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2006 (5) TMI 60

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..... e assessee. Being aggrieved the appellant has approached this court. As far as the first question is concerned, the High Court answered it in the affirmative relying on the decision of this court in State Bank of Travancore v. CIT [1986] 158 ITR 102; [1986] 2 SCC 11. In the decision of State Bank of Travancore v. CIT [1986] 158 ITR 102; [1986] 2 SCC 11 the minority opinion expressed by Tulzapurkar, J. was that the stickiness of advances or loans objectively established to the satisfaction of the taxing authorities by furnishing proper material, is sufficient to prevent the accrual of interest thereon as real income and would have the effect of rendering such income hypothetical. Therefore the interest cannot be brought to tax irrespective of the method of accounting followed, provided the assessee was able to establish to the satisfaction of the taxing authority that the loans had in fact become sticky during the concerned year or years by producing proper material and that the assessee had invariably followed the practice of carrying the interest of such loans to interest suspense account instead of crediting the same to interest account or profit and loss account with the addit .....

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..... The court in UCO Bank's case [1999] 237 ITR 889 (SC) was of the view that these circulars dated October 6, 1952 and October 9, 1984 were binding on the authorities under section 119(1) of the Act. The court was also of the view that the judges in State Bank of Travancore [1986] 158 ITR 102 (SC) did not have the occasion to consider the 1984 circular and proceeded on the assumption that the 1978 circular was in force. The court did not agree with the conclusion expressed by the majority in State Bank of Travancore [1986] 158 ITR 102 (SC) and said: "The relevant circulars of the Central Board of Direct Taxes cannot be ignored. The question is not whether a circular can override or detract from the provisions of the Act: the question is whether the circular seeks to mitigate the rigour of a particular section for the benefit of the assessee in certain specified circumstances. So long as such a circular is in force it would be binding on the departmental authorities in view of the provisions of section 119 to ensure a uniform and proper administration and application of the Income-tax Act." Therefore, the assessment year in question in this appeal should have been dealt with by .....

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..... tires, he is to be treated as a former employee and payments made to him as a former employee again ought to be deductible within the permissible limit. The court was of the view that any other construction of such section under which such an employee is treated only as "an employee" or as a "former employee" in the year in question would render one part or the other of the section nugatory. The court rejected the submission on behalf of the Revenue that the status of the employee as on the last date of the previous year should be taken into consideration for the purpose of fixing the limit of deductions. The court said if this contention was to be accepted then the salary paid to the employee while he was in employment cannot be taken into account in determining the ceiling of allowable deduction under section 40A(5). The court referred to section 40A(5)(a) and noted that the first proviso thereunder provided a ceiling of Rs. 72,000 on the permissible deduction or of expenditure or allowances consisting of the aggregate of four different types of expenses and allowances mentioned thereunder. Similarly, under section 40A(6) where any expenditure was incurred by an assessee on payme .....

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..... e opinion expressed by the Bombay High Court is correct. The intention of the Legislature was to fix limits of deduction under the various clauses of sub-section (5) of section 40A. If the view accepted by the Calcutta High Court were to be accepted the fixation would be meaningless as the limits would vary depending on the date on which an employee may retire. According to the Calcutta High Court's view if an employee serves for 12 months, and retires on the last day of the previous year, the employer would be entitled to claim a deduction of Rs. 60,000 on account of salary paid to an employee while in service and another limit of Rs. 60,000 on account of "salary" paid to the employee on retirement. In other words, the employer would be entitled to a deduction of two different amounts. Yet clause (c)(ii) of sub-section (5) of section 40A speaks of "an amount". This would indicate that the employer is only entitled to deduction of one amount. Clause (c)(i) also speaks of an employee as being not only one who has ceased to be in employment, but one who ceases to be in employment. In respect of the latter it is assumed that the employee served for a period but ceases to be so em .....

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