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2001 DIGILAW 417 (CAL)

COMMISSIONER OF INCOME-TAX v. GRINDLAYS BANK PLC

2001-07-13

ARUN KUMAR MITRA, Y.R.MEENA

body2001
Y. R. Meena, Arun Kumar Mitra ( 1 ) ON an application under Section 256 (1) of the Income-tax Act, 1961, the Tribunal has referred the following question for our opinion :"whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in law in upholding the order of the Commissioner of Income-tax (Appeals) in respect of disallowance under Section 40a (5) of the Income-tax Act, excluding the proportionate expenses deductible under Section 20 (l) (i) of the Income-tax Act ?" ( 2 ) THE assessee is a banking company within the meaning of the Banking Regulation Act and is incorporated under the laws of the United Kingdom. In the return filed on December 31, 1976, the assessee has declared the income of Rs. 12,25,99,190. The assessment year involved is 1976-77. During the course of the assessment, the Assessing Officer noticed that the assessee has paid excess amount to the employees in terms of Section 40a (5 ). The assessee has in fact claimed the proportionate expenses deductible under Section 20 (l) (i) of the Act in computing the income under the head "interest on securities" for the purpose of disallowance under Section 40a (5 ). That has been rejected and the Assessing Officer has added back that excess amount in the income of the assessee. In appeal, the Commissioner of Income-tax (Appeals) has taken the view that while computing the income for the purpose of disallowance under Section 40a (5), the interest on securities are not to be included. In appeal before the Tribunal, the Tribunal has confirmed the view taken by the Commissioner of Income-tax (Appeals ). ( 3 ) NONE appeared for the assessee. We heard learned counsel for the Revenue. The facts are not in dispute that the Assessing Officer has disallowed Rs. 27,07,043 under Section 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. ( 4 ) THE Commissioner of Income-tax (Appeals) as well as the Tribunal have taken the view that for the purpose of disallowance under Section 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 under Section 40a (5) of the Act. Therefore that cannot be included for the purpose of disallowance under Section 40a (5) of the Act. ( 5 ) THE provision of Section 40a (5) provides that while computing the income under the head "profits and gains of business or profession" certain excess amount or expenses paid to the employees or directors of the company are not deductible in computing the income of the assessee under the head "profits and gains of 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. ( 6 ) THE provisions of Section 40a (5) start with a non obstante clause which contemplates that the provision of Section 40a (5) shall have effect notwithstanding anything to the contrary contained in any other provision of this Act, relating to the computation of income under the head "profits and gains of business or profession". ( 7 ) SUB-SECTION (5) of Section 40a provides that where the assessee incurs 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 employees, the amount of Rs. 27,07,043 is excess payment to the employees for the purpose of Section 40a (5 ). There is no dispute that if we include the interest paid to the employees, the amount of Rs. 27,07,043 is excess payment to the employees for the purpose of Section 40a (5 ). ( 8 ) THE provisions of Section 20 provide for deduction from interest on securities in the case of a 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 moneys 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 under Section 18 bear to the gross receipts from all sources which are included in the profit and loss account of the company. ( 9 ) IN Sub-section (2), 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 below Sub-section (2) further provides that for the purposes of this section "moneys borrowed" includes moneys received by way of deposits. ( 10 ) IT is true that the deduction from the interest on securities is allowable under Section 20. But how the interest paid to the employee or director can be excluded for the purpose of disallowance under Section 40a (5) of the Act. That has nothing to do with the disallowance under Section 40a (5 ). More so, when Section 40a (5) starts with a 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. ( 11 ) IN the result, we answer the question in the negative, that is, in favour of the Revenue and against the assessee.