1998 (2) TMI 537 - SC - Income Tax

Ceiling limit provided u/s 40(c) and 40A(5) - remuneration to directors outside India - impugned remuneration has to be excluded u/s 40A(5)(b)(i) while calculating the ceiling laid down in the first proviso to section 40A(5)(a) & 40(c)

Issues Involved:
1. Interpretation of sections 40(c) and 40A(5) of the Income-tax Act, 1961.
2. Applicability of the ceiling limit on remuneration paid to directors stationed outside India.
3. Determination of permissible expenditure for employee-directors.

Detailed Analysis:

1. Interpretation of Sections 40(c) and 40A(5) of the Income-tax Act, 1961:
The core issue was whether remuneration paid to directors stationed outside India should be excluded from the ceiling limit of Rs. 72,000 as per sections 40(c) and 40A(5)(a) of the Income-tax Act, 1961. The relevant provisions were analyzed to determine if the remuneration paid to employee-directors for their employment outside India should be considered within the prescribed ceiling limits.

2. Applicability of the Ceiling Limit on Remuneration Paid to Directors Stationed Outside India:
The respondent-assessee, a civil construction company, paid substantial remuneration to its directors, including those stationed outside India. The Income-tax Officer disallowed the amount exceeding Rs. 72,000 per director as per sections 40(c) and 40A(5)(a). The assessee contended that the remuneration paid to directors for their employment outside India should not be included in the ceiling limit calculation.

The Commissioner of Income-tax modified the Income-tax Officer's order, agreeing with the assessee that remuneration for employment outside India should not be considered within the ceiling limit. The Tribunal upheld this decision, and the High Court affirmed it, leading to the present appeals.

3. Determination of Permissible Expenditure for Employee-Directors:
The Supreme Court examined the legislative history and judicial precedents regarding sections 40(c) and 40A(5). Section 40(c) deals with the remuneration, benefits, or amenities provided to directors and sets a ceiling of Rs. 72,000 for such expenditure. Section 40A(5) relates to expenditure on salaries and perquisites for employees, including directors, and also prescribes a ceiling.

The Court noted that both sections 40(c) and 40A(5) apply to employee-directors. Previous judgments, including CIT v. Indian Engineering and Commercial Corporation Pvt. Ltd. and CIT v. Synpol Products Pvt. Ltd., established that the higher of the two ceilings should be applied when a person is both an employee and a director.

The Court further analyzed section 40A(5)(b), which excludes certain expenditures, including those for employment outside India, from the ceiling limit. The Court held that this exclusion applies to employee-directors as well. Therefore, remuneration paid to directors for their employment outside India should not be included in the ceiling limit calculation under sections 40(c) and 40A(5)(a).

The Court emphasized that the purpose of these provisions is to prevent excessive remuneration but also to allow reasonable expenditures, such as those for employment outside India. The Court concluded that sections 40(c) and 40A(5) should be read together, and the exclusions under section 40A(5)(b) should apply to employee-directors.

Conclusion:
The Supreme Court affirmed the High Court's decision, holding that remuneration paid to directors for their employment outside India should be excluded from the ceiling limit under sections 40(c) and 40A(5)(a). The appeals were dismissed with costs, and the question was answered in favor of the assessee.

← Previous Next →