Skip to content


Commissioner of Income-tax Vs. Best and Co. (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Case No. 437 of 1975 (Reference No. 334 of 1975)
Judge
Reported in[1979]119ITR830(Mad)
ActsIncome Tax Act, 1961 - Sections 40; Finance Act, 1964
AppellantCommissioner of Income-tax
RespondentBest and Co. (P.) Ltd.
Appellant AdvocateJ. Jayaraman, Adv.
Respondent AdvocateS. Swaminathan, Adv.
Excerpt:
direct taxation - applicability - section 40 of income tax act, 1961 and finance act, 1964 - whether any part of remuneration paid in excess of rs. 5000 from 01.03.1963 to 30.09.1963 could be disallowed by reference to section 40 (c) (iii) as in force in relevant year - act of 1964 made modification with effect from 29.02.1964 - section 40 (c) (iii) would continue in force between 01.03.1963 to 28.02.1964 - question answered in favour of revenue. - .....prior to the 1st day of april, 1939, owing to there being no profits or gains chargeable for that year...the allowance or part of the allowance to which e0ect has not been given...shall be added to the amount of the allowance for depreciation for the following year and deemed to be part of that allowance,,..and so on for succeeding years.'12. in view of the words, ' not being a year which ended prior to the 1st day of april, 1939,' the contention of the revenue was that the unabsorbed depreciation of the earlier years could not be added in the assessments subsequent to the 1st day of april, 1940. it is this claim which was negatived by the supreme court on the ground that the unabsorbed depreciation allowance had already merged in the depreciation allowance of the assessment year.....
Judgment:

Sethuraman, J.

1. The Income-tax Appellate Tribunal has referred the following question under Section 256(1) of the I.T. Act, 1961 :

' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the Appellate Assistant Commissioner was justified in holding that any part of the remuneration paid in excess of Rs. 5,000 per month from March 1, 1963, to September 30, 1963, should not be disallowed ?

2. The question is not happily framed and we would reframe the question as follows :

' Whether, on the facts and in the circumstances of the case, any part of the remuneration paid in excess of Rs. 5,000 per month from March 1, 1963, to September 30, 1963, could be disallowed by reference to Section 40(c)(iii) of the Income-tax Act as in force in the relevant year ?'

3. The assessee was a private limited company. It submitted a return declaring an income of Rs. 25,23,265. In the statement accompanying the return, the assessee had disallowed a sum of Rs. 55,701 out of the remuneration paid. Neither in the statement of the case nor in any of the orders is there any detail as regards, (a) the person to whom remuneration was paid, and (b) the amount of remuneration paid out of which the disallowance was made in the assessee's own statement. However, by a letter dated 27th November, 1968, the assessee claimed that the disallowance of Rs. 55,701 made in the adjustment statement enclosed with the return might be deleted as, according to it, the provisions of Section 40(c)(iii) of the Act, introduced by the Finance Act of 1963, was applicable only for 1963-64 (assessment year) and not for the later years. By the Finance Act of 1964, Section 40(c)(iii) was amended so as to disallow any perquisites given to the employee in excess of twenty per cent, of the salary paid after 28th February, 1964. As a result of the amendment made in the year 1964, there was no scope for disallowance of any remuneration as such. It is this aspect which was placed before the ITO by the assessee. The ITO rejected this contention. The assessee appealed to the AAC, who agreed with the assessee's submission. When the matter came before the Tribunal on appeal at the instance of the department, the Tribunal, after referring to the relevant provisions, came to the conclusion that the AAC was justified in holding that any remuneration paid to the employees, even if it was in excess of Rs. 5,000 per month should not be disallowed. It is this order of the Tribunal that has given rise to the question already extracted.

4. In the original statement accompanying the return, the assessee had disallowed remuneration in excess of Rs. 5,000 per month. That is how a sum of Rs. 55,701 had been arrived at as the disallowable amount. The assessee, in the subsequent letter, stated that this disallowance in the statement furnished along with the return was not proper and that the same should be allowed as deduction. The question has thus to be considered in the context of the provisions of Section 40(c)(iii) of the I.T. Act, 1961. Section 40(c) contained the following provisions before the amendment under the Finance Act of 1963 :

' 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-

(i) any expenditure which results 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 the director or of such person, as the case may be.............

if in the opinion of the Income-tax Officer any such expenditure or allowance as is mentioned in Sub-clauses (i) and (ii) is excessive or unreasonable having regard to the legitimate business needs of the, company and the benefit derived by or accruing to it therefrom ;

Explanation.--The provisions of this clause shall apply notwithstanding that any amount not to be allowed under this clause is included in the total income of any person referred to in Sub-Clause (i);...'

5. It may be seen from this provision that the ITO was given a discretion to go into the question of the amount of remuneration and investigate whether it was excessive or unreasonable, having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom. If the remuneration was considered to be excessive or unreasonable, then he had power to disallow the expenditure to that extent.

6. Clause (iii) was added by the Finance Act of 1963 with effect from 1st April, 1963, Originally, as may be seen from the extract, there were only two Sub-clauses to Section 40(c). By Section 6 of the Finance Act of 1963, the following was inserted as Sub-clause (iii) :

' any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to an employee who is a citizen of India, to the extent such expenditure exceeds the amount calculated at the rate of five thousand rupees per month for any period of his employment after the 28th day of February, 1963 ;...'

7. There is a proviso, but it is unnecessary to extract it here. Section 1(2) of the Finance Act of 1963 provided that this provision, among others, should be deemed to have come into force on the 1st of April, 1963. The Finance Act of 1963 itself received the assent of the President on the 28th April, 1963. It may be seen from this provision that there was a ceiling fixed on the remuneration or benefit or amenity to an employee who was a citizen of India and the ceiling was Rs. 5,000 per month for any period after 28th February, 1963. If any remuneration or benefit or amenity had been paid or granted in excess of Rs. 5,000 prior to 28th February, 1963, then that was not affected and would not be the subject of disallowance under the provision set out above.

8. This provision underwent a modification under the Finance Act of 1964. Section 10 of the said Finance Act provided as follows :

' for Sub-Clause (iii) of Section 40(c), the following Sub-clause shall be substituted, namely :--

'(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 :...'

9. There is a proviso to Sub-clause (iii) and another Explanation was also added to this provision. It is unnecessary for our present purpose to extract them as they are not relevant to the point in controversy now before us. Under the provision, as it was inserted by the Finance Act of 1964, it would be seen that the remuneration paid to an employee was left untouched and that restrictions were imposed on the allowance of any benefit or amenity or perquisite which was fixed at one-fifth or 20% of the salary payable to the employee for any period of his employment after the 29th February, 1964.

10. There is no dispute about the fact that this provision, in so far as it imposed a ceiling only on the benefit or amenity or perquisite to the extent of one-fifth of the salary payable to au employee, was applicable only after 29th February, 1964. What the assessee contended before the income-tax authorities and before the Tribunal and what was accepted by the AAC and the Tribunal was that on the 1st of April, 1964, the new provision inserted by Section 10 of the Finance Act of 1964 had come into force and it is only that provision that could be looked into. As under that provision, there was no restriction on the amount of salary payable to an employee, which could be allowed under the I,T. Act, the total amount paid to the employee in the present case, according to the assessee, should have been allowed as deduction. Learned counsel for the revenue challenges this contention which found favour with the AAC and the Tribunal.

11. It is a well settled proposition in the income-tax law that in income-tax matters, the law to be applied is the law in force in the assessment year unless otherwise stated or implied. This proposition was laid down by the Supreme Court in CIT v. Isthmian Steamship Lines : [1951]20ITR572(SC) . In that case, the assessee was a company incorporated in the United States of America and owned steamships which visited India. The assessee was being assessed to Indian income-tax. There was unabsorbed depreciation at the end of 1938-39. When the Indian I.T. Act of 1922 was amended with effect from 1st April, 1939, it was provided by Section 10(2)(vi) that the unabsorbed depreciation allowance should be allowed to be further carried forward and form part of the allowance for the next year and so on. In the assessments for 1941-42, 1942-43 and 1943-44, the assessee claimed that the unabsorbed depreciation of 1938-39 should be taken as part of the allowance of those years and should be adjusted in the assessments accordingly. The ITO and the AAC rejected the claim of the assessee on the ground that the assessee was not entitled to carry forward the unabsorbed depreciation allowance at the end of 1938-39 because of the particular provision which ran as follows (p. 576):

' With effect from 1st of April, 1940, where full effect cannot be given to any such allowance (of depreciation) in any year, not being a year which ended prior to the 1st day of April, 1939, owing to there being no profits or gains chargeable for that year...the allowance or part of the allowance to which e0ect has not been given...shall be added to the amount of the allowance for depreciation for the following year and deemed to be part of that allowance,,..and so on for succeeding years.'

12. In view of the words, ' not being a year which ended prior to the 1st day of April, 1939,' the contention of the revenue was that the unabsorbed depreciation of the earlier years could not be added in the assessments subsequent to the 1st day of April, 1940. It is this claim which was negatived by the Supreme Court on the ground that the unabsorbed depreciation allowance had already merged in the depreciation allowance of the assessment year 1939-40 and that, therefore, those words, which are put in inverted commas, did not affect the assessee's claim. It is in this context that the Supreme Court pronounced that in income-tax matters, the law to be applied is the law in force in the assessment year unless otherwise stated or implied. This proposition has been either stated or affirmed in other decisions to which our attention was drawn. We find it unnecessary to discuss those decisions as the point itself is not in dispute. It is enough if we refer to the following cases : CIT v. Sind Hindu Provident Funds Society [1940] 8 ITR 467 , Maharajah of Pithapuram v. CIT [1945] 13 ITR 221 , CIT v. Scindia Steam Navigation Co. Ltd. : [1961]42ITR589(SC) , Gautam Sarabhai v. CIT : [1964]52ITR921(Guj) and CIT v. H.E.H. Mir Osman Ali Bahadur : [1966]59ITR666(SC) .

13. So, the point to be considered is whether there is anything in the language of Section 40(c)(iii) which would indicate that the provision, as brought in by the Finance Act of 1963, continued to be in force up to 29th February, 1964. Under Section 40(c)(iii), as it was inserted by Section 6 of the Finance Act of 1963, there is a specific provision which says that any expenditure resulting directly or indirectly in the provision of any remuneration or benefit or amenity to an employee, who was a citizen of India, to the extent such expenditure exceeds the amount calculated at the rate of five thousand rupees per month for any period of his employment after the 28th day of February, 1963, could be disallowed. This provision would ordinarily have applied to control the remuneration paid in the present case subsequent to the 28th February, 1963, unless there was any change in the law subsequently. Under the Finance Act of 1964, a new provision was inserted and that was with effect from 29th February, 1964. Both these provisions clearly show that what is intended to be affected is the payment of salary or remuneration or the grant of any benefit or amenity for a period subsequent to the particular dates. They are not linked to any assessment year as such or even previous years. The aim and intention of the provisions is to control the allowance of remuneration or the grant of any benefit or amenity during the period the respective provisions were in force, despite the fact that the assessee may have different previous years. The link in the matter of allowance or disallowance is with reference to the remuneration paid to a particular employee during the period of his employment subsequent to the dates mentioned in the statute. If the provisions are understood in this manner, then it would be clear that Section 40(c)(iii) would control the payment of the remuneration after 28th February, 1963, and before the new provision under the Finance Act of 1964 provided the contrary. The Finance Act of 1964 made the modification with effect from 29th February, 1964. Thus, in effect, Section 40(c)(iii) would continue in force between the 1st March, 1963, and 28th February, 1964.

14. The contention strenuously urged on behalf of the assessee was that this interpretation runs counter to the well-accepted proposition that the law as on the first day of the assessment year should govern the assessment. This well-settled proposition itself is subject to a qualification by any express provision or necessary implication. For instance, even subsequent to 1st April, a provision may be retrospectively brought into the statute book so as to affect any assessment year. The proposition that the law as on the 1st April of the particular assessment year governs the assessment for that year is not absolute. Apart from the provision as on 1st April, 1964, having to be given effect to, the assessing authority and even an appellate authority will also have to take into account the provisions in which there is an indication of applicability retrospectively. If the contentions of the learned counsel for the assessee were to be accepted, then Section 40(c)(iii) could be in force only for a period of one month. There is no reason why Parliament should enact a law of this kind to be in force for only one month. The provisions brought into force under the Finance Acts of 1963 and 1964 would be in force for the respective years. This general intention which pervades these Acts would be defeated if the contention urged for the assessee were to be accepted. The dates given in the provisions themselves militate against the acceptance of the assessee's contentions. The relevant previous year of the company ended on 30th September, 1963, and that is how we are concerned only with the period between 1st March, 1963, and,30th September, 1963, in this reference. For this period, the law enacted by the Finance Act, 1963, would apply. The result is that the question, as modified by us, is answered in the affirmative and in favour of the revenue. The revenue will be entitled to its costs. Counsel's fee Rs. 500.


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