High Court Of Delhi
CIT vs. Siya Ram Kumar Engineering Works (P) Ltd.
Section 40A(5)
Asst. Year 1978-79, 1979-80
Arijit Pasayat, C.J. & D.K. Jain, J.
IT Ref. Nos. 120 & 121 of 1983
8th August, 2001
Counsel Appeared
R.D. Jolly with Ms Prem Lata Bansal, for the Revenue : None, for the Assessee
JUDGMENT
BY THE COURT :
On being moved for reference under s. 256(1) of the IT Act, 1961 (in short the Act) by the Income-tax Appellate Tribunal Delhi Bench (in short, the Tribunal) has referred the following question for the asst. yrs. 1978-79 and 1979-80 for opinion of this Court :
“Whether, on the facts and in the circumstances of the case, the ITO in the assessment of the assessee was justified in making the addition of Rs. 30,063 (asst. yr. 1978-79) and Rs. 96,681/- (asst. yr. 1979-80) by invoking the provisions of s. 40A(5) of the IT Act, 1961 ?
2. Factual position is almost undisputed and is as follows : Assessee is a company incorporated under the Companies Act, 1956. For the two asst. yrs. 197879 and 1979-80, previous years ended on 30th Sept., 1977 and 30th Sept., 1978, respectively. Out of the claim of deduction made in respect of three directors of the company as salary, bonus, commission and house rent allowance, the ITO disallowed the claim for Rs. 30,063 for the first year and Rs. 96,681 in the second year. Such disallowance was made with reference to s. 40A(5)(c) of the Act. Matter was carried in appeals before the CIT(A), who held that s. 40A(5)(c) had no application regarding remuneration of three directors. Matter was carried in appeals before the Tribunal by the Revenue. Following its view in some other case the Tribunal was of the view that salary, bonus, commission and house rent allowance have to be restricted to the extent it exceeds Rs. 72,000 in each case. It was held that though s. 40A(5) had application aforesaid outer limit was to be followed.
3. On being moved for reference, the question as set out above has been referred for opinion of this Court.
4. We have heard the counsel for the Revenue. There is no appearance on behalf of the assessee.
5. Learned counsel for Revenue submitted that disallowance made by the ITO was justified and the Tribunal should not have varied it.
6. We find that the ITO had proceeded on the basis as if s. 40A(5)(c) was applicable to the facts of the case. In fact, correct provision which was applicable was proviso to s. 40A(5)(a). Sec. 40A(5) (c) applies to persons other than directors whereas s. 40A(5)(a) relates to directors. Proviso to s. 40A(5)(a)(i) applicable to employee-directors at the relevant time read as under : Sec. 40A(5) prior to its omission by the Direct Tax Laws (Amendment) Act, 1987 (4 of 1988) w.e.f. 1st April, 1989 stood as under : 40A(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 cl. (b), so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in cl. (c) shall not be allowed as a deduction : Provided that where the assessee is a company, so much of the aggregate of : (a) the expenditure and allowance referred to in sub-cls. (i) and (ii) of this clause; (b) the expenditure and allowance referred to in sub-cls. (i) and (ii) of cl. (c) of s. 40, in respect of an employee or a former employee, being a director or a person who has a substantial interest in the company or a relative of the director or of such person as in excess of the sum of seventy-two thousand rupees shall in no case be allowed as a deduction : Provided further that in computing the expenditure referred to in sub-cl. (i) or the expenditure or allowance referred to in sub-cl. (ii) of this clause or the aggregate referred to in the foregoing proviso, the following shall not be taken into account, namely : (i) the value of any travel concession or assistance referred to in cl. (5) of s. 10; (ii) passage moneys or the value of any free or concessional passage referred to in sub-cl. (i) of cl. (6) of s. 10 ; (iii) any payment referred to in cl. (iv) of cl. (v) of sub-s. (1) of s. 36. (iv) any expenditure referred to in cl. (ix) of sub-s. (1) of s. 36.”
As the ITO proceeded on the erroneous basis that s. 40A(5)(c) was applicable, confusion arose. Tribunal has applied the correct provision. In that view of the matter our answer is in the negative in favour of the assessee and against the Revenue.
[Citation : 254 ITR 358]
