1993 (12) TMI 2 - HC - Income Tax

Summary

Issues:
1. Applicability of sections 40(c) and 40A(5) to a director-employee.
2. Determination of remuneration for a director who is also an employee.
3. Inclusion of gratuity in remuneration for disallowance under sections 40A(5)/40(c).
4. Relevance of the point of time for payment under section 40(c).
5. Limitation on expenditure disallowance for reasonable payments.
6. Disallowance of specific amounts paid to a director-employee.

Analysis:
The High Court of Bombay was presented with a reference under section 256(1) of the Income-tax Act, 1961, regarding various questions related to the assessment year 1975-76 concerning a director-employee of an assessee-company. The primary issue revolved around whether the provisions of section 40(c) or section 40A(5) applied to the case. The court held that in the case of a director-employee, both sections are applicable, and the higher of the two ceilings must be applied. This decision was influenced by the Supreme Court's judgment in CIT v. Indian Engineering and Commercial Corporation P. Ltd. [1993] 201 ITR 723.

Regarding the inclusion of gratuity in the remuneration for disallowance, the court referred to a previous decision in CIT v. Colgate Palmolive (India) Pvt. Ltd. [1994] 210 ITR 770. The court ruled that the expenditure on payment of retirement gratuity was not covered under sections 40(c) or 40A(5) but was deductible under section 37(1) of the Income-tax Act, 1961. Thus, the court answered this question in favor of the assessee.

As a consequence of the above rulings, questions related to the point of time for payment under section 40(c) and the limitation on expenditure disallowance did not require an answer. However, a specific sum paid to the director-employee was subject to disallowance. The court directed the Tribunal to recompute the disallowance amount after excluding the gratuity payment and considering the aggregate ceiling of Rs. 72,000 applicable to the case.

Ultimately, considering the facts and circumstances, the court made no order as to costs, concluding the judgment on the referenced issues related to the Income-tax Act, 1961.