Skip to content


Additional Commissioner of Income-tax Vs. Brakes India Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 24 of 1975 (Reference No. 24 of 1975)
Judge
Reported in[1979]118ITR820(Mad)
ActsIncome Tax Act, 1961 - Sections 10(6), 32, 33A, 40 and 40A(5)
AppellantAdditional Commissioner of Income-tax
RespondentBrakes India Ltd.
Appellant AdvocateNalini Chidambaram, Adv. for ;Addl. Commissioner
Respondent AdvocateK.R. Ramamani, Adv. of ;Subbaraya Aiyar, Padmanabhan and Ramamani
Excerpt:
.....contended that salary paid to foreign technical personnel not chargeable to income tax under head salaries by virtue of provisions of section 10 (6) (iii) and second proviso to section 40 (c) (iii) attracted - wherever one finds exemption or exclusion from payment of tax not only sum not liable to tax but sum also not to form part of total income for purpose of determining rate - words 'rs. 7,500 or less' include nil amount as well - question answered in negative in favour of assessee. - - this view is clearly opposed to the provisions of the act and untenable. ' 7. we are, therefore, unable to accept the argument of the learned counsel for the revenue that the salary paid to the foreign technician is chargeable under the head 'salaries'.8. the learned counsel for the assessee..........section 10. for the purpose of understanding the second proviso, the income chargeable under the head'salaries' alone is the criterion and whether it is exempt from tax or not could not change the position. or, in the alternative, it is stated that, if the earlier submission is not correct, there should be some income chargeable under the head 'salaries' which is less than rs, 7,500 and if the income chargeable under the head 'salary' is 'nil', the proviso would not be attracted. it is necessary to set out the relevant portion of section 40(c)(iii) as it stood in the assessment year 1965-66 and the second proviso to that section which alone is relevant :'40. notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the.....
Judgment:

V. Ramaswami, J.

1. The following four questions are referred to us in respect of the two assessment years 1964-65 and 1965-66 :

For the assessment year 1964-65 :

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that indirect expenses incurred before commencement of production could be added to the cost of assets for granting depreciation allowance as also for the purposes of allowing development rebate for the assessment year, 1964-65 ?

2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the business of the assessee was not set up before December 31, 1963, and, consequently, no portion of the amount of Rs. 2,77,159 claimed as a revenue loss was admissible in computing the total income for the assessment year 1964-65 ?'

For the assessment year 1965-66:

'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that indirect expenses incurred before the commencement of production could be added to the cost of assets for granting depreciation allowance as also for the purposes of allowing development rebate for the assessment year 1965-66 ?

2. Whether, on the facts and in the 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 ?'

2. The first question arising in each of the assessment years 1964-65 and 1965-66 was at the instance of the revenue arid that question is covered by the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT : [1975]98ITR167(SC) . On the basis of the decision of the Supreme Court, we answer these two questions in the affirmative and against the revenue. The other two questions were referred at the instance of the assessee. The learned counsel for the assessee conceded that the Tribunal is right in so far as the second question in respect of the assessment year 1964-65 is concerned.Accordingly, we answer that question also in the affirmative and against the assessee. The only question, therefore, that survives for consideration in this tax case is the second question in respect of the assessment year 1965-66, which has been extracted above.

3. The facts necessary for answering this question are as follows : The assessee had paid to its foreign technical director a total remuneration of Rs. 66,000 which included a sum of Rs. 28,576 paid as perquisites in respect of the assessment year 1965-66. The ITO held that perquisites paid could be allowed as a deduction only to the extent of l/5th of the amount of the salary payable under Section 40(c)(iii) and that the second proviso of that clause is not applicable as the income chargeable under the head 'Salaries' was not Rs. 7,500 or less. , In that view, he allowed only a sum of Rs. 13,200 of the perquisites and disallowed the balance of Rs. 15,326. Though the AAC held that the entirety of the perquisites had to be allowed as a deduction in view of the second proviso, the Tribunal, on further appeal, held:

'Section 14 details the heads of income, and one such head is 'Salaries'. Section 15 specifies the types of income which shall be chargeable to income-tax under the head 'Salaries'. The payment made to the technical director would fall under Section 15. It is excluded from actual inclusion in the total income only by virtue of the provisions of Section 10, which in its turn excludes the particular type of income drawn by the technical director, in the present case, which was chargeable under the head 'Salaries'. We have already set out the proviso to Section 40(c)(iii). The proviso only takes out of the purview of Section 40(c)(iii) that type of employee whose income chargeable under the head 'Salaries' was Rs. 7,500 or less. In the present case, the income chargeable under the head 'Salaries' is much more than Rs. 7,500 and merely because such chargeable income is not included in the total income, in our view, the proviso to Section 40(c)(iii) cannot help the assessee. There is no dispute in the present case that the technical director, though a director, is an employee of the assessee. This may be a case which would fall under Section 40(c)(i), but it also squarely falls under Section 40(c)(iii) and, therefore, the Income-tax Officer was not in error in resorting to the provisions of Section 40(c)(iii).'

4. On these facts, the above question had been referred.

5. The learned counsel for the assessee contended that the salary paid to its foreign technical personnel was not chargeable to income-tax under the head 'Salaries' by virtue of the provisions of Section 10(6)(iii) and that, therefore, the second proviso to Section 40(c)(iii) is attracted. The revenue put forward two alternative contentions. Firstly, it was said that the remuneration payable to the foreign technician is chargeable under the head 'Salaries', but no tax could be levied as it is exempted under Section 10. For the purpose of understanding the second proviso, the income chargeable under the head'Salaries' alone is the criterion and whether it is exempt from tax or not could not change the position. Or, in the alternative, it is stated that, if the earlier submission is not correct, there should be some income chargeable under the head 'Salaries' which is less than Rs, 7,500 and if the income chargeable under the head 'Salary' is 'nil', the proviso would not be attracted. It is necessary to set out the relevant portion of Section 40(c)(iii) as it stood in the assessment year 1965-66 and the second proviso to that Section which alone is relevant :

'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 aforesaid 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.'

6. The ITO has allowed the expenditure on perquisites only to the extent of 1/5 of the amount of salary payable to the foreign technician relying on the main part of the provision and holding that the proviso is not applicable on the ground that the income chargeable under the head 'Salaries' is more than Rs. 7,500. The first argument of the learned counsel for the revenue is on the basis of this view of the ITO. This view is clearly opposed to the provisions of the Act and untenable. Section 4 charges the total income of an assessee to income-tax. Total income is defined in Section 2(45) as meaning the total amount of income referred to in Section 5 computed in a manner laid down in the Act. Section 5 defines total income in terms of residence. Section 10 exempts certain categories of income which are exempt from tax and provides that, in computing the total income, those incomes which are exempted in that provision shall not be included. The definition in Section 2(45) has made the manner of computation laid down by the Act as an integral part of the definition itself. Thus, it is not possible to treat anything as being chargeable to tax unless, under a process of computation as laid down under the Act, income, profits and gains enierge. Where the Act grants exemption from tax in respect of a certain sum, thatamount could not be treated as forming part of the total income unless there is some other provision in the Act making it includible in the total income. The salary paid to the foreign technician is one that admittedly falls under Section 10(6)(iii). Accordingly, it does not form part of the total income of the employee and, therefore, necessarily it is one exempted from charge to income-tax. In the words of Chief Justice Chagla, in CIT v. N. M. Raiji [1949] 17 ITR 180 , decided under the 1922 Act, the pro-visions of which so far as this point is concerned is in pari materia :

'The scheme is that wherever one finds an exemption or exclusion from payment of tax, the exemption or exclusion also operates for the purpose of computing the total income. Not only is the sum not liable to tax, but it is also not to form part of the total income for the purpose of determining the rate.'

7. We are, therefore, unable to accept the argument of the learned counsel for the revenue that the salary paid to the foreign technician is chargeable under the head 'Salaries'.

8. The learned counsel for the assessee contended that the salary paid to the foreign technician is exempt from tax, that his income chargeable under the head 'Salaries' is 'nil' and that, therefore, it will clearly come under the proviso. In other words, according to the learned counsel, the income chargeable under the head 'Salaries' is less than Rs. 7,500. The learned counsel for the revenue on the other hand, contended that in order to attract the second proviso, there should be some income chargeable under the head 'Salary' at least one rupee to say that this is less than Rs. 7,500 but where no part of the income is chargeable under the head 'Salary' the proviso would not be attracted. Having given our anxious and careful consideration we are of the view that the words 'Rs. 7,500 or less' would include a nil amount as well and it could not be understood to mean 'from one rupee to Rs. 7,500'. The legislature had not used any words which would imply that at least there should be one rupee which is chargeable under the head 'Salaries' in order to attract the provisions of the proviso. We are also unable to find any rationale or logic for not giving the benefit of the proviso to a case where no part of the amount paid is chargeable under the head 'Salaries '. We, accordingly, hold that the second proviso is attracted to the facts and circumstances of the case, and that, therefore, we answer the question referred in the negative and in favour or the assessee. In the circumstances of the case, the parties will bear their respective costs.


Save Judgments// Add Notes // Store Search Result sets // Organizer Client Files //