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TMI Blog2006 (5) TMI 60X X X X Extracts X X X X X X X X Extracts X X X X ..... ount? (ii) Whether two separate limits apply for the purposes of computing disallowance under section 40A(5) of the Act where an employee retires and ceases to be in employment during the previous year, so that one limit will apply in respect of the amounts and benefits received by him as an employee and another for the amounts and benefits received by him as a former employee? The High Court answered both the questions in favour of the Revenue and against the assessee. Being aggrieved the appellant has approached this court. As far as the first question is concerned, the High Court answered it in the affirmative relying on the decision of this court in State Bank of Travancore v. CIT [1986] 158 ITR 102; [1986] 2 SCC 11. In the decision of State Bank of Travancore v. CIT [1986] 158 ITR 102; [1986] 2 SCC 11 the minority opinion expressed by Tulzapurkar, J. was that the stickiness of advances or loans objectively established to the satisfaction of the taxing authorities by furnishing proper material, is sufficient to prevent the accrual of interest thereon as real income and would have the effect of rendering such income hypothetical. Therefore the interest cannot be bro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1978-79 the taxability of interest on doubtful debts credited to suspense account would be decided in the light of the Board's earlier circular dated October 6, 1952 as the said circular was withdrawn only in June, 1978. With effect from 1979-80 the new procedure prescribed under the 1984 circular would apply. The procedure prescribed is not relevant for our purposes. But it is clear that the circular issued in 1978 was effectively set aside and rendered ineffective. The court in UCO Bank's case [1999] 237 ITR 889 (SC) was of the view that these circulars dated October 6, 1952 and October 9, 1984 were binding on the authorities under section 119(1) of the Act. The court was also of the view that the judges in State Bank of Travancore [1986] 158 ITR 102 (SC) did not have the occasion to consider the 1984 circular and proceeded on the assumption that the 1978 circular was in force. The court did not agree with the conclusion expressed by the majority in State Bank of Travancore [1986] 158 ITR 102 (SC) and said: The relevant circulars of the Central Board of Direct Taxes cannot be ignored. The question is not whether a circular can override or detract from the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employee was in employment and again up to the limit of ₹ 60,000 when the employee retires? The Calcutta High Court in the case of Hindustan Motors Limited v. CIT [1985] 156 ITR 223 construed the provisions of section 40A(5)(c) and came to the conclusion that for the period that an employee remains in service he is to be treated as an employee and all payments made to him as an employee would be allowed as a deduction within the permissible monthly limit. After that period, when such an employee retires, he is to be treated as a former employee and payments made to him as a former employee again ought to be deductible within the permissible limit. The court was of the view that any other construction of such section under which such an employee is treated only as an employee or as a former employee in the year in question would render one part or the other of the section nugatory. The court rejected the submission on behalf of the Revenue that the status of the employee as on the last date of the previous year should be taken into consideration for the purpose of fixing the limit of deductions. The court said if this contention was to be accepted then the salary paid t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 60,000. Learned counsel appearing on behalf of the appellant has urged that the view expressed by the Calcutta High Court in Hindustan Motors Ltd. v. CIT [1985] 156 ITR 223 should be accepted. As far as the respondents are concerned, they have reiterated the reasoning of the Bombay High Court and have submitted in addition that the word and in section 40A(5)(c)(i) should be read disjunctively as or . Several decisions have been cited in support of this principle of interpretation. We are of the opinion that the opinion expressed by the Bombay High Court is correct. The intention of the Legislature was to fix limits of deduction under the various clauses of sub-section (5) of section 40A. If the view accepted by the Calcutta High Court were to be accepted the fixation would be meaningless as the limits would vary depending on the date on which an employee may retire. According to the Calcutta High Court's view if an employee serves for 12 months, and retires on the last day of the previous year, the employer would be entitled to claim a deduction of ₹ 60,000 on account of salary paid to an employee while in service and another limit of ₹ 60,000 on acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) was inapt. Both the proviso and sub section (6) deal with different kinds of payment or expenditure which, therefore, necessitated the use of the word aggregate . Thus the first proviso refers to: (a) the expenditure and allowance referred to in sub-clauses (i) and (ii) of this clause; and (b) the expenditure and allowance referred to in sub-clauses (i) and (ii) of clause (c) of section 40. Similarly sub section (6) refers to (a) such expenditure by way of fees, or (b) where the assessee has also incurred in relation to such person any expenditure by way of salary referred to in sub-clause (i) of clause (a) of sub-section (5), the aggregate of such expenditure by way of fees and by way of salary. Sub-section (5)(c) on the other hand as we have seen speaks of an amount and salary indicating a single deduction where the use of the word aggregate was uncalled for. We would, therefore, affirm the answer given in the impugned judgment to the second question in favour of the Revenue and hold that only one limit is prescribed for deduction on account of salary whether paid to an employee in service or a retired employee in any one previous year. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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