High Court rules in favor of assessee on perquisites and proposed dividend issues

The High Court ruled in favor of the assessee on both issues raised in the reference applications. It held that perquisites to directors were allowable expenses under Section 40A(5) of the Income Tax Act, 1961, within the prescribed limit. Additionally, the provision for proposed dividend was not deductible from the value of assets for computing capital employed under Section 80J, as it was not approved by the General Body of shareholders. The Court directed the Income Tax Appellate Tribunal to act in accordance with its decisions.

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Issues:
1. Disallowance of perquisites to directors under Section 40A(5) of the Income Tax Act, 1961.
2. Deductibility of provision for proposed dividend from the value of assets for computing capital employed.

Issue 1: Disallowance of Perquisites to Directors:
The High Court considered two reference applications arising from ITA appeals for the assessment years 1982-83 and 1983-84. The questions raised pertained to the disallowance of perquisites to directors under Section 40A(5) of the Income Tax Act, 1961. The Court referred to a judgment by the Bombay High Court in a similar case and held that the legislative intent was to treat employee directors differently regarding the allowability of expenses incurred on them. The Court relied on the view taken by the Gujarat High Court and distinguished judgments from other High Courts. It was established that the expenses incurred by the director were within the ceiling limit of Rs.72,000, leading to a decision in favor of the assessee against the revenue.

Issue 2: Deductibility of Proposed Dividend Provision:
Regarding the deductibility of the provision for proposed dividend from the value of assets for computing capital employed, the Court referred to a judgment by the Madras High Court. The Madras High Court's opinion, supported by Supreme Court decisions, clarified that a proposed dividend by the Board of Directors, without approval by the General Body of shareholders, did not constitute a debt owed on the first day of the computation period. Therefore, it was not liable to be deducted from the aggregate value of assets for determining capital employed under Section 80J. In the present case, where the dividend was proposed but not approved by the General Body, the Court ruled in favor of the assessee against the revenue on this issue as well.

In conclusion, the High Court disposed of the income tax reference, deciding in favor of the assessee on both issues raised in the reference applications. The Income Tax Appellate Tribunal was directed to proceed accordingly based on the Court's judgments.

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