TMI Blog1997 (4) TMI 23X X X X Extracts X X X X X X X X Extracts X X X X ..... ether, on the facts and in the circumstances of the case, surtax liability is not an admissible deduction under the provisions of the Income-tax Act? 3. Whether, on the facts and in the circumstances of the case and having regard to the provisions of section 2(18) of the Income-tax Act, 1961, the Tribunal was right in holding that the assessee should be treated as a company in which the public are substantially interested? 4. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that weighted deduction under section 35B should be allowed at 1 1/2 times of the expenditure and not at one and one third of the expenditure allowed by the Income-tax Officer? 5. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the provisions of section 40A(5)(b)(ii) would be applicable to the provisions of section 40(c) also in respect of the remuneration paid to the director-cum-foreign technician and the remuneration exempted under section 10(6)(viia) should not be taken into account for fixing the ceiling limit of Rs. 72,000 under section 40(c) of the Act?" The answer to questions Nos. 2, 3 and 4 need not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of assessment proceedings for the assessment year 1977-78, the Income-tax Officer found that one Mr. Dougall was the managing director of the company and was also a foreign technician. He found that the total remuneration paid to Mr. Dougall was Rs. 1,24,442 and after applying the ceiling limit provided under section 40(c) of the Act, he disallowed a sum of Rs. 52,442 being the excess of total remuneration paid to Mr. J. Dougall. The assessee preferred an appeal before the Commissioner of Income-tax (Appeals) against the disallowance made by the Income-tax Officer. The Commissioner of Income-tax (Appeals), following his earlier order for the assessment year 1976-77, held that the entire amount paid to Mr. J. Dougall should be allowed as business expenditure and no part of it can be disallowed under section 40A(5) or section 40(c) of the Act. The Department preferred an appeal before the Income-tax Appellate Tribunal. The Appellate Tribunal, following its earlier order, for the assessment year 1976-77, in the assessee's own case in I. T. A. No. 1369/Mds of 1980 dated August 31, 1982, held that the provisions of section 40A(5), clauses (i) and (ii) have to be considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... since both the provisions are attracted, the higher of the ceiling has to be applied. In other words, according to learned counsel for the Revenue, clause (b) to section 40A(5) of the Act is not made applicable to section 40(c) of the Act, and for the purpose of determining the ceiling limit under section 40(c), there is no scope for exclusion of the amount found under section 40A(5)(b)(ii) of the Act. Learned counsel also submitted that it is not permissible to bifurcate the expenditures, one as a payment to the director and another to a foreign technician and if such a contention is accepted, the proviso to section 40(c) of the Act would become otiose. According to learned counsel, the remuneration paid to the employees who are directors should also be taken into account in fixing the ceiling limit under section 40(c) of the Act. Mr. Janarthana Raja, learned counsel for the assessee, submitted that the provisions of section 40A(5) have to be taken into account in determining the ceiling under section 40(c) of the Act. Learned counsel for the assessee submitted that the second proviso to section 40A(5) of the Act deals with certain kinds of expenditure, viz., value of travel co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 or 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 : Provided that in a case where such person is also an 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 sub-clause (B) as the case may be." Section 40A(5)(a) and (b) of the Act in so far as it is relevant to the facts of the case, reads as under : "(a) Where the assessee--- (i) incurs any expenditure which results directly or indirectly in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rupees or less." Section 40(c) deals with the case of an employer, which is a company, and it applies to the directors and some others. Section 40A(5) is applicable to all employers, whether a company or others. The Supreme Court in the case of CIT v. Indian Engg, and Commercial Corporation P. Ltd. [1993] 201 ITR 723 held that in the case of directors, who are employees, both the provisions would be attracted and the higher of the ceiling limits has to be applied. Hence, there is no difficulty in accepting the contention of learned counsel for the Revenue that both the provisions of section 40(c) and 40A(5) of the Act are applicable to the facts of the case. The question that immediately arises is how to determine the ceiling limit prescribed under section 40(c) as well as section 40A(5) of the Act in the case of an employee who is a director-cum-employee and is a foreign technician. The object of section 40(c) as well as section 40A(5) is to place a monetary ceiling limit in the question of the allowance of the remuneration and perquisites paid to the directors, director-cum-employees and employees by the company or by an assessee to its employees. In other words, both the sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act would not be appropriate, and that is one reason for the omission to refer to section 40A(5)(b) of the Act in section 40(c) of the Act. Secondly, there is nothing to suggest that the remuneration which is excluded from the scope of consideration in section 40A(5)(a) of the Act, by virtue of section 40A(5)(b) of the Act, should be taken into consideration for the purpose of section 40(c) of the Act. In our view, both sections 40(c) and 40A(5) of the Act should be read together and in determining the ceiling prescribed under section 40A(5) of the Act, if certain items go out of reckoning in section 40A(5) of the Act on the principle of harmonious construction, the same amount of income also cannot be taken into account under section 40(c) of the Act. We are of the view that the proviso to section 40(c) of the Act refers to the kinds of expenditures found in the second proviso to section 40A(5) of the Act, and considering the object behind section 40A(5) as well as section 40(c) of the Act, the provisions of section 40A(5)(b) should also be taken into account. A harmonious reading of sections 10(6)(viia), 40(c) and 40A(5) would indicate that the remuneration which is exempt u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 315 of the Kerala High Court in Travancore Rayons Ltd. v. CIT [1986] 162 ITR 732 and of the Calcutta High Court in CIT v. Indian Molasses Co. (P.) Ltd. [1989] 176 ITR 473 and after considering the legislative history, held that section 40A(5)(b) specifically deals with a question of an employee who is in employment outside India and section 40(c) does not deal with the case of employee who is in employment outside India. The Delhi High Court, therefore, held that even if it be assumed, that section 40A(5) is general and section 40(c) is specific qua the directors, nevertheless, in respect of employee-directors who are posted outside India, section 40(c) cannot and does not apply and section 40(c) of the Act does not envisage the case of an employee-director who is posted out of India. The Delhi High Court, therefore, held that section 40A(5) is a specific provision and section 40(c) has to be regarded as a general provision. Applying the principles of law laid down by the Delhi High Court, we are of the opinion, that the provisions of section 40A(5)(b) should also be taken into account for the purpose of determining the quantum of director's remuneration by way of salary and ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that section 40A(5) of the Act should also be taken into account in determining the ceiling limit prescribed under section 40(c) of the Act. The learned author Mr. Sampath Iyengar, in his book on Law of Income-tax, 9th edition, volume-II, at page 2816, observed as under : "Employee-director posted outside India.---Section 40(c) does not envisage the case of an employee-director who is posted outside India; such a case is dealt with only by section 40A(5)(b). This being so, at least qua employee-directors employed outside India, section 40A(5)(b) is a specific provision and section 40(c) has to be regarded as a general provision. On the principle that, if there is a general provision and there is also a special provision, then, it is the special provision which will prevail, the only conclusion possible is that the case of remuneration to employee-directors employed outside India falls under the provisions of section 40A(5) and not section 40(c). Accordingly, it was held that the remuneration to the directors in respect of their employment outside India has to be excluded from consideration for the purpose of the limit of Rs. 72,000." Mr. C. V. Rajan, learned counsel for the Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X
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