1995 (1) TMI 114 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 40(c) versus Section 40A(5) of the Income-tax Act, 1961, for determining the allowable deductions for salary and perquisites of directors who are also employees.
2. Whether the higher ceiling of Rs. 1,02,000 applies to each director under Section 40(c) or if the headwise limit under Section 40A(5) applies.

Issue-wise Detailed Analysis:

1. Applicability of Section 40(c) versus Section 40A(5):

The primary issue in this case is whether the composite relief of Rs. 1,02,000 for each director is available under Section 40(c) of the Income-tax Act, 1961, or if the headwise limit as contemplated by Section 40A(5) applies. The assessee-company paid salaries and provided perquisites to its Managing Director and Director, which the Assessing Officer restricted based on Section 40A(5). The CIT(A) upheld this decision, following the Punjab and Haryana High Court's judgment in CIT v. Amritsar Rayon & Silk Mills (P.) Ltd. and the Kerala High Court's judgment in Travancore Rayons Ltd. v. CIT.

2. Higher Ceiling of Rs. 1,02,000:

The assessee argued that the Supreme Court's decision in CIT v. Indian Engg. & Commercial Corpn. (P.) Ltd. established that for directors who are also employees, both Section 40(c) and Section 40A(5) apply, and the higher of the two ceilings should be applied. The Supreme Court observed that "the higher of the two ceilings has to be applied" in such cases. The assessee contended that this decision nullified the Punjab and Haryana High Court's judgment in Amritsar Rayon & Silk Mills (P.) Ltd.

The Department argued that the Supreme Court's remarks were obiter dicta and could not overrule the jurisdictional High Court's decision. They maintained that the facts in the Supreme Court case were distinguishable and supported the application of Section 40A(5) as per the Punjab and Haryana High Court's decision.

Tribunal's Analysis:

The Tribunal examined the Supreme Court's decision in Indian Engg. & Commercial Corpn. (P.) Ltd., which compared Section 40(a)(v) with Section 40A(5) and concluded that both provisions were substantially similar. The Supreme Court held that for directors who are also employees, both Sections 40(c) and 40A(5) are attracted, and the higher ceiling should be applied.

The Tribunal also considered the Andhra Pradesh High Court's decision in CIT v. D.B.R. Mills, which held that both Section 40(c) and Section 40A(5) apply to director-employees. The Kerala High Court in Travancore Rayons Ltd. further clarified that the permissible deduction for salary and perquisites is limited to the amounts mentioned under Section 40A(5)(a)(i) and (ii) and cannot exceed the maximum stipulated amount.

Harmonizing the Judgments:

The Tribunal found no contradiction between the Supreme Court's observations and the Punjab and Haryana High Court's decision. The Supreme Court's statement that "the higher of the two ceilings has to be applied" does not imply that the higher ceiling of Rs. 1,02,000 is automatically available for salary and perquisites alone. The Kerala High Court's illustrations clarified that if salary and perquisites exceed the respective limits under Section 40A(5), the higher ceiling under Section 40(c) does not apply.

Conclusion:

The Tribunal upheld the CIT(A)'s order, following the jurisdictional High Court's decision in Amritsar Rayon & Silk Mills (P.) Ltd. It concluded that the headwise limitation under Section 40A(5) applies to salary and perquisites, and the higher ceiling of Rs. 1,02,000 under Section 40(c) is not applicable in this context. The appeal was dismissed.

Result:

The appeal by the assessee was dismissed, affirming the disallowance of Rs. 52,071 under Section 40A(5) of the Income-tax Act, 1961.