COMMISSIONER OF INCOME TAX Vs. LUCAS TVS LIMITED

JUDGEMENT

(1.) THIS is a combined reference at the instance of the assessee as well as by the Revenue. The Tax Case Nos. 1816 and 1817 of 1984 are at the instance of the assessee and TC 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 Tribunal has forwarded a consolidated statement of case and referred the following five questions of law for the opinion of this Court :

(2.) THE answer to the question 2, 3 and 4 need not detain us as the questions are covered by decisions of the Supreme Court as well as by earlier decisions of this Court. In so far as the second question which is referred at the instance of the assessee is concerned, the point that is involved is whether the assessee would be entitled to claim surtax liability as a deduction in computing the business income under the provisions of the IT Act, 1961 (hereinafter referred to as 'the Act'). THE Supreme Court in the case of Smith Kline & French (India) Ltd. vs. CIT , has held that the surtax paid under the provisions of Companies (Profits) Surtax Act, 1964 cannot be allowed as deduction while computing business income of the assessee under the provisions of the Act. Following the decision of the Supreme Court, we answer the second question of law referred to us in the affirmative and against the assessee.

(3.) MR. C. V. Rajan, learned counsel for the Revenue submitted that s. 40A(5)(b) of the Act provides that nothing in cl. (a) to s. 40A(5) shall apply to any expenditure or allowance in relation to any employee being an individual referred to in s. 10(6)(viia) of the Act. The proviso to s. 40(c) of the Act excludes from its consideration the expenditure of the nature referred to in sub-cls. (i), (ii), (iii) or (iv) to the second proviso to cl. (a) to s. 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 expenditures referred to in the second proviso to s. 40A(5) of the Act are excluded from consideration of s. 40(c) of the Act, but there is no specific exclusion of s. 40A(5)(b) of the Act and in the absence of exclusion, s. 40(c) would apply to any salary paid to director-cum-foreign technician also. Learned counsel for the Revenue placed reliance on a decision of the Supreme Court in the case of CIT vs. Indian Engg. & Commercial Corpn. , and submitted that though the provisions of s. 40(c) as well as s. 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 the learned counsel for the Revenue, cl. (b) to s. 40A(5) of the Act is not made applicable to s. 40(c) of the Act and for the purpose of determining the ceiling limit under s. 40(c) there is no scope for exclusion of the amount found under s. 40A(5)(b)(ii) of the Act. Learned counsel also submitted that it is not permissible to bifurcate the expenditure, one as a payment to the director and another to a foreign technician and if such a contention is accepted, the proviso to s. 40(c) of the Act would become otiose. According to the learned counsel, the remuneration paid to the employees who are directors should also be taken into account in fixing the ceiling limit under s. 40(c) of the Act.