Commissioner of Income Tax vs GRINDLAYS BANK PLC

By the Court

On an application u/s 256(1) of the Income Tax Act, 1961, the Tribunal has referred the following question for our opinion :

"1. Whether, on the facts and in the circumstances of the case, the Hon''ble Tribunal is -correct in law in upholding the order of the Commissioner (Appeals) in respect of disallowance u/s 40A(5) of the Income Tax Act, excluding the proportionate expenses deductible u/s 20(1)(i) of the Income Tax Act."

The assessee is a banking company within the meaning of Banking Regulation Act and is incorporated under the laws of United Kingdom. In the return filed on 31-12-1976, assessee has declared the income of Rs. 12,25,99,190. The assessment year involved is 1976-77. During the course of assessment assessing officer noticed that assessee has paid excess amount to employees in terms of section 40A(5). Assessee has in fact claimed the proportionate expenses deductible u/s 20(1)(i) of the Act in computing the income under the head interest on securities for the purpose of disallowance u/s 40A(5) that has been rejected and the assessing officer has added back that excess amount in the income of the assessee. In appeal, Commissioner (Appeals) has taken the view that while computing the income for the purpose of disallowance u/s 40A(5), the interest of securities are not to be included. In appeal before the Tribunal, Tribunal has confirmed the view taken by Commissioner (Appeals).

None appeared for the assessee. We heard learned counsel for the revenue. The facts are not in dispute that assessing officer has disallowed Rs. 27,07,043 u/s 40A(5). While disallowing this amount, the assessing officer has taken into account the total payment to the employees, which includes the payment of interest on securities.

Commissioner (Appeals) as well as the Tribunal have taken the view that for the purpose of disallowance u/s 40A(5), the interest paid to the employees is not computable as income under the head profits and gains of business or profession. Therefore, that cannot be included for the purpose of disallowance u/s 40A(5) of the Act.

The provision of section 40A(5) provides that while computing the income under the heads profits and gains of the business or profession certain excess amount or expenses paid to the employees or director of the company are not deductible in computing the income of the assessee under head profit and gains of the business. There is no dispute that if interest paid to the employees/directors of the company if that be included in that case there will be an excess payment from the limit prescribed for the purpose of disallowance, that has to be disallowed.

The provisions of section 40A(5) start with non obstante clause which contemplates that provision of section 40A(5) shall have effect notwithstanding anything to the contrary contained in any other provisions of this Act, relating to the computation of income under the head profits and gains of the business or profession.

Sub-section (5) of section 40A provides that where the assessee incur an expenditure which results directly or indirectly in the payment of any salary to an employee or incurs an expenditure which results directly or indirectly in the provision of any perquisite to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of assets of the assessee used by the employee, then subject to the provision of clause (b) so much of the expenditure or allowance as is in excess of the limit specified in respect thereof in clause (c) shall not be allowed as a deduction. There is no dispute that if we include the interest paid to the employee, the amount of Rs. 27,07,043 is excess payment to employee for the purpose of section 40A(5).

The provisions of section 20 provides for deduction from interest on securities in the case of banking company : (i) the sum to be regarded as a sum reasonably expended for the purpose referred to in clause (i) of section 19 shall be an amount bearing to the aggregate of its expenses as are admissible under the provisions of sections 30, 31, 36 and 37; (ii) the amount to be regarded as interest payable on money borrowed for the purpose referred to in clause (ii) of section 19 shall be an amount which bears to the amount of interest payable on all moneys borrowed by the company the same proportion as the gross receipts from interest on securities chargeable to Income Tax u/s 18 bear to the gross receipts from all sources which are included in the profit & loss account of the company.

In sub-section (2), the expense payable that the expenses deducted under clause (i) and clause (ii) of sub-section (1) shall not again form part of the deductions admissible under sections 30 to 37 for the purposes of computing the income of the company under the head profits and gains of business or profession. The Explanation to sub-section (ii) further provides that for the purpose of this section "money borrowed" includes moneys received by way of deposits.

It is true that the deduction from the interest on securities is allowable u/s 20. But how the interest paid to the employee or director can be excluded for the purpose of disallowance u/s 40A(5) of the Act. That has nothing to do with the disallowance u/s 40A(5). Moreso, when the 40A(5) starts with the non obstante clause, if any provision is contrary to the provision of section 40A(5) of the Act, the provision of section 40A(5) will prevail over other provision of the Act.

In the result, we answer the question in negative that is in favour of revenue and against assessee.