LexBHARAT BEEDI WORKS (PRIVATE) LIMITED AND ANR. versus COMMISSIONER OF INCOME-TAX
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UHARA T BEEDI WORKS (PRIVATE) LIMITED AND ANR.
n
c
D
ETC.ETC.
v.
COMMISSIONER OF INCOME-TAX
MAY 7, 1993
[B.P . .JEEVAN REDDY AND N. VENKATACHALA,JJ.J
Income-Tax Act 1961-S.40 (c)-Parmers in firm also directors in a
company-\Vhether royalty payme111s by company to jinn falls within s. 40
(c)-Held, pay111e111s are consideration for a valuable right parted by firm!
par111ersldirectors of the assessee-Company in favour of assessee-\l'here
agreemem wherewuler pay111e111s made not mere device or screen, it cannu1 be
trea1ed as payments made 10 directors qua direc/ors-S. -10 (A) (2).
A partnership firm consisting of three partners was engaged inter alia
in the business of manufacturing and sale of becdics under the brand name
"Mangalorc Prakash Bccdics". On May 20, 1972 a private limited compan~·
called' prakash Bccdics Ltd. '-the asscssce-appellant was incorporated. One
of its objects was to take over the business of' the aforesaid firms which it did
under an agreement dated 15.July1972 whereby the firms sold its rights and
assets to the company. For the use of' the trade name,a royalty at l Op. for every
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1000 becdies was to be paid by the company to the firm. This payment ~·as
made every year by the as.,.cssce on account of' royalty. The three partners of
the firms were also directors of the company.
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The relevant assessment years were 1974-75 and 1975-76. The facts in
the other appeals arc similar.
The assesscc claimed deduction of the amount paid by it as royalty. The
ITO allowed the deductions as claimed. The CIT in mo motu proceedings
disallow the aforesaid deductions. On appeal, the Tribunal rest9rcd the order
of the ITO.
On reference, the High Court answered in favour of the revenue as the
three directors of'thc assessce-company were also partners in the firm. It held
that in law, a firm is mcrcl)' a collection or association of' individuals for
carrying on a business. Merely beL-ausc the firm is an assessable entity under
the Income Tax Act, it docs not follow that it is a juristic or legal entity. It must
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therefore he held that t-he payments to the firm were in reality made to the
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BI-IARA T BEED! WORKS v. COMMISSIONER OF INCOME-TAX [REDDY,J.] 607
directors, thus attracting S. 40 (c).
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Before this Court, it was contended for the assessee.Jbat payment to a
firm is not ipso fact pa~·ment to the partners, directly or indirectly. In any
event, the payments were made ~ the three persons not in .their capacity of
directors (qua directors). but in consideration of a valuable right parted by
them in fal·our of the assessee-company. S. 40(c) was neveri~tended to take
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in such payments. They relied on the budget speech of the Finance Minister
. and argued that the principle of interpretation noscitor a sociis must be
applied to the words "remuneration, benefit or amenity".
The genuineness or validity of the agreement, the factum of pa~·ments as
royalty, and that the brand name carries significant business value was not
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disputed. The question before this Court was whether the royalty payments
fail within S. 40(c).
Allowing the appeal, this Court,
HELD : J. Even assuming that the payments to firm were payments to
partnerst the t;aid payments did. not fall within S. 40(c). The payments were
made in con..,ideration of a valuable right parted by the firm/partners/
directors of the assessee-company in favour of the assessee .. So long as the
agreement whereunder the said payments were made is not held to be a mere
. device or a mere screen, the said payments cannot be treated.a!> payments
made ffJ the directors (qua directors). (613-H, 614-A)
·fhe payments were made by way of consideration for allowing the
assE:Ssce to use a valuable right belonging to them viz. the brand name. Such
a payment may be liable to be scrutinised under sub-section.{2) o.f section 40
(A), but it certainly did not fall within the four corners of section 40(c).
(614-M
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T.T. (Pvt.) Ltd. v. / T 0 Bangalore 121 ITR 551, approved.
CIT Patiale·v. Avon Cycles (p) Ltd. 126 ITR 448 and Indialttte C~. ltd. v. CIT
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178 ITR 649, referred to.
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2. The power vested in the ITO is to determine whether any expenditure
of allowance is excessive or unreasonable having regard to the. legitimate
business needs of the company and the benefit der.ived by the assessee or
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608
SUPREME COURT REPORTS
(1993 I 3 S.C.R.
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accruing therefrom. Any pa~·ment to.a relExcerpt shown. Read the full judgment & AI analysis in Lexace.