TMI Blog1998 (2) TMI 537X X X X Extracts X X X X X X X X Extracts X X X X ..... -assessee is a civil construction company which has executed a large number of projects outside India. Its overseas projects include irrigation and hydel projects in Libya, a fibre board factory at Abu-Sukhair in Iraq and the Karkh Water Supply Project, Baghdad, which had a total value of 534 million dollars. For the assessment year 1983-84, the assessee had paid a sum of Rs. 14,00,74,570 to its directors as remuneration and commission. The Income-tax Officer disallowed a sum of Rs. 13,94,98,570 being excess amount over the limit of Rs. 72,000 per director prescribed under section 40(c) and section 40A(5)(a) of the Income-tax Act, 1961. The respondent did not dispute the disallowance of Rs. 7,61,05,230 payable to the two India-based directors subject to the allowance of Rs. 72,000 each as laid down in sections 40(c) and 40A(5)(a). The dispute related to the remuneration paid to the directors who were stationed outside India in connection with the work of the respondent-assessee. According to the assessee, the amount paid to its employee-directors in respect of their employment outside India was not to be taken into account while calculating the ceiling under section 40A(5) or sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 sub-clause (B), as the case may be." Section 40(c), therefore, deals with the remuneration, benefit or amenity to a director of a company (and other persons described thereon) and any expenditure or allowance in respect of any asset of the company used, inter alia, by a director. The ceiling of allowable expenditure which can be deducted is fixed at Rs. 72,000 when such expenditure or allowance relates to a period exceeding eleven months. If the period is less than eleven months then the ceiling amount is to be calculated at the rate of Rs. 6,000 per month. Under the proviso set out above, certain expenditure is to be excluded while calculating the ceiling limit under section 40(c). The excluded expenditure is of the kind referred to in clauses (i), (ii), (iii) and (iv) of the second proviso to section 40A(5)(a). Section 40A(5) relates to expenditure relating to payment of any salary or providing any perquisite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-clause (vii) or sub-clause (viia) of clause (6) of section 10 in respect of any period during which he is entitled to the exemption under sub-clause (vii) or, as the case may be, sub-clause (viia) aforesaid ; (iii) any employee whose income chargeable under the head 'Salaries' is seven thousand and five hundred rupees or less." (underlining ours) The permissible limit of deduction for expenditure falling under sub-clauses (i) and (ii) of section 40A(5)(a) is laid down in clause (c). In respect of salaries to an employee or a former employee, the permissible deduction is up to an amount at a rate of Rs. 5,000 per month during the period of an employee's employment in India during the previous year. In respect of expenditure on perquisites under clause (a)(ii), the permissible deduction is up to 1/5th of the amount of the salary payable to the employee or an amount calculated at the rate of Rs. 1,000 for each month or part thereof comprising the period of employment in India of the employee during the previous year, whichever is less. Thus the ceiling for expenditure deductible under clause (a)(i) is Rs. 60,000 and clause (a)(ii) is Rs. 12,000. However, in the case of an emp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iling prescribed was Rs. 5,000 per month for any period of employment after February 28, 1963. The expenditure on perquisites with a ceiling of 1/5th of the amount of the salary payable to the employee was subsequently also added. The expenditure on employees is now removed from section 40(c) and incorporated in section 40A(5). The two sections 40(c) and 40A(5) are, however, not mutually exclusive. In section 40(c), the proviso, for example, refers to a case where the director (or a person who had a substantial interest in the company or a relative of the director or of such person) is also an employee of the company for any period prescribed in the previous year. In that situation, expenditure of the nature referred to in clauses (i), (ii), (iii) and (iv) of the second proviso to clause (a) of section 40A(5) shall not be taken into account for the purpose of calculating the ceiling under section 40(c). These excluded items are items such as the value of any travel concession, passage money, payment referred to in section 36(1)(iv) and (v) and expenditure referred to in section 36(1)(ix). These items in section 36 deal with contribution towards provident fund, approved gratuity f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gujarat High Court has now, in the case of CIT v. Synpol Products Pvt. Ltd. [1996] 217 ITR 154, held that in the case of directors who are also employees, both the provisions will be attracted. The higher of the two ceilings will have to be applied. We have now to consider in this light whether the provisions of section 40A(5)(b) will apply for the purpose of calculating the expenditure so covered when the expenditure is incurred in connection with a director who is also an employee. Under section 40A(5)(b)(i) nothing in clause (a) which deals with expenditure on salaries and perquisites of an employee shall apply, inter alia, to any expenditure in relation to an employee in respect of any period of his employment outside India. Therefore, for example, in calculating the expenditure on the salary of an employee, the salary paid in respect of his employment outside India will not be taken into account for the purposes of calculating the ceiling. This expenditure is outside the expenditure which is subject to a ceiling limit. Under section 40A(5)(b)(ii) and (iii), similarly certain other expenditure in connection with an employee is also excluded from the ceiling limit. The questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is excluded from the expenditure on which a ceiling is placed under section 40A(5)(a), will have to be excluded in the case of an employee-director also. Under the proviso to section 40A(5)(a), in the case of an employee-director, for the purposes of ceiling, expenditure which has to be taken into account is both under section 40A(5)(a) as well as under section 40(c). For calculating the expenditure and allowances under section 40A(5)(a), one has to exclude the expenditure and allowances referred to in section 40A(5)(b). Therefore, in the case of a director employee also while calculating the expenditure and allowances spent on a director-employee under section 40A(5)(a) and section 40(c), expenditure of the kind referred to in section 40A(5)(b) has to be necessarily excluded. A similar view has been taken by the Madras High Court in the case of CIT v. Lucas TVS Ltd. [1997] 226 ITR 281. The Madras High Court was concerned with foreign technicians working under a contract in India and falling under section 10(6)(viia). Under section 40A(5)(b)(ii) expenditure incurred in relation to such an employee is to be excluded from the expenditure for which a ceiling is prescribed under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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