LUCAS TVS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a combined reference at the instance of the assessee as well as by the Revenue. Tax Cases Nos. 1816 and 1817 of 1984, are at the instance of the assessee and T.C. No. 1818 of 1984, is at the instance of the Revenue. The assessment year involved is common for both the tax cases, viz., 1977-78. The Appellate Tribunal has forwarded a consolidated statement of case and referred the following five questions of law for the opinion of this court :

(2.) WHETHER, on the facts and in the circumstances of the case, surtax liability is not an admissible deduction under the provisions of the Income-tax Act ?

(3.) MR. C. V. Rajan, learned counsel for the Revenue, submitted that section 40A(5)(b) of the Act provides that nothing in clause (a) to section 40A(5) shall apply to any expenditure or allowance in relation to any employee being an individual referred to in section 0(6)(viia)of the Act. The proviso to section 40(c) of the Act excludes from its consideration the expenditure of the nature referred to in clause (i), (ii), (iii) or (iv) of the second proviso to clause (a) to section 40A(5) of the Act. Learned counsel for the Revenue, therefore, submitted that the intention of the Legislature is clear that only some of the expenditure referred to in the second proviso to section 40A(5) of the Act are excluded from consideration of section 40(c) of the Act, but there is no specific exclusion of section 40A(5)(b) of the Act and in the absence of exclusion, section 40(c) would apply to any salary paid to the director-cum-foreign technician also. Learned counsel for the Revenue placed reliance on a decision of the Supreme Court in the case of CIT v. Indian Engineering and Commercial Corporation P. Ltd. [1993] 201 ITR 723, and submitted that though the provisions of section 40(c) as well as section 40A(5) of the Act are applicable, since both the provisions are attracted, the higher of the ceiling has to be applied. In other words, according to learned counsel for the Revenue, clause (b) to section 40A(5) of the Act is not made applicable to section 40(c) of the Act, and for the purpose of determining the ceiling limit under section 40(c), there is no scope for exclusion of the amount found under section 40A(5)(b)(ii) of the Act. Learned counsel also submitted that it is not permissible to bifurcate the expenditures, one as a payment to the director and another to a foreign technician and if such a contention is accepted, the proviso to section 40(c) of the Act would become otiose. According to learned counsel, the remuneration paid to the employees who are directors should also be taken into account in fixing the ceiling limit under section 40(c) of the Act.