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1998 Supreme(SC) 145
1998(2) Supreme 26
Supreme Court of India
(From Delhi High Court)
Sujata V. Manohar & S.S.M. Quadri, JJ.
Commissioner of Income Tax, Delhi (Central-I) -Appellant
versus
M/s. Continental Construction Ltd. -Respondent
Civil Appeal Nos. 3311-13 of 1993
Decided on 3-2-1998
Counsel for the Parties :
For the Appellant : Ranbir Chandra, Anil Srivastava, R.N. Verma, Advocates for B.K. Prasad, Advocate/Advocates.
For the Respondent : M.L. Verma, Sr. Advocate, Ms. Geetanjali Mohan, M.N. Shroff, Advocates.
Headnote:Taxation-Income Tax Act, 1961-Sections 40(c) and 40A(5) (b) - Remuneration paid to the Directors in respect of their employment outside India-Whether can be excluded from the limit laid down in the first proviso to Section 40A(5)(a) as well as Section 40(c) of the Act? -(Yes)
Held : We do not see any reason to hold that Section 40A(5)(b) will not apply to employee-Directors when this Court, in the case of employee-Directors has held, both Sections 40(c) and 40A(5) as applicable. For determining the ceiling, the higher ceiling has to be taken into account. Similarly, for determining permissible expenditure which is outside the ceiling limit also, both the sections will have to be applied. Therefore, expenditure under Section 40A(5)(b) which 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. (Para 13)
The Delhi High Court was, therefore, right in coming to the conclusion that any expenditure covered by Section 40A(5)(b)(i) in respect of an employee-Director shall not be taken into account for the purposes of calculating the aggregate of expenditure under the proviso to Section 40A(5)(a) for the application of the ceiling limit prescribed there. (Para 15)
Judgment
Mrs. Sujata V. Manohar, J.-The appeals pertain to assessment year 1983-84. The following question of law was referred to the High Court for determination at the instance of the Revenue:
“Whether on the facts and in the circumstances of the case, the Tribunal was correct in holding that having regard to the provisions of Sections 40(c) and 40A(5)(b) of the Income-tax Act, the remuneration paid to the Directors in respect of their employment outside India has to be excluded from the limit of Rs. 72,000/- laid down in the first proviso to Section 40A(5)(a) as well as Section 40(c) of the Income-tax Act, 1961?”
Facts :
The respondent-assessee is a civil construction company which has executed a large number of projects outside India. Its overseas projects include irrigation and hydle 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.
2. For the assessment year 1983-84, the assessment had paid a sum of Rs. 14,0074,570/ 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 Section 40(c).
3. The assessee filed an appeal before the Commissioner of Income-tax who modified the order of the Income-tax Officer and held that any remuneration paid to employee-Directors in respect of any period of their employment outside India should not be taken into account while calculating the expenditure subject to the ceiling limit of Rs. 72,000/- under Sections 40(c) and 40A(5) (a). The department preferred an appeal before the Tribunal from the order of the Commissioner of Income-tax. The Tribunal dismissed the appeal.
4. On the application of the department the Tribunal referred the question set out above as a question of law to the High Court. The High Court by its impugned judgment and order dated 24.5.1990 answered the question in the affirmative and against the Revenue. The present appeals are filed on a certificate granted by the High Court of fitness to appeal.
5. The relevant provisions of Section 40(c) are as follows :
“Section 40 : Notwithstanding .......... the following amounts shall not be deducted in computing the income chargeable 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 or benefit or amenity to a director............
(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 or benefit,
if in the opinion of the Income-tax Officer any such expenditure or allowance as is mentioned in sub-clauses (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 exceed
