JUDGMENT - KAPADIA S.H., J.:---The above group of references deal with common question of law which has been referred by the Tribunal to this Court under section 256(1) of the Income Tax Act at instance of the revenue.

Whether the salary payable to the floating staff for the period of employment outside India should not be considered for the purpose of disallowance under section 40-A(5)(a) of the Income Tax Act, 1961?

2. For the sake of brevity the facts in Income Tax Reference No. 444 of 1995 are taken into consideration.

3. The assessee-M/s. Indo Oceanic Shipping Company Ltd. is a limited company. While computing the amount to be disallowed under the above provision, the A.O. included the salary payable to the floating staff of an Indian Vessel for a period of employment outside India in respect of the assessment year 1978-79. The A.O. considered the International Law and came to the conclusion that so long as the Indian Flag was flying on the ship, the said ship was considered to be Indian Territory and, therefore, the place of employment of the floating staff was in India irrespective of the fact as to whether the ship was sailing. The A.O. further came to be conclusion that there was a difference between "Working outside India" and "Employment outside India". He further came to the conclusion that under section 40-A, the employment outside India is not covered as the cost of living in foreign country is higher than the cost of living in India but in the case of floating staff the employees stay on board the ship and as such they are not required to spend any amount in foreign country for their stay and, therefore, section 40-A(5) was applicable to the floating staff as if they were working in India. Consequently, the A.O. disallowed Rs. 3.56 lacs under section 40-A(5). Being aggrieved, the assessee went in appeal to the C.I.T. (Appeals). The Appellate Authority, however, came to the conclusion that, on the facts of the case, section 40-A(5)(b)(i) (hereinafter referred to for the sake of brevity as "the exclusion clause") stood attracted. The C.I.T. (Appeals) came to be conclusion that under section 40-A(5)(b)(i) for the period when the floating staff is employed outside India for which he is paid salary, the same cannot be taken into account for the purposes of computing the disallowance under section 40-A(5). The Commissioner emphasised the expression "employment outside India" in section 40-A(5)(b)(i) and interpreted the said expression to mean outside the territorial boundaries of India. Hence, the appeal was allowed. Being aggrieved by the decision of C.I.T. (Appeals) the department preferred an appeal to the Tribunal. Following its decision in the case of (Garware Shipping Corporation Ltd. v. I.T.O.)1, reported in 7 I.T.D. 118, the Tribunal dismissed the appeal. Accordingly, the department has come by way of reference to this Court.

4. For the sake of convenience, sections 40-A(5)(a) as also 40-A(5)(b) and (c) as they stood at the material time are reproduced hereinbelow:---

"(5)(a) Where the assessee.---

(i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or.

(ii) incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit.

then, subject to the provisions of Clause (b), so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in Clause (c) shall not be allowed as a deduction:"

(b) Nothing in Clause (a) shall apply to any expenditure or allowance in relation to---

(i) any employee in respect of any period of his employment outside India;

(c) The limits referred to in Clause (a) are the following, namely:---"

5. The object of s

Click Here to Read the rest of this document