Madras H.C : Two questions have been referred to us, one at the instance of the assessee, and the other at the instance of the Revenue. The assessment year is 1981-82

Counsel Appeared

P.P.S. Janarthana Raja, for the Assessee : C.V. Rajan, for the Revenue

JUDGMENT

R. Jayasimha Babu, J. :

Two questions have been referred to us, one at the instance of the assessee, and the other at the instance of the Revenue. The assessment year is 1981-82. The assessee is engaged in the business of shipping. It employs persons on the ships owned by it and which sail mainly outside the territorial waters of India. It also employs shore staff, who occasionally make trips outside India for relatively short periods of time.

The Tribunal having held in the appeal preferred by the assessee that the disallowance under r. 6D of the IT Rules would take into account all the expenses incurred by the assessee during the entire period of absence of its employees from headquarters, the correctness of that decision has been called into question in the reference made at the instance of the assessee. That question can be immediately disposed of, as another Bench of this Court in the case of R.K. Swamy Advertising Associations (P) Ltd. vs. CIT (1998) 147 CTR (Mad) 332 : (1996) 220 ITR 507 (Mad) : TC S17.1919 has already held that the expenditure incurred in connection with the travelling by an employee including hotel expenses or allowances paid in connection with such travelling is required to be excluded under r. 6D of the Rules. We, therefore, answer the question referred at the instance of the assessee in favour of the Revenue and against the assessee.

The question referred at the instance of the Revenue concerns the scope of s. 40A, sub-s. (5)(b) (i) of the IT Act. The Revenue has questioned the correctness of the Tribunal’s view that if an employee in the course of his employment with an Indian employer works outside India for any period, then, the expenditure incurred on his salary or allowance for such period would be covered by this clause, and s. 40A(5)(a) of the Act would become inapplicable in respect of such expenditure. Sec. 40A(5)(a)(i) of the Act refers to the expenditure incurred by an assessee by way of salary to an employee or former employee, and sub cl. (ii) refers to perquisites and allowances paid to the employee. Sec. 40A(5)(b)(i) of the Act excludes expenditure incurred on employees “in respect of any period of his employment outside India” from the purview of s. 40A(5). Sec. 40A(5)(c) sets out the limit referred to in cl. (a). Sec. 40A(5)(c)(i) of the Act specifies the limit with reference to “each month or part thereof comprised in the period of his employment in India during the previous year……”

The section does not define “employment”, nor is there any specification of the period referred to in s. 40A(5)(b)(i) of the Act. The Supreme Court in the case of CIT vs. Continental Construction Ltd. (1998) 145 CTR (SC) 1 : (1998) 230 ITR 485 (SC) : TC S18.2045 has held that s. 40(c) and 40A(5) are to be read together both for the purpose of ceiling on expenditure, as also for the purpose of deciding what is to be excluded from the expenditure subject to the ceiling, and that the two provisions are to be read as constituting a composite scheme. The purpose of prescribing ceiling on expenditure in connection with directors and employees under ss. 40(c) and 40A(5) of the Act, viz. : “………to discourage a company or an organisation from paying excessive salaries, remuneration, perquisites, etc. to its employees and/or directors. If it does so, the organisation will not be able to claim the entire expenditure as deduction, but only expenditure up to the ceiling limit. However, from this ceiling limit, certain kinds of expenditure on employees have been excluded—presumably because this kind of expenditure was considered reasonable and permissible. One such category of expenditure is expenditure on an employee in respect of his period of employment outside India. Presumably the organisation may have to pay to an employee posted outside India amounts which may be much higher than what he may be entitled to in India in view of the exigencies of the situation, his requirements at the place of posting and the fact that the amount may have to be paid in a foreign country. This expenditure is, therefore, not subject to a ceiling.”

In the case before the Supreme Court, the expenditure which was under consideration was that paid to directors, who were stationed outside India in connection with the work of the assessee.

The employment referred to in s. 40A(5)(b)(i) of the Act is outside India. This implies that the person is employed to perform work outside India for his employer and the salary and allowance paid to him for such employment outside India is an amount which would depend upon the exigencies of the situation, the likely use of foreign exchange and the provision of allowances, as also salary at a rate which may be higher because of his place of employment. It certainly signifies some reasonable period of time requiring continuous stay outside India. A person who normally works in India but is sent abroad for short periods to attend to the employer’s work abroad is not a person who can be regarded as being employed outside India. He continues to be employed in India and his place of employment does not change to a place outside India only on account of his having made short visits to places outside India in the course of the performance of his work for his employer in India.

In the case of the crew employed on a ship, the place of work is the ship itself. When the ship moves out of the territorial waters of India, the place of employment is a place outside India, and the person employed on the ship is employed outside India, though the employer is placed in India. Therefore, in the case of the crew employed on the ship for the period for which the ship remains outside the territorial waters of India, the employment of the crew for the purpose of this provision is to be regarded as employment outside India.

This provision was not intended to enable the assessee to incur expenditure as they pleased on employees by sending them outside India even though their place of work remained in India and they were to return to India after a short stay abroad while attending to the employer’s work outside India. The exclusion of expenditure or employees for the duration of their employment outside India is only intended to prevent hardship to the employer by limiting the deduction claimable by the employer to the ceiling fixed in ss. 40A and 40(c) of the Act which ceiling is fixed having regard to the economic conditions prevailing in India and what is regarded as reasonable expenditure that an employer could incur in the Indian context. The incurring of higher expenditure on employees who are employed outside India being necessary, that was regarded by the legislature as not requiring a ceiling, and was, therefore, excluded from the purview of s. 40A(5)(a) of the Act.

Learned counsel for the Revenue brought to our notice the decision of the High Court of Gujarat in the case of McGaw-Ravindra Laboratories (India) Ltd. vs. CIT (1992) 106 CTR (Guj) 24 : (1994) 210 ITR 1002 (Guj) : TC 27R.594, wherein also it was held that the salary paid to an employee in India at his normal rates of salary in the assessment year which include a period of 29 days for which he had remained abroad in connection with the employer’s work was not to be excluded from the purview of s. 40A(5)(a) of the Act.

Learned counsel for the assessee invited our attention to s. 6(1)(b) of the Act and the Explanation (a) thereunder, as amended from 1st April, 1990, by which a member of the crew of an Indian ship as defined in s. 3(18) of the Merchant Shipping Act would be treated as nonresident, if he remains outside India for 182 days. This only indicates recognition by the legislature that a person employed as a member of the crew on an Indian ship when the ship leaves India, is to be regarded as a person not resident in India by reason of his employment on the ship. Employment on ship which is outside Indian territorial waters has, therefore, been regarded as employment outside India.

As the Tribunal has found that the expenditure in respect of which the assessee contended that s. 40A(5)(b)(i) of the Act is applicable is expenditure incurred on the floating staff, the expenditure is required to be excluded from s. 40A(5)(a) of the Act. We make it clear that the expenditure incurred on the shore staff during the period spent by them outside India is not to be so excluded. Parties to bear the respective costs.

[Citation : 250 ITR 624]