Court Upholds Disallowance of Excess Payments to Employees by Banking Company (5)

Commissioner of Income Tax Versus Grindlays Bank PLC.

Commissioner of Income Tax Versus Grindlays Bank PLC. - [2002] 254 ITR 289, 172 CTR 264 Issues involved:
Interpretation of section 40A(5) of the Income-tax Act regarding disallowance of expenses paid to employees.

Analysis:
The judgment pertains to an application under section 256(1) of the Income-tax Act, 1961, where the Tribunal referred a question regarding the correctness of upholding the disallowance under section 40A(5) of the Act. The case involved an assessee, a banking company incorporated under the laws of the United Kingdom, declaring income for the assessment year 1976-77. The Assessing Officer disallowed an amount under section 40A(5) due to excess payments to employees, including interest on securities. The Commissioner of Income-tax (Appeals) and the Tribunal held that interest paid to employees should not be included in the disallowance under section 40A(5) as it is not income under the head 'Profits and gains of business or profession.'

The provisions of section 40A(5) dictate that certain excess expenses paid to employees or directors are not deductible while computing income under the head 'Profits and gains of business or profession.' The section includes a non obstante clause, emphasizing its overriding effect over other provisions of the Act related to income computation. Sub-section (5) of section 40A specifies that any expenditure resulting in payments to employees beyond prescribed limits shall not be allowed as a deduction. In this case, including interest paid to employees resulted in an excess payment subject to disallowance under section 40A(5).

Section 20 of the Act allows deductions from interest on securities for a banking company. However, the judgment highlighted that while deductions under section 20 are permissible, the interest paid to employees or directors cannot be excluded for the purpose of disallowance under section 40A(5). The court emphasized that the non obstante clause in section 40A(5) prevails over conflicting provisions, reinforcing the disallowance of excess payments to employees. Ultimately, the court ruled in favor of the Revenue, upholding the disallowance under section 40A(5 against the assessee.

In conclusion, the judgment provides a detailed analysis of the interpretation and application of section 40A(5) of the Income-tax Act concerning the disallowance of expenses paid to employees, emphasizing the overriding nature of the provision and its impact on income computation for businesses and professions.