High Court Of Calcutta
CIT vs. Grindlays Bank PLC
Sections 40A(5)
Asst. Year 1976-77
Y.R. Meena & Arun Kumar Mitra, JJ.
IT Ref. No. 107 of 1993
13th July, 2001
Counsel Appeared
M.P. Agarwal with R.K. Chowdhury, for the Revenue : None, for the Assessee
ORDER
BY THE COURT :
On an application under s. 256(1) of the IT Act, 1961, the Tribunal has referred the following question for our opinion : “1. Whether, on the facts and in the circumstances of the case, the Hon’ble Tribunal is correct in law in upholding the order of the CIT(A) in respect of disallowance under s. 40A(5) of the IT Act, excluding the proportionate expenses deductible under s. 20(1)(i) of the IT Act.”
2. The assessee is a banking company within the meaning of Banking Regulation Act and is incorporated under the laws of United Kingdom. In the return filed on 31st Dec., 1976, assessee has declared the income of Rs. 12,25,99,190. The assessment year involved is 1976-77. During the course of assessment AO noticed that assessee has paid excess amount to employees in terms of s. 40A(5). Assessee has in fact claimed the proportionate expenses deductible under s. 20(1)(i) of the Act in computing the income under the head interest on securities’ for the purpose of disallowance under s. 40A(5) that has been rejected and the AO has added back that excess amount in the income of the assessee. In appeal, CIT(A) has taken the view that while computing the income for the purpose of disallowance under s. 40A(5), the interest of securities are not to be included. In appeal before the Tribunal, Tribunal has confirmed the view taken by CIT(A).
3. None appeared for the assessee. We heard learned counsel for the Revenue. The facts are not in dispute that AO has disallowed Rs. 27,07,043 under s. 40A(5). While disallowing this amount, the AO has taken into account the total payment to the employees, which includes the payment of interest on securities. CIT(A) as well as the Tribunal have taken the view that for the purpose of disallowance under s. 40A(5), the interest paid to the employees is not computable as income under the head ‘profits and gains of business or profession’. Therefore, that cannot be included for the purpose of disallowance under s. 40A(5) of the Act.
4. The provision of s. 40A(5) provides that while computing the income under the heads ‘profits and gains of the business or profession’ certain excess amount or expenses paid to the employees or director of the company are not deductible in computing the income of the assessee under head ‘profit and gains of the business’. There is no dispute that if interest paid to the employees/directors of the company if that be included in that case there will be an excess payment from the limit prescribed for the purpose of disallowance, that has to be disallowed.
5. The provisions of s. 40A(5) start with non obstante clause which contemplates that provision of s. 40A(5) shall have effect notwithstanding anything to the contrary contained in any other provisions of this Act, relating to the computation of income under the head ‘profits and gains of the business or profession’. Sub-s. (5) of s. 40A provides that where the assessee incur an expenditure which results directly or indirectly in the payment of any salary to an employee or incurs an expenditure which results directly or indirectly in the provision of any perquisite to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of assets of the assessee used by the employee, then subject to the provision of cl. (b) so much of the expenditure or allowance as is in excess of the limit specified in respect thereof in cl. (c) shall not be allowed as a deduction. There is no dispute that if we include the interest paid to the employee, the amount of Rs. 27,07,043 is excess payment to employee for the purpose of s. 40A(5).
6. The provisions of s. 20 provides for deduction from interest on securities in the case of banking company : (i) the sum to be regarded as a sum reasonably expended for the purpose referred to in cl. (i) of s. 19 shall be an amount bearing to the aggregate of its expenses as are admissible under the provisions of ss. 30, 31, 36 and 37; (ii) the amount to be regarded as interest payable on money borrowed for the purpose referred to in cl. (ii) of s. 19 shall be an amount which bears to the amount of interest payable on all moneys borrowed by the company the same proportion as the gross receipts from interest on securities chargeable to income-tax under s. 18 bear to the gross receipts from all sources which are included in the P&L a/c of the company. In sub-s. (2), the expense payable that the expenses deducted under cl. (i) and cl. (ii) of sub-s. (1) shall not again form part of the deductions admissible under ss. 30 to 37 for the purposes of computing the income of the company under the head ‘profits and gains of business or profession’. The Explanation to sub-s. (ii) further provides that for the purpose of this section “money borrowed” includes moneys received by way of deposits.
7. It is true that the deduction from the interest on securities is allowable under s. 20. But how the interest paid to the employee or director can be excluded for the purpose of disallowance under s. 40A(5) of the Act. That has nothing to do with the disallowance under s. 40A(5). Moreso, when the 40A(5) starts with the non obstante clause, if any provision is contrary to the provision of s. 40A(5) of the Act, the provision of s. 40A(5) will prevail over other provision of the Act.
In the result, we answer the question in negative that is in favour of Revenue and against assessee.
[Citation : 254 ITR 289]
