at Manoalore
One of its objects was to take over business of the aforesaid firm
Under an agreement dated July 15 1972 between the firm and the company the firm sold its rights and assets to the company on the terms and conditions set out therein
Clause 4a of the agreement which alone is material for the purposes of these appeals reads a For the use of the trade name the Company shall pay royalty to the Vendor at the rate of 10ps
for every thousand beedies sold by the Company by using the trade name of the Vendor
The royalty shall be worked out at the end of each quarter ending on March June September and December on the sales made during each quarter
The royalty fixed hereby shall not be varied for a period of one year and may be reviewed andor revised thereafter wards from time to time
The assessee was making payments to the firm every year on account of royalty in terms of said clause
The three partners aforesaid of the firm were also the directors of the assessee company
For the assessment years 1974 75 and 1975 76 the assessee claimed deduction of the amount paid by it to the firm on account of royalty in terms of clause 4a of the agreement
The amounts paid during the accounting years relevant to the said assessment years were Rs 3 16 526 and Rs 3 95 742 respectively
The ITO allowed the deductions as claimed
In exercise of the powers conferred on him by Section 263 the Commissioner of Income Tax initiated suo moto proceedings for revising the said assessments in so far as the aforesaid deductions were concerned
After hearing the assessee he passed orders on September 16 1976 whereunder he disallowed payments to the firm over and above the ceiling prescribed in Section 40c
The assessee preferred appeals to the Tribunal against the orders of the ITO The appeals were allowed and the orders of the ITO restored
On reference the High Court answered to question in the negative ie in favour of the revenue and against the assessee on the following reasoning  the three directors of the assessee company were also the partners in the firm to which royalty payments were made
In law a firm has no separate legal existence it is not a juristic person or a distinct legal entity
It is merely a collection or association of the individuals for carrying 610 on a business
Merely because the firm is an assessable entity under the Income Tax Act it does not follow that it is a juristic or legal entity
It must therefore be held that the payments made to the firm are in reality payments made to the directors
Such payments clearly attract and fall within the mischief of Section 40c
The Commissioner was right in saying so and the opinion of the Tribunal to the contrary is unsustainable in law
In these appeals SShri Harish NSalve and Rohinton Nariman assailed the correctness of the view taken by the High Court
They submitted firstly that the payments were made not to the directors of the assessee but to a firm which was a separate entity
A payment to a firm is not ipso facto a payment to the partners directly or indirectly
In a firm there may be other partners besides the directors of the assessee company
It may also happen that the firm has no income to distribute because of the losses incurred by it which are set off against the income so received
The High Court was in error in holding that payment to a firm is a payment to the partners
Assuming that a partnership firm is not a separate juristic entity distinct from its partners even so the payments were made to the said three persons not in their capacity as directors qua directors but in consideration of a valuable right parted by them in favour of the assessee company
Such payments do not and cannot fall within the mischief of Section4Oc
Section 40c was never intended to take in such payments
A company may take on lease the house of its directors for its legitimate business purposes and pay rent which is reasonable having regard to the market conditions or it may pay even less than the market rate of rent
Whether the rent paid by the company to its director in such a case falls within Section 40c ask the counsel
Another illustration given by the counsel is where a director supplies raw material to the assessee company for a price which is the appropriate market price
Would such payment also fall under section 40c they ask
The Budget speech of the Finance Minister in the Parliament while introducing the said provision is relied upon in support of their contention
It is also argued that the words remuneration benefit or amenity occurring in Section 40c must be read having regard to the context in which they occur applying the principle NOSCITORA SPCOOS recognition of associated words
If so read the payments in question can never fall within the ambit of the said words
Shri Ahuja the learned counsel for the Revenue justified the reasoning and approach of the High Court having regard to the clear language employed in clause c
The genuineness or validity of the agreement between the assessee company and the firm is not disputed
The factum of payments made on account of royalty in terms of clause 4a of the said agreement is also not disputed
It is also 611 not disputed that in the beedi trade brand name carries significant business value
It is necessary to keep this factual context in mind while examining the question at issue
Section 40c read as follows during the relevant assessment years 40
Notwithstanding anything to the contrary in sections 30 to 39 the following amounts shall not be deducted in computing the income charge able under the head profits and gains of business or profession a  b  c in the case of any company i any expenditure which results directly or indirectly in the provision of any remuneration of benefit or amenity to 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 ii any expenditure or allowance in respect of any assets of the company used by any person referred to in sub clause i either wholly or partly for his own purposes of benefit if in the opinion of the Income tax Officer any such expenditure or allowance as is mentioned in sub clause i and ii is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom so however that the deduction in respect of the aggregate of such expenditure and allowance in respect of any one person referred to in sub clause i shall in no case exceed A where such expenditure or allowance relates to a period exceeding eleven months comprised in the previous year the amount of seventy two thousand rupees B where such expenditure of allowance relates to a period not exceeding eleven months comprised in the previous year an amount calculated at the rate of six thousand rupees for each month or part thereof comprised in that period 612 Provided that in case where such person is also and employee of the company for any period comprised in the previous year expenditure of the nature referred to in clauses i ii iii and iv of the second proviso to clause a of sub section 5 of section 40A shall not be taken into account for the purposes of sub clause A or subclause B as the case may be iii     Explanation
The provisions of this clause shall apply notwithstanding that any amount not to be allowed under this clause is included in the total income of any person referred to in sub clause i The Budget speech of the Finance Minister in so far as it mentions the reasons for introduction of clause c of Section 40 reads as follows I am firmly of the view that the fiscal instrument must be deployed to discourage payment of high salaries and remunerations which go ill with the norms of egalitarian society
I accordingly propose to impose a calling on the remuneration of company employees which would be deductible in the computation of taxable profits
The ceiling is being set at Rs 5000 per month
Together with the existing ceiling of Rs 1000 per month in the case of perquisites the allowable overall ceiling on remuneration and perquisites for purposes of taxation will be at Rs 6000 per month    The object behind the provision undoubtedly was to discourage and disallow payment of high salaries and remunerations which go ill with the norms of egalitarian society
The provision was of course not confined to the directors  It took in relatives of directors persons having substantial interest in the company and their relatives
The clause vested in the ITO the power to determine whether any such expenditure or allowances as is mentioned in the said clause was excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom
In addition to it a ceiling was also prescribed beyond which such expenditure or allowance could not go in any event
At this juncture it would be appropriate to notice the provision contained in sub section 2 of Sec 40A Clause A provides that where the assessee incurs any expenditure in respect of which payment has been made or is to be made to any 613 person referred to in clause b of the sub section and the Income tax Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction
Clause b mentions the categories of persons to whom the provision in clause a applies
It includes directors of the company and their relatives among others
Clause b also takes in any payment to any company firm association of persons or Hindu undivided family of which a director partner or member as the case may be has substantial interest in the business or profession of the assessee
In short the net is cast very wide to ensure that excessive or unreasonable payments are not made to the persons in control of the affairs of the assessee in the name of paying for the goods services and facilities rendered supplied or extended by them as the case may be
That the payments made by the assessee company to the firm on account of royalty in terms of clause 4 a of the agreement fall within the meaning of the expression expenditure  in sub clause i of clause c is not disputed
The observations in CIT Bombay
vs Ms Indian Engineering and Commercial Corporation Private Uinited Civil Appeal Nos 1583 and 1584 NT of 1977 decided on 1341993 by us reported in  do not say otherwise
That case arose under Section 40A 5
The payments in question were made to the directors by way of commission on sales
The question was whether the said payments fell within sub clause ii of clause a of sub section 5 of section 40A
It was held that they did not
While holding so it was observed that it is difficult to say that payment of certain cash amount by way of 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 
 The said observations were made in response to the Revenue s argument that the said payment constituted perquisites  within the meaning of sub clause ii of clause a of Section 40A 5
The observations are clearly confined to the said sub clause and have no relevance to any other provision in the Act
The observations cannot be read dissociated from their context
Coming back to the provisions of Section 4Oc and the facts of the case before us the only question is whether the royalty payments to the firm fell within clause c
We assume for the purpose of this argument that in this case payments to firm were payments to partners
Even so we think that the said payments did not fall within clause C
The payments were made in consideration of a valuable right parted by the partners directors of the assessee company in favour of the assessee
SO long a the agreement whereunder the said payments were made is not held to be a mere 614 device or a mere screen the said payments cannot be treated as payments made to the directors as directors qua directors
The payments were made by way of consideration for allowing the assessee to use a valuable right belonging to them viz the brand name
Such a payment may be liable to be scrutinised under subsection 2 of Section 40A but it certainly did not fall within the four corners of Section 40c
In T T Ltd vs LTO Bangalore 1 a Bench of Karnataka High Court comprising DM Chandrashekhar CJ
and ES VenkataramiahJ has taken a view which accords with the one taken by us
Speaking for the Bench ES Venkataramiah J as he then was observed A close reading of the above provision shows that section 40c refers to an expenditure in curred by making periodical payments to person mentioned in that clause apparently for any personal service that may be rendered by him
It cannot have any reference to payments made by the assessee for all kinds of services or facilities referred to in section 4OA2 a
It is argued that the proviso thereto suggests that any expenditure incurred for any kind of service which is referred to in the main part of section 40A 2 a and the expenditure referred to in section 40c belong to the same category
This contention is not correct
The expression services in section 40A 2 a is an expression of wider import  
If the remuneration benefit or amenity referred to in section 40c is treated as the same as what is paid in return for the goods services or facilities then irrespective of the fair market value of the goods services and facilities provided by a person who may be a director or a person who has a substantial interest in the company or a relative of the director or of such person as the case may be only a maximum of Rs 72000 can be allowed to be deducted in computing the income of the company in any one year
We do not think that Parliament ever intended that such a result should follow
The goods services and facilities referred to in section 40A 2 a are those which have a market value and which are commercial in character
Many of the services and facilities referred to above are those which are nowadays provided by independent organisations  The said decision has been followed by the Punjab and Haryana High Court in Commissioner of Income Tax Patiala vs Avon Cycles P Ltd  The Calcutta High Court has also taken a similar view in India Jute Co Ltd vs 615 Commr of Income Tax Mr Ahuja learned counsel for the Revenue submitted that the argument of the assessee that only the payments made to directors as directors fall within clause c and not the other payments becomes inapt when the payments are made to the relative of the directors or to persons holding substantial interest in the assessee company or their relatives
The ceilinG prescribed in clause c cannot also be applied to such persons says the counsel
The answer perhaps lies in the clause itself in the power vested in the ITO to determine whether any expenditure or allowance is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by the assessee or accruing therefrom
Any payment to a relative of a director or other persons mentioned in clause c will necessarily be examined applying the above test and if it is found that they are unwarranted unreasonable or excessive they will be disallowed
Since such a situation does not arise herein we need not pursue the argument further
For the above reasons we are of the opinion that the judgment under appeal cannot be sustained
It must he held that the payments in question did not fall within section 40c
Accordingly the appeals are allowed the judgment of the High Court is set aside and the question referred to the High Court is answered in the affirmative ie in favour of the assessee and against the revenue
No costs
UJ R Appeal allowed


Summary:
The writs referred to in article 226 are intended to enable the High Court to issue them in grave cases where the subordinate tribunals or bodies or officers act wholly without jurisdiction or in excess of it or in violation of the principles of natural justice or refuse to exercise a jurisdiction vested in them or there is an error apparent on the face of the record and such act omission or error or excess has resulted in manifest injustice
However exten sive the jurisdiction may be it is not so wide or large as to enable the High Court to convert itself into a court of appeal and examine for itself the correctness of the deci sions impugned and decide what is the proper view to be taken or the order to be made
The Motor Vehicles Act contains a complete and precise scheme for regulating the issue of permits providing what matters are to be taken into consideration as relevant and prescribing appeals and revisions from subordinate bodies to higher authorities and the issue or refusal of permits is solely within the discretion of the transport authorities it is not a matter of right
Where in a dispute between two rival claimants for running through a particular route five buses which each of them alleged he had purchased from a third person the Central Road Traffic Board Madras after calling for a report from the Regional Transport Officer and considering several circumstances that had a material bearing on the case restored the permanent permits which had been granted to one of the claimants but on an application by the other claimant under article 226 of the Constitution to the High Court of Madras for a writ of certiorari quashing the orders of the Regional Transport Authority the Central Road Traffic Board and the State of Madras and for a writ of mandamus to the respondents to transfer issue or grant 584 permanent permits to the petitioner the High Court set aside the order of the Central Traffic Board relying mainly on the fact that the petitioner s title to the five buses had been established and directed the Regional Traffic Authority to grant to the petitioner permits in respect of the five buses Held that under the Motor Vehicles Act the issue of a permit for a bus was not dependent on the ownership of the bus but on other considerations also and as the Central Traffic Board had issued an order granting permits to one of the claimants after considering all circumstances the High Court acted erroneously in interfering with the Order of Traffic Board on an application under article 226 and in any event the order of the High Court issuing a direction to the Regional Transport Authority to grant permits to the other party was clearly in excess of its powers and jurisdiction
The Motor Vehicles Act is a statute which creates new rights and liabilities and prescribes an elaborate procedure for their regulation
No one is entitled to a permit as of right even if he satisfies all the prescribed conditions
The grant of a permit is entirely within the discretion of the transport authorities and naturally depends on several circumstances which have to be taken into account