Commissioner of Income Tax vs R.K. Swamy Advertising Associates (P) Ltd.

Thanikkachalam, J.—At the instance of the Department, the Tribunal referred the following question for the opinion of this Court under s.

256(1) of the IT Act, 1961, hereinafter referred to as the ''Act'', for the asst. yrs. 1975-76 and 1976-77 :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the disallowance towards the remuneration paid

to Sri R. K. Swamy, the managing director of the company, should be regulated in terms of s. 40(c) and not as per s. 40A(5) of the IT Act, 1961

?

The reference applications relate to the asst. yrs. 1975-76 and 1976-77. For these two years, the ITO made additions of Rs. 19,164 and Rs.

19,355 respectively in respect of the remuneration paid to the managing director, Shri R. K. Swamy, under s. 40(c)(i)(ii), r/w s. 40A(5) of the Act.

On the assessee''s appeal, the CIT(A) held that the excess to be disallowed, if any, should be computed under s. 40(c) of the Act, which

applies specifically to directors and not with reference to s. 40A(5), relying on the Gujarat High Court''s decision in Additional Commissioner of

Income Tax, Gujarat Vs. Tarun Commercial Mills Ltd., . Hence the CIT(A) remitted the matter back to the ITO for recalculating the disallowance

under s. 40(c) of the Act. On Revenue''s appeal, the Tribunal upheld the CIT(A)''s direction on this point, following the decision in Additional

Commissioner of Income Tax, Gujarat Vs. Tarun Commercial Mills Ltd., as also the decision of the Bombay Special Bench of the Tribunal in the

case of Geoffry Manners & Ltd. in ITA No. 1296/Bom/1976-77, for the asst. yr. 1975-76, in which it was held that regarding the director cum

employees, s. 40(c) will apply and not s. 40A(5) of the Act.

Before us, the learned senior standing counsel appearing for the Department submitted that in the present case, the provisions of s. 40A(5) of

the Act would apply, r/w s. 40(c)(i)(ii) of the Act. According to the learned senior standing counsel, the repairing charges borne out by the

employer to be treated as perquisite in the hands of the employee director. The learned senior standing counsel further submitted that the Tribunal

was not correct in directing the AO to apply s. 40(c) in the present case and find out the reasonableness in allowing the expenditure incurred by the

employer towards its managing director.

We have heard the learned senior standing counsel appearing for the Department and also the learned counsel appearing for the assessee, who

supported the order passed by the Tribunal. The fact remains that the Tribunal in its order, though gave certain findings with regard to certain items

of expenditures incurred by the employer, but ultimately directed the ITO to recompute the liability in accordance with s. 40(c) of the Act,

especially after finding out the reasonableness of the expenditure, if any, under s. 40(c) of the Act. The Tribunal also directed that in such

recomputation, the AO may also deal with the issue about the apportionment of the rent between official and personal use of the managing

director. The Tribunal also held that the repairing charges borne out by the employer would amount to perquisite in the hands of the employee-

director. In Commissioner of Income Tax, Bombay Vs. M/s. Indian Engineering and Commercial Corporation Pvt. Ltd., , the Supreme Court held

that the employees concerned herein happen to be directors. The provision in cl. (c) of s. 40 applies to directors among others. Of course, s. 40(c)

is applicable only to companies, whereas s. 40A(5) is applicable to employees, whether of companies or others. In the case of directors of

company who are also employees, both the provisions ss. 40(c) and 40A(s) will be attracted-the higher of the two ceilings has to be applied"". In

view of the abovesaid decision of the Supreme Court, we consider that there is no infirmity in the order passed by the Tribunal in the present case

directing the AO to recompute the liability in accordance with the provisions contained in s. 40(c) of the Act. Accordingly, we answer the question

referred to us in the affirmative and against the Department. No costs.