2000 (11) TMI 50 - HC - Income Tax

Summary

Issues:
1. Interpretation of rule 6D of the Income-tax Rules regarding disallowance of expenses incurred during employees' absence from headquarters.
2. Scope of section 40A(5)(b)(i) of the Income-tax Act concerning expenditure on employees working outside India.

Issue 1: Interpretation of Rule 6D of the Income-tax Rules
The High Court addressed the issue of the disallowance of expenses under rule 6D of the Income-tax Rules. The Tribunal had previously held that all expenses incurred by the assessee during the entire absence period of its employees from headquarters should be considered for disallowance. The court referred to a previous case and concluded that expenses related to employee travel, including hotel expenses or allowances, should be excluded under rule 6D. Therefore, the question referred by the assessee was answered in favor of the Revenue.

Issue 2: Scope of Section 40A(5)(b)(i) of the Income-tax Act
The High Court examined the scope of section 40A(5)(b)(i) of the Income-tax Act, which deals with expenditures on employees working outside India. The court analyzed the provisions of section 40A(5)(a) and (c) along with relevant judicial precedents. It emphasized that the purpose of setting expenditure limits was to prevent excessive payments to employees. The court clarified that the exclusion of expenditure on employees working outside India was intended to prevent hardship to the employer within reasonable limits. The judgment differentiated between employees sent abroad for short periods and those employed outside India for a substantial duration.

The court further discussed the case of crew members on ships, highlighting that when a ship operates outside Indian waters, the crew's employment can be considered as outside India. The judgment emphasized that the exclusion of expenditure for employees working outside India was not meant to allow unrestricted spending by sending employees abroad temporarily. The court referred to a Gujarat High Court decision and an amendment to the Act recognizing crew members of Indian ships as non-residents after a certain period outside India.

In conclusion, the court ruled that the expenditure on floating staff, as contended by the assessee under section 40A(5)(b)(i), should be excluded from section 40A(5)(a) of the Act. However, it clarified that the expenditure on shore staff during their time outside India should not be excluded. The judgment provided a detailed interpretation of the legal provisions and relevant case law to resolve the issues raised by the parties.