AI Drafter 
TaxTMI 
TaxTMI 
1981 (4) TMI 279
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....o the question as to whether in considering the limit of admissible deduction in regard to expenditure on remuneration of a director of the assessee, who is also an employee, the amount of gratuity on his retirement from service of the assessee is to be included or not. There was a conflict of views in the orders of some of the Benches of the Tribunal on this point necessitating the reference to Special Bench. In one of the two grounds of the assessee's cross objection, namely, Ground No. 2, the contention of the assessee is that in case the gratuity is held to be part of the remuneration, then a separate limit in regard to the same should be applied in the sum of Rs. 60,000 as provided by section 40A(5)(c) of the Income-tax Act (hereinafter referred to for convenience as "the Act"). 4. The relevant facts, which give rise t this particular dispute in Ground No. 2 as well as the disputes raised in Ground Nos. 1 and 3 of the department, are as follows : Mr. V.P. Kamat, a director of the assessee-company, was also an employee and he retired from service, it is stated, prematurely, at the end of the previous year 31-12-1974, but was on leave preparatory to such retirement from 1-....
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....applied is that contained in section 40A(5)(c) or 40(c), covered by the Special Bench order of the Tribunal in the case of Geoffrey Manners & Co. Ltd. v. ITO [1978] Taxman 111 (Bom.-Trib.), though the department does not wish to give up its case. While, therefore, following the Special Bench order, we hold that for the purpose of considering the admissible expenditure on remuneration and perquisites in the case of a director, it is the provisions of section 40(c) read with first proviso to section 40A(5) that would apply and not the limit prescribed by section 40A(5)(c), the objection to the deletion of the disallowance of Rs. 38,693 does not necessarily get rejected as a consequential finding as it depends on the objection to the exclusion of gratuity in Ground No. 2 and to some extent on the ground in the assessee's cross objection. Therefore, the objection whether the Commissioner (Appeals) was justified in deleting the addition of the sum of Rs. 38,693 or not will stand disposed of after we deal with all the connected grounds in the appeal and cross objection. 6. The second ground, as we already stated, raises the dispute which call for consideration of the point by the Spec....
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....urposes is one which is towards a liability actually existing at the time but the putting aside of the money which may become expenditure on the happening of an event is not expenditure and that under the Income-tax Act, an actual liability in praesenti alone is deductible. It is, therefore, submitted that the period has reference to the incurring of the expenditure by the assessee and has no relation to the period of service. It is also contended that the assumption made with reference to the period stated in months that it relates to periodical monthly remuneration is not justified or correct as the expenditure covered by the section is not confined to such salary and allowances per month but also covers certain items of perquisites or payments which have no relation to any specified period, like reimbursement of medical expenses, commission on profit, etc. Reference is also made in this connection to the Supreme Court decision in E.D. Sassoon & Co. Ltd. v. CIT [1954] 26 ITR 27 , where the question of apportionment of a part of the commission accruing or arising to the managing agents between the assignor and the assignee of the managing agency transferred in the course of the ye....
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....on" is a sort of a reward or recompense, an act of remunerating, etc., and also to the decision of the Punjab and Haryana High Court in CIT v. Avon Cycles (P.) Ltd. (supra). It was, therefore, submitted that in the context of the relevant provisions, gratuity is not contemplated to fall within the expression "remuneration". Further, it is pointed out that clause (ii) contemplates expenditure or allowance in regard to items during the tenure of service of a director. Reference is also made to the test laid down for determining the admissibility of the expenditure that it should not be excessive or unreasonable having regard to the legitimate business needs of the company and the benefits derived, etc., which according to the submission of the learned counsel of the assessee, has reference to the services of a particular period. It is further submitted that incurring of expenditure in a previous year is one concept but the expenditure relating to a period is a different concept and the sub-clauses (A) and ( B) of clause (c) of section 40 properly construed would only relate to periodic payments in relation to a particular year for services rendered, whereas incurring expenditure by t....
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....being reasonable and not excessive, then the limit does not come into play at all and then whatever be the quantum of expenditure, the same would stand to be allowed. It is further submitted that the proviso to this section also shows that what is contemplated is the period of service and the status of that person during the year as to whether he is a director or not. According to the learned counsel's contention, if a director was an employee-director for a period of 28 years and during the relevant previous year only a director, then the gratuity payable to him would not apply to any period during the relevant previous year at all and, therefore, will not be comprehended by the section. Reliance is then strongly placed on the order of the Tribunal in the case of Asbestos Cement Ltd. (supra) and the observations and reasoning in paragraph 12 of that order. Reference is also made and reliance placed on another order of the Tribunal in Colgate Palmolive (India)(P.) Ltd. [IT Appeal Nos. 1441 and 1572 (Bom.) of 1978-79 dated 21-7-1979]. It is also submitted that the remuneration contemplated by section 40(c) is a payment to be made to a director which can only be in regard to services....
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....s nothing to do with the service, but as being in the nature of a terminal benefit, it is argued that it is a part and parcel of the remuneration or salary due to the employee or director under the terms of employment and the liability to pay the same undoubtedly arises in the relevant previous year on the director or employee concerned ceasing to be in employment. The fact that in quantifying the gratuity the period of service not only in the relevant previous year but also in the past is taken into consideration has, it is submitted, nothing to do with the question as to when the liability to pay the sum arises. It is further submitted that even if any such gratuity is payable to the legal heir of the concerned director or employee by the reason of his death prior to his receipt it does not alter the character of the liability or the expenditure. 9. At this stage, it is convenient to state the connected grounds of cross objection of the assessee. We have already referred earlier to one of its two grounds that a separate limit of Rs. 60,000 is claimed in regard to gratuity payment. If it is held as part of remuneration in the first ground, the assessee's claim is that if the de....
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....he intention behind the enactment. Section 40 purports to put a ban on the deduction of certain amounts in computing the chargeable income under the head "Profits and gains of business or profession" even if such deduction is permitted under the provisions of sections 30 to 39 of the Act. Obviously, therefore, this ban against deduction is in regard to assessment of income from business or profession carried on by the assessee. Clause (c) of this section applies, it would be seen, not to all assessees engaged in business or profession but to a particular class or category or assessees, namely, companies and its subject-matter is : (i)the expenditure incurred by a company - assessee which results, whether directly or indirectly, in the provision of remuneration or benefit or amenity to a director, or to certain other persons mentioned therein with which we are concerned in this appeal, such as, a person who has substantial interest in the company or to a relative of a director, etc., and (ii)the expenditure or allowance in respect of any asset of the assessee-company used by a director or such other person either wholly or partly for his own benefit. The ban on the allowanc....
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....nsidered is as to the meaning of, so far as material in this case, the expression "any remuneration". The word "remuneration" has not been defined, and, therefore, must receive its meaning as ordinarily understood and in terms of the dictionary meaning. The extract fro the four dictionaries-Black, Chambers, Websters and Short Oxford and also from the decision in the case of CIT v. Avon Cycles (P.) Ltd. (supra) filed by the assessee gives the following meanings to the expression "remuneration": Black : Reward, recompense, salary. Chambers : Recompense, reward, pay. Websters : Act of remunerating (to pay an equivalent to a person for a service, loss or expenses). Short Oxford : Reward, recompense, repayment, payment, pay. Avon Cycles' case : Reward, recompense, pay, wages or salary for services rendered. It would been from the above that "remuneration" is a recompense or a reward for any services rendered, loss or expense suffered, etc., and includes every type of recompense such as salary, bonus, commission, etc., not necessarily referable to periodic service. It can be compared to a genus of which salary, wages, commission, bonus are the species. Therefore, it is ....
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....he limits prescribed under clause (c) of the provisions of section 40A(5) because the concerned persons are employees of the assessee-company, according to the assessee the addition has to be determined in accordance with the provisions of section 40(c) which operate in the cases of companies when the payment in question is made to directors. The scope for such a dispute arises because whereas the provisions of section 40(c) restrict the amount admissible out of payments made by a company to its directors and the provisions of section 40A similarly restrict payment made by any assessee to any employee, in a case like the present, the concerned assessee is a company and the payments in question are made to persons who are directors as well as employees throughout the year. The case of the department is that it is specifically stated in section 40A(1) that the provisions of the said section shall have effect notwithstanding anything contained to the contrary in any other provisions of the Act relating to the computation of income under the head 'Profits and gains of business or profession'. Relying upon this, it is suggested that this means that the provisions of section 40A(5)....
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....its counterpart in the second proviso to section 40A(5). According to us, therefore, the case falls under both in so far as the nature of the expenditure by way of remuneration to the director is concerned. It falls under section 40A(5) as an expenditure which results directly or indirectly in the payment of salary to an employee, the director in this case, and to ascertain the meaning of the term or expression "salary" for the purpose of this section, one has necessary to resort to its meaning under Explanation 2 to that section, as we had already held in the other Special Bench case in Kodak Ltd. (supra) argued by the same counsel analogously. We have, in our separate order therein, held that "salary" for the purpose of section 40A(5) includes gratuity. It, therefore, follows that if the salary paid to the director concerned in this case is within the purview of section 40A(5), as we hold it to be, for the reasons already stated, gratuity must necessarily form part of it. Again, by the fact that the salary paid to the director falls within the purview of section 40A(5)(a)( i), as regards its inherent character as flowing from the contract of employment for service (sic), it is no....
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....from the decision of the Gujarat High Court in Addl. CIT v. Tarun Commercial Mills Ltd. (supra) as well as its later decision in Saurashtra Cement & Chemical Industries Ltd. v. CIT (supra) that only the provisions of section 40(c) will be applicable for all purposes in the case of a director's remuneration and not section 40A(5) altogether. Though our decision in the case of Kodak Ltd. (supra) that the expression "salary" under section 40A(5) includes death-cum-retirement gratuity and other terminal payments or benefits to an employee under section 40A(5)(i) will govern the remuneration by way of salary to a director also, it is clear that the first proviso to the section seeks to take out the identical expenditure along with remuneration or allowance due to a director in a capacity other than an employee as envisaged by clause (b) of the said proviso, if any, for special consideration in regard to the overall limit to be applied. In the case of a director who is also an employee throughout the year, the nature of expenditure by way of salary and allowances will fall under section 40A(5)(i) for determining the meaning, scope, extent and contend of expression "salary" which will non....
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....ows that the expenditure referred to in sub-clause (i) should be such as to be directly relatable to the whole or part of the year. If a particular expenditure is not so relatable, runs the reasoning, the maximum permissible mount in this regard cannot be determined under sub-clauses (A) and (B) and consequently such an expenditure in regard to which maximum permissible cannot be determined is not covered by sub-clause (i). We are unable, with respect, to subscribe to this view because, in the first place, it proceeds on an assumption that the apparently wide expressions mentioned above have certain inherent limitations which are sought to be imposed by the language used in fixing a limit on them and secondly, it is a cardinal rule of construction that the provisions of statute have to be construed in a reasonable and workable manner on the basis of the words and expressions used according to their ordinary sense, giving their normal, natural and full meaning, without reading any qualifications or limitations in them, and the full effect of the expressions cannot be whittled down by supposed inherent qualifications or limit unless compelled to do so for the purpose of effecting or ....
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....nd it passes the test of being reasonable and not excessive, the only next step is to determine the limit to the same and as to how to work out the limit. This is what is exactly provided by sub-clauses (A) and ( B). Reference to periods mentioned in the two sub-clauses is, according to us, for the reason that expenditure contemplated may not be incurred for the whole of the year but only for a part as in the case where a director or employee retires or leaves the employment in the course of the year before its expiry in which case the expenditure relates only to the period up to the date of such retirement or exit from the assessee's service and not for any period beyond. The idea appears to be to fix an overall limit of Rs. 72,000 for a full year and proportionately where the period is less than 12 months, taking for this purpose, the fraction of a month as a complete month which further emphasises the point that determination of the amount to be calculated has nothing to do with the period of service. For instance, if a director retires after, say 5 months and 10 days during the previous year, and is paid a remuneration of Rs. 3,000 per month and a commission of say, Rs. 25,000,....
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....ed by the department on the basis of certain observations of the audit party that the proper section which governed the case would be section 40(c)(i ) and not section 40A(2)(a). This was sought to be challenged by the assessee in writ petition to the High Court. It is in this context that the observations came to be made by the High Court. It is to be noticed that the service in regard to which the remuneration was paid in that case related to the service of an independent partnership firm carrying on its own business. This is emphasised in the observations reported at page 570 where it is observed that it is not disputed that TTK & Co., the selling agents, have been providing the services and facilities under the agreement as independent entrepreneurs and they were found to be carrying on marketing operations and performing services such as providing godown facilities, providing workshop facilities, providing watch and ward, arranging collection of price, etc. etc. It is, however, significant to note that though the observation states that section 40(c) refers to expenditure incurred by making periodical payments to a person mentioned in that clause, service referred to in that c....
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....an independent and different capacity as partners of a firm which acts as an agent for the sale of the assessee-company's products or for any other purpose. This is evidently in keeping with the scheme, purport and object of section 40(c) which, as we already noted, is to discourage unduly high and excessive remuneration to directors for their personal services and persons who are able to control the affairs of a company and to divert the profits to themselves in that manner. 18. In the other Special Bench case of Kodak Ltd. ( supra) a somewhat similar argument relating to the calculation of limit on salary and other items contemplated by section 40A(5) read with clause (c) has been considered and we have held that the rule or standard or method of fixing the permissible expenditure at a particular sum for each month or part of a month comprised in the period of employment is only a method or manner of calculating the ceiling and itself does not indicate that it only applies to the salary for services referable to particular period or month and on the same analogy we must hold that the reference to the period as exceeding 11 months or not exceeding 11 months and fixing the limit....
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....e clause and scheme just ended with this. But the clause just occurring before sub-clauses (A) and (B) "so, however, that the deduction in respect of the aggregate of such expenditure or allowance in respect of any one person referred to in sub-clause (i) shall, in no case, exceed-..." further bring out and translate in adequate language the avowed object and purpose, as extracted in the Notes on clauses appended to the Finance (No. 2) Bill, 1971, that the permissible deduction on account of such expenditure where it passes the test of being not unreasonable or excessive will be further subjected to an overall ceiling limit of Rs. 72,000 or at a figure calculated at Rs. 6,000 per month. In other words, even where the expenditure of the nature as contemplated by sub-clauses (i) and (ii) of section 40(c), incurred by an assessee-company is found to pass the test of not being excessive or unreasonable having regard to the legitimate business needs of the company and a benefit derived or accrued to an assessee therefrom, any amount thereof which is beyond the sum of Rs. 72,000 or the figure calculated at the rate of Rs. 6,000 per month will be axed. As a matter of fact, it appears to u....
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....ding in the other Special Bench case of Kodak Ltd. (supra). 21. It only now remains for us to consider the alternative claim of the assessee for a separate limit. We have already stated earlier that by virtue of the first proviso to section 40A(5), the limit contemplated by clause (c) of that section is excluded and the limit as is envisaged in section 40(c) is applicable. The separate limit of Rs. 60,000 contemplated under clause (c) of section 40A(5) is only in the case of an employee simpliciter and not a director-employee for whom the special provisions of section 40(c) will apply for the purpose. The argument advanced, as we understand, on behalf of the assessee is that gratuity is payable after the director ceased to be a director in which case it becomes payable to him in the capacity of ex-employee and, therefore, separate limit will apply. The other argument is that since the gratuity would be payable to the director after he ceased to be director and therefore to a person other than in the capacity of a director or even as an employee it is not hit by the limit contemplated by section 40(c). In the other Special Bench case of Kodak Ltd. (supra ) we have, for reasons st....
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..... Moreover, in the present case, the gratuity also paid in fact before his services stood terminated or before his retirement and the fact that it is made during the leave period does not alter the position in law that it is paid to him at the time when he was a director of the assessee-company though on leave. In the circumstances we agree with the contention of the department that no separate limit is permissible in regard to gratuity as claimed in the cross objection of the assessee. 22. We may summarise our conclusion on this point as under : 1. The scheme of section 40 in its clause (c) is to prohibit or disallow expenditure on the provision of remuneration, benefit or amenity to a director of a company or any assets used by him wholly or partly for his own purposes or benefit and the allowance in regard to any such assets so used by him, where the expenditure or allowance is found by the ITO to be unreasonable or excessive judged by the test of legitimate business needs and the benefit derived by the company by such expenditure or allowance. (In this context we would endorse the stand of the learned departmental representative that the ITO is entitled to examine the rea....
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....ty must of necessity becomes payable only after the person ceases to be in employment or service, as it will, according to us, depend upon the statutory provisions, if any, applicable thereto or the rules governing the same. On the basis of the above conclusions, it follows that in this case, the Commissioner (Appeals) was not justified in deleting the sum of Rs. 38,693 and in restricting the disallowance of Rs. 1,193. The object of the department in Ground No. 2 against exclusion of gratuity is accepted and the ground raised in the assessee's cross objection is rejected. 23. The next ground is objection to the finding of the Commissioner (Appeals) that the ITO was not justified in disallowing gifts and presentations aggregating to Rs. 54,760 and that it would be reasonable to allow a deduction of Rs. 25,000 thus restricting the disallowance to Rs. 29,760. The learned departmental representative in this connection referred to the facts stated in paragraphs 8, 9 and 10 of the Commissioner (Appeals)'s order and contended that as the value of such gifts in each case exceeded a sum of Rs. 50, disallowance made by the ITO was justified. The learned counsel for the assessee relied ....