Bombay High Court
Sapt Textile Produces (India) Ltd. vs Commissioner Of Income-Tax on 17 December, 1993
Equivalent citations: [1996]217ITR378(BOM)
Author: Sujata V. Manohar
Bench: Sujata V. Manohar
JUDGMENT D.R. Dhanuka, J.
1. By this reference made under section 256(1) of the Income-tax Act, 1961, the Income-tax Tribunal has referred the following questions to this court for its opinion :
"(1) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has rightly held that the provisions of section 40(c) and not section 40A(5) are applicable to the case of a director-employee of an assessee-company?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal has rightly held that where a director is also an employee of the assessee-company, the provisions of section 40A(5), clauses (i) and (ii), will also come into play for the purpose of determining the nature and quantum of his remuneration?
(3) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has rightly held that the gratuity paid to a director-employee in consideration of his past services forms a part of the remuneration for the purposes of determining the disallowance under section 40A(5) /40(c)?
(4) Whether, on the fact and in the circumstances of the case, the Income-tax Appellate Tribunal has rightly held that for the purpose of section 40(c) the point of time of making the payment by the assessee-company was irrelevant?
(5) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal ought to have held that once the payment to the director was found to be reasonable, the limit of Rs. 72,000 for allowing expenditure did not apply?
(6) Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal has rightly disallowed the sum of Rs. 38,693 out of the amount of Rs. 1,40,693 paid by the assessee-company to Mr. V. P. Kamat, as salary, allowance, bonus gratuity and perquisites?"
2. This reference relates to the assessment year 1975-76. During the relevant year, Mr. V. P. Kamat was an employee-director of the assessee-company. Mr. Kamat retired from service prematurely. During the previous year, Mr. Kamat was paid on amount of Rs. 54,675 by way of salary, dearness allowance and bonus and was also allowed perquisites aggregating in value of Rs. 18,518. A sum of Rs. 67,500 was paid by the assessee to Mr. Kamat as retirement gratuity. The question before the authorities below was as to what was the ceiling for disallowance of expenditure incurred on payment of the various amounts to Mr. Kamat and as to whether the case of the assessee was governed under section 40(c) or section 40A(5) of the Act. One of the question raised before the authorities below also was, as to whether the payment of gratuity was covered under section 40(c) or under section 40A(5) of the Act.
3. Being aggrieved by the order passed by the Tribunal in the second appeal being order dated April 20, 1981, this reference is made by the Tribunal to this court at the instance of the parties. The questions referred to the court are covered by the decisions of the supreme court and this court. In this view of the matter, no elaborate discussion is necessary.
4. Having regard to the applicability of the ratio of the judgment of the Supreme Court in the case of CIT v. Indian Engineering and Commercial Corporation P. Ltd. [1993] 201 ITR 723, we answer questions Nos. 1 and 2 as under :
"In the case of a director-employee, both the provisions, i.e., sections 40(c) and 40A(5), are applicable and the higher of the two ceilings has to be applied. We accordingly answer question Nos. 1 and 2 in the terms aforesaid."
5. As regards question No. 3, the question is covered by the decision of this court delivered today in Income-tax Reference No. 212 of 1982 CIT v. Colgate Palmolive India Pvt. Ltd. [1994] 210 ITR 770. Following the ratio of the said decision, we answer question No. 3 as under :
"The expenditure incurred by the assessee on payment of retirement gratuity to Mr. V. P. Kamat in the sum of Rs. 67,500 is not includible under either of the provisions, i.e., section 40(c) or section 40A(5) of the Act. The said expenditure is beyond the scope and ambit of the said provisions. In our opinion, the expenditure incurred on payment of retirement gratuity is deductible under section 37(1) of the Income-tax Act, 1961. We accordingly, answer question No. 3 in the terms aforesaid and in favour of the assessee."
6. In view of our answer to questions No. 1, 2 and 3, questions Nos. 4 and 5 do not survive. We accordingly, decline to answer questions Nos. 4 and 5.
7. As regards question No. 6, the said question is a consequential question. We direct the Tribunal to recompute the amount of disallowance after excluding the item of payment of gratuity and on the footing that the aggregate ceiling in a sum of Rs. 72,000 is applicable to the case of the assessee.
8. Having regard to the facts and circumstances of the case, there shall be no order as to costs.