2013 (12) TMI 1208 - HC - Income Tax

Perquisites to director - Held that - Following Commissioner of Income Tax v. HICO Products Pvt. Ltd. 1992 (11) TMI 58 - BOMBAY High Court - In the case of employee director and such other persons, who are covered by the proviso to Clause (a) the aggregate ceiling of Rs.72000/- was fixed not only in respect of expenditure referred to in sub-clause (i) and sub-clause (ii) but also those referred to in sub-clause (i) and (ii) of clause (c) of Section 40 (5) of the Act - The legislative intention was to treat the employee directors and other persons mentioned in the proviso differently from other employees in the matter of allowability of expenditure incurred on them - The expenditure incurred by the director were within the ceiling. Whether proposed dividend is an ascertained liability - Held that - Following CIT v. Enfield India Ltd 1996 (10) TMI 14 - MADRAS High Court - The dividend was only proposed and was not yet approved by the General Body of the shareholders at the annual general meeting - It could not be said to be liability on the first day of the computation period under sub-section (1) of Section 80J - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of perquisites to directors under Section 40A(5) of the Income Tax Act, 1961.
2. Deductibility of provision for proposed dividend from the value of assets for computing capital employed.

Issue 1: Disallowance of Perquisites to Directors:
The High Court considered two reference applications arising from ITA appeals for the assessment years 1982-83 and 1983-84. The questions raised pertained to the disallowance of perquisites to directors under Section 40A(5) of the Income Tax Act, 1961. The Court referred to a judgment by the Bombay High Court in a similar case and held that the legislative intent was to treat employee directors differently regarding the allowability of expenses incurred on them. The Court relied on the view taken by the Gujarat High Court and distinguished judgments from other High Courts. It was established that the expenses incurred by the director were within the ceiling limit of Rs.72,000, leading to a decision in favor of the assessee against the revenue.

Issue 2: Deductibility of Proposed Dividend Provision:
Regarding the deductibility of the provision for proposed dividend from the value of assets for computing capital employed, the Court referred to a judgment by the Madras High Court. The Madras High Court's opinion, supported by Supreme Court decisions, clarified that a proposed dividend by the Board of Directors, without approval by the General Body of shareholders, did not constitute a debt owed on the first day of the computation period. Therefore, it was not liable to be deducted from the aggregate value of assets for determining capital employed under Section 80J. In the present case, where the dividend was proposed but not approved by the General Body, the Court ruled in favor of the assessee against the revenue on this issue as well.

In conclusion, the High Court disposed of the income tax reference, deciding in favor of the assessee on both issues raised in the reference applications. The Income Tax Appellate Tribunal was directed to proceed accordingly based on the Court's judgments.