1. to 4. [These paras are not reproduced here as they involve minor issues.] 5. The second ground raised in this appeal is that the Commissioner (Appeals) has erred in confirming the disallowance of Rs. 23,981, as made by the ITO, under Section 40A(5)(a) of the Income-tax Act, 1961 ('the Act'), on the ground that in respect of the two employees of the assessee, the remuneration exceeded by the said amount the limit prescribed under the said provision.
6. The two employees, referred to in this ground, are Capt. M.R.Dandekar and Capt. P.R. Sawant. They were captains of the ships owned by the assessee and their duty was on board the ships which sailed for abroad. The salary payable to these two employees came to Rs. 66,104 and Rs. 77,877, respectively. The ITO allowed salary to the extent of 60 per cent to each of the employees and disallowed the balance, which came to Rs. 23,981.
7. The contention of the assessee was that salaries paid to these two employees were in respect of the period they were outside India. Clause (b)(i) of Section 40A(5) expressly lays down that nothing in Clause (a) applies to any expenditure or allowance in relation to any employee in respect of any period of his employment outside India. This clause would be applicable and, as such, disallowance under Clause (a) would not be made.
8. The contention on behalf of the department, on the other hand, is that the contract of employment had taken place in India and the two employees were working on the ships which had the Indian flags.
Consequently, Clause (b)(i) would not apply. These are also the reasons given by the Commissioner (Appeals) while confirming the disallowance.
9. The assessee had submitted details regarding the salary paid to these employees. From the details submitted, it is found that Capt.
M.R. Dandekar was in India for 79 days and was abroad on board the ship for 286 days in the course of his employment. Capt. P.R. Sawant was in India for 179 days and abroad for 186 days in the accounting year. The salaries payable for period spent in India in respect of these two employees came to Rs. 18,221.86 and Rs. 39,130.29, respectively.
Salaries payable for period during which these two employees were on duty abroad came to Rs. 47,882.42 and Rs. 38,646.66 respectively.
10. The fact that contract of their employment took place in India and that the ships on which they were captains were under the Indian flag would not be decisive of the question that we have to decide under Clause (b)(i) of Section 40A(5). What we have to determine is whether any portion of the salary can be ascribed to any period of employment outside India. The term 'outside India' indicates 'outside the territorial boundaries of India'. The word 'employment' connotes 'working as an employee'. Consequently, if the concerned employee, in the course of his employment with the assessee, worked as employee outside the territorial limits of India for any period, then the expenditure on salary and allowances in respect of the said period would be covered by Clause (b)(i) of Section 40A(5). This appears obvious from the plain reading of the said provisions.
11. The Commissioner (Appeals) has referred to the expression used in Section 80RRA of the Act, namely, 'services rendered outside India' and has observed that the said expression refers to 'physical rendering of services outside India', while the expression 'employment outside India' in Section 40A(5)(b)(i) refers to contract of employment outside India.
12. The distinction made by the Commissioner (Appeals) does not appear to be sound. As already stated, the words 'contract of service' are nowhere used in the provision under consideration. What we have to see is as to what was the period of employment outside India. The period of employment outside India would mean period spent outside India in the course of employment, irrespective of the place where the contract of service took place. Besides, this provision is applicable to all the Indian companies and it is obvious that the contracts, in most of these cases, would take place in India. The intention to exclude period of employment of such employees from operation of Clause (b)(i) does not appear apparent in the provision. Consequently, the construction on this provision made by the Commissioner (Appeals) does not appear to be acceptable.
13. It is not necessary for us to determine in this appeal whether Clause (b)(i) would apply to the whole of the salary paid to each of these two employees, although it has been contended that the periods spent by these employees in India were not periods of employment, but were period of their leave to which they became entitled for service rendered outside India and as such, the salary for the period spent in India would also be covered by Clause (b)(i) of Section 40A(5). We shall assume for this appeal that Clause (b)(i) would not apply to salary payable for the period which was spent by these two employees in India, although that period was spent on leave. However, as far as that part of the salary is concerned, which pertains to period of employment outside India, there can be no doubt that salary payable in respect of the said period would not be considered for disallowance under Section 40A(5)(a). The salary of each of these two employees for the period spent by them in India is below Rs. 60,000. Consequently, even if it is held that the salary payable in respect of the period spent by these employees in India would be subject to disallowance under Section 40A(5)(a), no disallowance under that provision can be made in view of the fact that such salary does not exceed the prescribed limit. As already stated, there can be no doubt that as far as salary pertaining to the period of employment outside India is concerned, to that salary, provisions of disallowance under Section 40A(5)(a) would not apply, in view of the fact that provision of Clause (b)(i) would be applicable.
In this view of the matter, the order of the Commissioner (Appeals) confirming the disallowance of Rs. 23,981 cannot be sustained. That order, therefore, is set aside.