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1989 Supreme(Cal) 277
High Court Of Calcutta
Ajit Kumar Sengupta, Bhagabati Prasad Banerjee
JEEWANLAL (1929) LTD. - Appellant
Versus
COMMISSIONER OF INCOME-TAX - Respondent
Income-Tax Reference 90 Of 1981
Decided On : 05/31/1989
The interpretation of Section 40a (5) of the Income-tax Act, 1961.
Headnote:
INCOME TAX - Whether transfer of import entitlements are capital receipts or revenue receipts - Whether reimbursement of out of pocket expenses to directors is entertainment expenditure - Whether bonus paid to managing director is salary - Whether retirement benefits paid to employee are salary - Interpretation of Section 40a (5) of the Income-tax Act, 1961.
Fact of the Case:
The assessee claimed that the receipt of Rs. 1,40,864 arising out of the transfer of import entitlements was a capital receipt and not revenue receipt assessable to tax. The assessee also claimed deduction of Rs. 21,000 paid to its directors as out of pocket allowance, Rs. 7,400 paid as bonus to its managing director, and Rs. 91,498 paid to an employee who retired during the previous year.
Finding of the Court:
The Tribunal held that the receipt of Rs. 1,40,864 arising out of the transfer of import entitlements was a revenue receipt and not a capital receipt. The Tribunal also held that the reimbursement of Rs. 21,000 to directors was entertainment expenditure and the bonus paid to the managing director was salary. The Tribunal further held that the retirement benefits paid to the employee were salary and the assessee was entitled to a deduction of up to Rs. 60,000 under Section 40a (5) of the Income-tax Act, 1961.
Issues: 1. Whether the transfer of import entitlements are capital receipts or revenue receipts? 2. Whether the reimbursement of out of pocket expenses to directors is entertainment expenditure? 3. Whether the bonus paid to managing director is salary? 4. Whether the retirement benefits paid to employee are salary?
Ratio Decidendi: 1. The receipt of Rs. 1,40,864 arising out of the transfer of import entitlements is a revenue receipt and not a capital receipt. 2. The reimbursement of Rs. 21,000 to directors is entertainment expenditure. 3. The bonus paid to the managing director is salary. 4. The retirement benefits paid to the employee are salary and the assessee is entitled to a deduction of up to Rs. 60,000 under Section 40a (5) of the Income-tax Act, 1961.
Final Decision: 1. The first question is answered in the affirmative and in favour of the Revenue. 2. The second question is answered in the affirmative and in favour of the Revenue. 3. The third question is answered in the affirmative and in favour of the Revenue. 4. The fourth question is answered in the affirmative and in favour of the Revenue. 5. The fifth question is answered by saying that the salary paid to the employee before the retirement is allowable under Section 40a (5) (c) of the Act and the Tribunal, in disposing of the case under Section 260, shall determine the quantum which will be allowable under the aforesaid provisions.
( 1 ) IN this reference under Section 256 (1) of the Income-tax Act, 1961, the following questions of law have been referred to this court for the assessment year 1974-75 :"1. Whether, on the facts and in the circumstances of the case and on a proper interpretation of the relevant provisions of the Special Export Promotion Scheme, the receipt of Rs. 1,40,864 arising out of the transfer of import entitlements are capital receipts and not revenue receipts assessable to tax. "
( 2 ) WHETHER, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the reimbursement of out of pocket expenses amounting to Rs. 21,000 actually incurred by the directors of the assessee-company is an entertainment expenditure which falls within the mischief of Section 37 (2a) of the Income-tax Act, 1961, and in so holding whether the Tribunal acted perversely ?
( 3 ) WHETHER the Tribunal was justified in upholding the disallowance of reimbursement of expenses amounting to Rs. 21,000 actually incurred by the directors of the assessee-company and in holding that the said reimbursement of expenses was in the nature of entertainment allowance or entertainment expenditure paid by the assessee to any employee or other person within the meaning of Clause (i) of the Explanation to Section 37 (2a) of the Income-tax Act, 1961 ?
( 4 ) WHETHER, on the facts and in the circumstances of the case, the sum of Rs. 7,400 paid as bonus to Shri D. H. Shah, managing director, would constitute 'salary' within the meaning of Section 40a (5) read with Section 27 of the Income-tax Act, 1961 ?
( 5 ) WHETHER, on the facts and in the circumstances of the case, the Tribunal was justified in restricting the deduction to Rs. 60,000 out of Rs. 91,498 paid to Sri P. K. Ambani, under the provisions of Section 40a (5) of the Income-tax Act, 1961?" 2. The facts are that the assessee claimed before the Income-tax Officer that receipts of Rs. 1,40,864 arising out of the transfer of import entitlements were capital receipts. The Income-tax Officer rejected that claim of the assessee. The assessee paid Rs. 21,000 to its directors as out of pocket allowance and claimed deduction thereof. The Income-tax Officer negatived this claim of the assessee. The assesbee paid remuneration of Rs. 1,01,650 to its managing director, Shri D. H. Shah. This amount included bonus of Rs. 7,400. The assessee claimed deduction of the entire amount of Rs. 1,01,650. But the Income-tax Officer restricted the allowance out of this claim to the extent of Rs. 72,000 in view of the provisions of Section 40a (5) of the Income-tax Act, 1961. In doing so, the Income-tax Officer treated the payment of bonus of Rs, 7,400 as "salary", 3. The assessee paid remuneration of Rs. 91,498 to one of its employees, Shri P. K. Ambani, who retired during the previous year relevant to the year under reference. This amount represented salary of Rs. 30,000, bonus of Rs. 4,998, leave salary of Rs. 10,000 and cash gratuity of Rs. 46,500. The Income-tax Officer disallowed Rs. 31,498 out of the aforesaid amount of Rs. 91,498 under Section 40a (5) as this amount represented excess over Rs. 60,000. 4. On appeal, the Appellate Assistant Commissioner held that the receipts arising out of transfer of import entitlements were revenue receipts. He also held that the Income-tax Officer was justified in disallowing the amount of Rs. 21,000 as entertainment expenses. He held that the bonus payment of Rs. 7,400 was to be treated as salary for the purpose of Section 40a (5 ). He upheld the disallowance of Rs. 31,498 made by the Income-tax Officer out of remuneration paid by the assessee to one of its employees, Shri P. K. Ambani. 5. Against the aforesaid order of the Appellate Assistant Commissioner, the assessee preferred a second appeal before the Tribunal. Before the Tribunal, it was contended on behalf of the assessee that the receipts arising out of transfer of import entitlements could not b
