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Issues:
1. Disallowance of salary under section 40A(5)(a) of the Income-tax Act, 1961. 2. Interpretation of clause (b)(i) of section 40A(5) regarding employment outside India. Analysis: The judgment concerns the disallowance of Rs. 23,981 under section 40A(5)(a) of the Income-tax Act, 1961, relating to the salary of two employees, Capt. M. R. Dandekar and Capt. P. R. Sawant, who were captains of ships owned by the assessee. The Income Tax Officer (ITO) disallowed a portion of their salaries as it exceeded the prescribed limit. The assessee contended that the salaries were paid for the period the employees were outside India, invoking clause (b)(i) of section 40A(5) which excludes expenditures in relation to employees working outside India from disallowance under clause (a). The department argued that since the employment contracts took place in India and the ships had Indian flags, clause (b)(i) did not apply. The assessee provided details showing the time each employee spent in India and abroad during their employment. The tribunal analyzed the meaning of "employment outside India," emphasizing that if an employee worked outside India during their employment, the salary for that period should not be disallowed under section 40A(5)(a). The tribunal rejected the Commissioner (Appeals)'s interpretation that "employment outside India" referred to the contract of employment taking place outside India. It clarified that the focus should be on the period of actual employment outside India, regardless of where the contract was signed. The tribunal highlighted that the provision aims to cover periods of physical work outside India, not just the contract location. It also noted that the salary for periods spent in India was below the disallowance limit, and thus, not subject to disallowance under section 40A(5)(a). Ultimately, the tribunal set aside the disallowance of Rs. 23,981, emphasizing that the salary related to the period of employment outside India should not be considered for disallowance under section 40A(5)(a) as per the applicable clause (b)(i). The judgment provides a detailed analysis of the interpretation of the relevant provisions and clarifies the criteria for determining the applicability of disallowances under the Income-tax Act, 1961.
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