COMMISSIONER OF INCOME-TAX VS BRAKES INDIA LTD,
1994 P T D 22
[201 ITR 647]
[Supreme Court of India]
Present: B.P. Jeevan Reddy and N. Venkatachala, JJ
COMMISSIONER OF INCOME-TAX
Versus
BRAKES INDIA LTD,
Civil Appeal No.1287 of 1982, decided on 06/04/1993.
(Appeal by special leave from the judgment and order, dated February 22, 1978, of the Madras High Court in Tax Case No.24 of 1975).
Income-tax---
----Business expenditure---Provision providing limit to allowance---Perquisite to company director---Salary to foreign technical director---Exempt and not forming part of total income---Salary is "nil"---Provision limiting allowance of perquisite not applicable---Indian Income Tax Act, 1961, Ss.10 (6)(vii), 40(c)(iii) & Prov. (ii).
During the accounting year relevant to the assessment year 1965-66, the respondent-company paid to its foreign technical director a total remuneration of Rs.66,000 which included a sum of Rs.28,576 paid as perquisites. The salary paid to the foreign technical director was exempt from tax under section 10(6)(vii) of the Income Tax Act, 1961. The question was whether the limiting provisions of section 40(c)(iii) applied and part of the perquisites could be disallowed in the computation of the profits of the company, as was sought to be done by the Income-tax Officer. The Appellate Tribunal held that merely because the salary was exempt under section 10(6)(vii), the provision of section 40(c)(iii) did not cease to apply; but, on a reference, the High Court held that as the salary paid to the foreign technical director was not chargeable to tax by reason of section 10(6)(vii) it did not form part of the total income and was "nil" for the purposes of the Act; that the words "Rs.7,500 or less" in the second proviso to section 40(c)(iii) would include a "nil" amount as well and that by virtue of the second proviso, the limiting provision of the main part of section 40(c)(iii) did not apply and could not be invoked to disallow part of the perquisite paid to the foreign technical director in computing the profits of the respondent company. On appeal to the Supreme Court:
Held, affirming the decision of the High, Court, that the view taken by the High Court was a reasonable one and did not call for any interference.
C.I.T. (Addl.) v. Brakes India Ltd. (1979) 118 ITR 820 affirmed on this point.
B.B. Ahuja, Senior Advocate (R. Satish and P. Parameswaran, Advocates with him) for Appellant.
Mrs. Janaki Ramachandran, Advocate for Respondent.
JUDGMENT
In this appeal preferred against the judgment of the Madras High Court (see (1979) 118 ITR 820), the words "whose income chargeable under the head `Salaries"' occurring in the second proviso to sub-clause (iii) of clause (c) of section 40 fall for interpretation. The assessment year concerned is 1965-66. During the accounting year relevant to the said assessment year; the assessee paid- to its foreign technical director a total remuneration of Rs.66,000 including a sum of Rs.28,576 paid by way of perquisites. The Income-tax Officer held that, by virtue of section 40(c)(iii), perquisites exceeding one-fifth amount of the salary cannot be allowed as a deduction. He held further that the second proviso to the said sub-clause is not applicable inasmuch as the income chargeable under the head "Salaries" was not Rs.7,500 or less. Accordingly, he allowed only a sum of Rs.13,200 by way of perquisites. He disallowed the balance of Rs.15,376.
The Appellate Assistant Commissioner, however, allowed the assessee's appeal holding that inasmuch as the salary of the foreign technical director was exempt from tax under section 10(6)(vii), the provision contained in section 40(c)(iii) was not applicable. The appeal filed by the Revenue was allowed by the Tribunal. The Tribunal opined that merely because the salary is exempt under section 10(6)(vii), the provision in section 40(c)(iii) does not cease to apply. Under the proviso to the said sub-clause, only an employee whose income chargeable under the head "Salaries" Was Rs.7,500 or less is exempted. Inasmuch as the income chargeable under the head "Salaries" in this case is more than Rs.7,500, the exemption does not operate. Since the said foreign technical director was an employee of the assessee, he was certainly governed by the provision of section 40(c)(iii), said the Tribunal. At the request of the assessee, it stated the following question for the opinion of the High Court (at page 821 of 118 ITR):
"Whether, on the facts and circumstances of the case, the Tribunal was justified in holding that the provisions of section 40(c)(iii) were rightly invoked for the assessment year 1965-66 in relation to the remuneration of the technical director of the assessee-company?"
Section 40 (c)(iii) as applicable to-the assessment year 1965-66, read as follows:
"40. Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head `Profits and gains of, business or profession':
(c) in the case of any company ............
(iii) any expenditure incurred after the 29th day of February, 1964, which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether convertible into money or not, to an employee (including any sum paid by the company in respect of any obligation which but for such payment would have been payable by such employee), to the extent such expenditure exceeds one-fifth of the amount of salary payable to the employee for -any period of his employment after the aforsaid date: ... ... ... ...
Provided further that nothing in this sub-clause shall apply to any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to an employee whose income chargeable under the head `Salaries' is seven thousand five hundred rupees or less."
Under section 10(6)(vii) of the Act, the remuneration due to any technician who was not a resident in any of the four financial years immediately preceding the financial year in which he arrived in India, chargeable under the head Salaries; for services rendered as a technician, was exempt. In this case, the salary paid to the foreign technical director was admittedly exempt under section 10(6)(vii). The contention of the assessee which has been accepted by the High Court runs thus: the salary payable to the said director was exempt by virtue of section 10(6) (vii). In other words, it is nil for the purpose of the Act. If so, the second proviso to the sub-clause is attracted, inasmuch as "nil" income, under the head "Salaries" is less than rupees seven thousand five hundred. By virtue of the said second proviso, the main provision in sub-clause (iii) goes out of the picture. The High Court reasoned that, if income of one rupee is less than Rs.7,500, there is no reason for saying that "nil" income is not an income less than Rs.7,500. Since the income exempted under section 10 is not liable to be included in the total income, such exempted salary income should be treated as "nil" income for the purpose of section 40(c)(iii), opined the High Court.
After hearing counsel for the parties, we are of the opinion that the view taken by the High Court is a reasonable one and does not call for any interference.
The appeal, accordingly, fails and is dismissed. No costs.
M.BA./2456/TAppeal dismissed.