Punjab-Haryana High Court
Commissioner Of Income-Tax vs Amritsar Rayon And Silk Mills (P.) Ltd. on 2 March, 1989
Equivalent citations: [1989]179ITR292(P&H)
JUDGMENT Gokal Chand Mital, J.
1. A director of a company was also its employee. The total perks debited were valued at Rs. 9,600 during the accounting year relevant to the assessment year and salary of Rs. 18,000.
2. The Income-tax Officer applied the provisions of Section 40A(5)(c) of the Income-tax Act, 1961 (for short "the Act"), and came to the conclusion that the allowance on account of perquisites was to be restricted to 20 per cent, of the salary and allowed Rs. 3,600 while disallowing the remaining Rs. 6,000.
3. On appeal, the Commissioner of Income-tax (Appeals) did not agree with the Income-tax Officer and held that Section 40(c) should apply and allowed the deduction of Rs. 9,600. The Income-tax Appellate Tribunal, Amritsar, agreed with the Commissioner of Income-tax.
4. At the instance of the Commissioner of Income-tax, the Tribunal has referred the following question for our opinion :
"Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the provisions of Section 40(c) and not of Section 40A(5)(c) are applicable for the purposes of disallowing expenditure incurred by the assessee-company for the benefit of an employee who is also a director of the company ?"
5. On behalf of the Revenue, reliance is placed on Travancore Rayons Ltd. v. CIT [1986] 162 ITR 732, a decision of the Kerala High Court for the proposition that if a director is also an employee of the company, then Section 40A(5) of the Act is applicable and Section 40(c) of the Act would not apply. The Tribunal relied upon a decision of the Gujatat High Court in Addl. CIT v. Tarun Commercial Mills Ltd. [1978] 113 ITR 745. It also made reference to a decision of this court in CIT v. Avon Cycles (P.) Ltd [ 1980] 126 ITR 448 and came to the conclusion that that decision further supported the decision of the Gujarat High Court in Tarun Commercial Mills' case [1978] 113 ITR 745. The Gujarat High Court has reiterated its stand in CIT v. Bharat Vijay Mills Ltd. [1981] 128 ITR 633.
6. First, we advert to the decision of this court in Avon Cycles (P.) Ltd.'s case [1980] 126 ITR 448. On going through the decision, we find that the facts are distinguishable and the points decided therein are not applicable to the facts of the case. There, the assessee had appointed a sole selling agent and in the firm of the sole selling agent, some of the directors of the company or their relatives were the partners. It was not a case where the director of the company was an employee. To such facts, as were before this court in Avon Cycles (P.) Ltd.'s case [1980] 126 ITR 448, Section 40A(5) of the Act could not even remotely apply. The Tribunal fell into an error in referring to the decision while deciding the matter.
7. On a reading of the judgments of the Kerala High Court in Travancore Rayons Ltd.'s case [1986] 162 ITR 732 and the Gujarat High Court in Tarun Commercial Mills' case [1978] 113 ITR 745, we are of the view that they are opposed to each other. Hence, we have to see which view is in consonance with the statute. On an in-depth study of the provisions, we have come to the conclusion that the view taken by the Kerala High Court is correct. The reason is obvious. Section 40(c) of the Act applies when an expenditure is incurred by a company resulting directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of a director or of such a person, as the case may be, whereas Section 40A(5) of the Act is applicable where the assessee incurs expenditure which results directly or indirectly in the payment of any salary to an employee, and the proviso further provides that where the assessee is a company, so much of the aggregate of the expenditure referred to in sub- Clauses (i) and (ii) thereof in respect of an employee or a former employee, being a director or a person who has a substantial interest in the company or a relative of the director or of such person, as is in excess of the sum specified, shall, in no case, be allowed as a deduction. Clause (b) of the proviso is again significant. It refers to the expenditure and allowance referred to in Sub-clauses (i) and (ii) of Clause (c) of Section 40 of the Act. Therefore, when we have a case of a director who is also an employee of the company, Section 40A(5) of the Act would be applicable and this in turn makes reference to Section 40(c) of the Act regarding expenditure and allowances referred to in the sub-clauses of that provision. But vice versa is not true. Accordingly, we are in agreement with the view taken by the Kerala High Court in Travancore Rayons Ltd.'s case [1986] 162 ITR 732, and dissent from the view taken by the Gujarat High Court in Tarun Commercial Mills' case [1978] 113 ITR 745, and hold that the Tribunal was not right in law in holding that the provisions of Section 40A(5) of the Act and Clause (c) thereof are not applicable for the purposes of disallowing expenditure incurred by the assessee-company for the benefit of an employee who is also a director of the company. The correct provision applicable to the facts and in the circumstances of the case is Section 40A(5) of the Act. Accordingly, the question is answered in favour of the Revenue, that is, in the negative, and since none has appeared on behalf of the assessee in spite of service, there will be no order as to costs.