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TMI Blog2000 (11) TMI 115X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessment year 1978-79. The Assessing Officer considered the international law and came to the conclusion that so long as the Indian flag was flying on the ship, the said ship was considered to be Indian territory and, therefore, the place of employment of the floating staff was in India irrespective of the fact as to where the ship was sailing. The Assessing Officer further came to the conclusion that there was a difference between "working outside India" and "employment outside India". He further came to the conclusion that under section 40A, the employment outside India is not covered as the cost of living in a foreign country is higher than the cost of living in India but in the case of floating staff the employees stay on board the ship and as such they are not required to spend any amount in a foreign country for their stay and, therefore, section 40A(5) was applicable to the floating staff as if they were working in India. Consequently, the Assessing Officer disallowed Rs. 3.56 lakhs under section 40A(5). Being aggrieved, the assessee went in appeal to the Commissioner of Income-tax (Appeals). The appellate authority, however, came to the conclusion that, on the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee on payment of salary was not to be allowed as deduction in computing the taxable profits to the extent that it exceeded the prescribed limit for each month or a part thereof comprised in the period of his employment in India (underlining supplied by us). For this purpose, salary was defined as per section 17(1) of the Act. However, limitations of section 40A(5) had no application in cases of payments made to an employee in respect of any period of his employment outside India. Therefore, section 40A(5)(b)(i), as reproduced hereinabove is an exclusionary clause. For the purposes of deciding the present matter, we are mainly required to construe the expression "employment outside India" under section 40A(5)(b)(i). For that purpose, one has to keep in mind the fact that section 40A(5) deals with deductions in the hands of an employer unlike deductions in the hands of an employee which are governed by the provisions of sections 5, 6, 9 and 192 of the Income-tax Act. A reading of section 40A(5) shows that section 40A(5)(a) speaks of salary, perquisites and allowances which should be disallowed in the hands of the company subject to the provisions of section 40A(5)(b) and keepi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontract and since the floating staff worked on the Indian territory even outside the territory of India, the employees were employed in India and, therefore, they cannot be said to have been employed outside India. He relied upon the judgment of the Gujarat High Court in the case of Mc Gaw Ravindra Laboratories (India) Ltd. v. CIT [1994] 210 ITR 1002. Accordingly, it was contended that section 40A(5)(b)(i) was not attracted. It was urged that the Legislature has not used the words "working outside India" in section 40A(5)(b)(i). That the Legislature has deliberately used the words "employment outside India". Hence, in this case, the floating staff cannot be said to have been employed outside India. Mr. Desai, contended that in appropriate cases if the contract was also executed outside India and an employee was required to go abroad to carry out the contract then alone section 40A(5)(b)(i) would apply. However, in the present case, he contended that the employees entered into the contract in India ; that they were paid salary in India ; that the salary was paid in the Indian currency and lastly, they were working on the Indian ship which was the territory of India and, therefore, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the hands 'of the employees subject to the disallowances correspondingly in the hands of the employer and in the hands of the employees. He also invited our attention to the circular issued by the Board bearing No. 586, dated November 28, 1990. Vide para. 2 of the said circular, the Board has clarified that after the amendment made in section 6 of the Income-tax Act, 1961, by the Finance Act, 1990, with effect from April 1, 1990, an Indian citizen who is the member of the crew of an Indian ship as defined in section 3(18) of the Merchant Shipping Act, 1958, is regarded as resident in India only if he is in India for 182 days or more. That, for this purpose it was important to take into account the definition of the expression "India" as defined in section 2(25A) of the Income-tax Act. Under the above circular, the Board has clarified that the term "India" in section 2(25A) does not extend to Indian ships operating beyond Indian territorial waters. Therefore, in the case of crew members of a foreign-going Indian ship who are not likely to be in India for a period extending 182 days in a year, the income which accrues outside India and the salary which is received outside India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notification dated April 1, 1983. Basically, Mr. Mehta, contended that the limit of the territorial waters prior to April 1, 1983, was only 12 nautical miles. However, certain areas were found to contain oil and minerals outside the 12 nautical miles. Therefore, under the notification issued under the Territorial Waters Act, 1976, some of these areas where oil was located came to be included as forming part of India and to those areas the Income-tax Act was applied. However, the Act was applied only to income which is derived in such areas from the activities enumerated in the notification, viz., extraction of oil, exploration of oil and minerals. Mr. Mehta accordingly contended that for the above purpose "India" includes the exclusive economic zone. However, he argued that there is no notification which includes foreign-going Indian ships in the term "India" under the Territorial Waters Act read with the notifications issued thereunder. Mr. Mehta accordingly contended that, even under the Territorial Waters Act, there is no law which includes such ships to form part of India. Mr. Mehta contended that one has to look to the provisions of the Income-tax Act and not to the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment outside India. In other words, if the taxpayer incurs expenditure on payment of salary to an employee in respect of the period of his employment in India then such taxpayer would be entitled to deduction for such expenses subject to it not exceeding the specified limits. To carve out an exclusion to section 40A(5)(a), we have section 40A(5)(b) which states that nothing in clause (a) shall apply to any expenditure incurred by a taxpayer on payment of salary to an employee in respect of the period of his employment outside India. This distinction is very important. It indicates the true meaning of the expression "employment outside India" in section 40A(5)(b) in contradistinction to section 40A(5)(a). Section 40A(5)(a) puts a ceiling on the expenditure incurred by a taxpayer by way of salary to an employee employed in India. Therefore, to bring in the exclusion, the Legislature has provided, inter alia, that the provisions of section 40A(5)(a) which impose a ceiling on such expenditure shall not apply to an expenditure incurred by a taxpayer by way of salary to an employee employed outside India. Therefore, section 40A(5)(a) proceeds to emphasise employment in India and to carve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e India. It is in this context the judgment of the Gujarat High Court is required to be read. In that matter, what was argued was that, because the employee happened to go abroad for 29 days he stood employed outside India. It is important to note the facts of that case. In that matter, the contract of employment never postulated working of the employee outside India. He happened to go out of India for a short period because of business exigency. On the other hand, in the present case, the employer is a shipping company. It employs floating staff. The contract of employment itself postulates that the members of the floating staff would be required to work outside India from time to time which was not so in the case before the Gujarat High Court. In the case before the Gujarat High Court, the salary which was paid to the employee was on the footing that the employee was employed in India, whereas the facts in our case show that the contract of employment itself postulated an entirely different formula to calculate the salary payable on the footing that the floating staff was required to work, most of the time, outside India. The judgment of the Gujarat High Court, therefore, is requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on territories. Reliance in connection with section 2(25A) was also placed on sections 5 and 6 of the Income-tax Act. It was contended by the Department that under section 5, the Legislature has laid down the scope of total income of a person who is a resident so as to include all income from whatever source it is derived, Reliance was also placed on section 6 which deals with the meaning of the term "residence in India". Section 6 shows that for the purposes of the Income-tax Act, an individual is said to be resident in India in any previous year, if he is in India in that year for one hundred and eighty-two days or more. In the present case, as stated hereinabove, we are only concerned with the question of deduction in the hands of a taxpayer-employer. The provisions of the Income-tax Act are required to be read strictly. Section 40A(5)(a) disallows expenditure by way of salary paid by the taxpayer in respect of employment in India beyond the prescribed limit. However, section 40A(5)(b)(i), as it stood at the relevant time, is an exclusionary clause. It lays down that any expenditure incurred by the taxpayer-employer by way of salary in respect of employment outside India will no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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