Kerala H.C : Whether the first proviso to s. 40A(5)(a) of the IT Act, 1961, is an exception not only to s. 40A(5) (a), but also to the scheme of limits prescribed by s. 40A(5)(c), and if so, whether, on the facts and in the circumstances of the case, the assessee is not entitled to deduction of the full amount of salary and perquisites amounting to Rs. 37,063 paid by it to its whole-time director ?

Counsel Appeared

Warrier, for the Assessee: P.K.R. Menon & N.R.K. Nair, for the Revenue

S. PARIPOORNAN, J. :

These are connected cases. At the instance of the same assessee/applicant, the Tribunal has referred the following questions of law, in the above two cases, for the decision of this Court : IT Ref. No. 200 of 1987 :

“Whether the first proviso to s. 40A(5)(a) of the IT Act, 1961, is an exception not only to s. 40A(5) (a), but also to the scheme of limits prescribed by s. 40A(5)(c), and if so, whether, on the facts and in the circumstances of the case, the assessee is not entitled to deduction of the full amount of salary and perquisites amounting to Rs. 37,063 paid by it to its whole-time director ?”

IT Ref. No. 201 of 1987 :

“1. Whether the first proviso to s. 40A(5)(a) of the IT Act, 1961, is an exception not only to s. 40A (5)(a) but also to the scheme of the limits prescribed by s. 40A(5)(c) and if so, whether, on the facts and in the circumstances of the case, the assessee is not entitled to deduction of the full amount of salary and perquisites totalling Rs. 59,486 paid by it to its whole-time director ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in allowing weighted deduction only on the cost of printing on the cartons used for exporting the assessee’s products and not on the cost of the cartons themselves ?”

The respondent is the Revenue. We are concerned with the asst. yrs. 1977-78 and 1979-80. The accounting periods ended on March 31, 1977 and March 31, 1979, respectively. The assessee is a company. During the relevant years, it was dealing in tea and spices. There are three directors in the company. One of them is a whole- time director. The whole-time director who was in charge of the company was Shri S. V. Doshi. In the year 1977- 78, he was given a salary of Rs. 22,320. He was also provided with, a car for his use, rent-free quarters and an air conditioner besides reimbursement of energy charges, totalling to Rs. 14,743. The ITO invoked s. 40A(5) of the IT Act and restricted the expenses to 1/5th of the salary paid to the director to the extent of Rs. 4,464 and disallowed the balance amount of Rs. 10,279. The plea of the assessee that s. 40A(5) of the Act will not apply was negatived. This was confirmed in appeal by the CIT (A). In further appeal, the Tribunal, following the decision of this Court in IT Ref. No. 67 of 1976 dt. 287-1978, confirmed the order passed by the lower authorities. It is thereafter at the instance of the assessee that the question of law formulated hereinabove, which is the subject- matter of IT Ref. No. 200 of 1987, has been referred for the decision of this Court. Similarly, for the asst. yr. 1979-80, the whole-time director was paid a salary of Rs. 27,300 in addition to perquisites by way of expenditure on car, depreciation on car, value of the residential accommodation provided free, energy charges and cost of repairs and maintenance of air conditioner amounting in all to Rs. 32,473. The ITO allowed 1/5th of the salary of Rs. 5,460. The balance of Rs. 27,013 was disallowed by the ITO by invoking s. 40A(5) of the Act. The disallowance so made by the ITO was confirmed in first appeal by the CIT (A) and in second appeal by the Tribunal. The Tribunal followed the decision of this Court in IT Ref. No. 67 of 1976. The assessee also claimed relief under s. 35B of the IT Act (weighted deduction). It was claimed under various heads-bank charges on overdue bills, cost of cartons, supervision charges on export, carriage outwards and overdue interest on foreign bills. The claims were substantially disallowed. The Tribunal allowed weighted deduction under s. 35B of the Act in respect of the cost of printing on the cartons used by the assessee for export. The disallowance on the rest of the items was confirmed. Aggrieved by the aforesaid order of the Tribunal, at the instance of the assessee, the Tribunal has referred the two questions of law formulated hereinabove for the assessment year 1979-80, which is the subject-matter of IT Ref. No. 201 of 1987, for the decision of this Court.

We heard counsel for the applicant-assessee, Mr. P. G. K. Warrier, as also counsel for the Revenue, senior standing counsel, Mr. P. K. R. Menon. Prima facie, the answer to the sole question in IT Ref. No. 200 of 1987 and the first question in IT Ref. No. 201 of 1987 is concluded by the decisions of this Court in Travancore Rayons Ltd. vs. CIT (1986) 55 CTR (Ker) 141:(1986) 162 ITR 732 (Ker) and Travancore Rayons Ltd. vs. CIT (1988) 172 ITR 350 (Ker). Counsel for the assessee, Mr. P. G. K. Warrier, strongly urged that the said decisions require reconsideration. Counsel placed considerable reliance on the decisions of the Gujarat and Karnataka High Courts, respectively, in CIT vs. Bharat Vijay Mills Ltd. (1981) 128 ITR 633(Guj) and International Instruments (P) Ltd. vs. CIT (1981) 130 ITR 315 (Kar) and submitted that the decisions of this Court in Travancore Rayons Ltd.’s case (supra) and (supra) require reconsideration. We perused the said decisions. In Travancore Rayons Ltd. vs. CIT (supra), this Court considered the entire matter in detail and has also in terms referred to the decision of the Gujarat High Court in Bharat Vijay Mills Ltd.’s case (supra) and has held that, in the case of remuneration paid to a director, an employee of the company, consisting of salary and perquisites only, the expenditure to be allowed is only with reference to s. 40A(5)(a) and (c) of the Act and not with reference to s. 40(c) of the Act. The above decision was followed by the Court in Travancore Rayons Ltd.’s case (supra). The decision of this Court in Travancore Rayons Ltd.’s case (supra) has been followed by a Bench of the Punjab and Haryana High Court in CIT vs. Amritsar Rayon & Silk Mills (P) Ltd. (1990) 81 CTR (P & H) 242:(1989) 179 ITR 292 (P & H). Our attention was not drawn to any decision of the Supreme Court which has taken a different view or any other High Court dissenting from the view taken by our High Court in the decision reported in (1986) 162 ITR 732(Ker) (supra). On the other hand, the Punjab and Haryana High Court has followed the above Division Bench decision of this Court. Law is not a mental exercise. Especially in regard to an all India statute, there should be certainty. Bearing the above aspects in view, we are of the opinion that the Bench decision of this Court in Travancore Rayons Ltd.’s case (supra), does not require reconsideration. The decision of the Tribunal is justified in law. The sole question in IT Ref. No. 200 of 1987 and the first question in IT Ref. No. 201 of 1987 should be answered in the affirmative, against the assessee and in favour of the Revenue. We do so.

The only other question that survives for our consideration is question No. 2 in IT Ref. No. 201 of 1987. It was submitted that weighted deduction is allowed on the cost of printing on the cartons. The Tribunal was in error in not allowing deduction on the cost of cartons. We were taken through s. 35B of the IT Act. We do not find that the various items for which weighted deduction under s. 35B of the Act was claimed and specified in para. 2 of the order of the Tribunal dt. April 2, 1983, come within the language of s. 35B of the Act. In this view of the matter, we hold that the assessee is not entitled to anything more than the sum allowed by way of weighted deduction by the Tribunal. The assessee is not entitled to weighted deduction on the cost of the cartons themselves.

We answer question No. 2 in IT Ref. No. 201 of 1987 in the affirmative, against the assessee and in favour of the Revenue.

The IT referred cases are disposed of as above.

[Citation : 189 ITR 374]