1. In view of contradicting decisions of the Division Benches of the Income-tax Appellate Tribunal, the President of the Income-tax Appellate Tribunal has constituted a Special Bench under Section 254(3) of the Act to decide the following issue: Whether the expression 'any period of his employment outside India' used in Sub-clause (i) of Clause (b) of Section 40A(5) of the Income-tax Act, 1961, applies only to cases of employees posted either temporarily or permanently abroad or whether it covers also the cases of employees who merely go on foreign tour in connection with the work of the employer? 2. The assessee is a company. The assessment year is 1979-80 and the relevant previous year ended on 30-11-1978.
3. During the relevant previous year, the assessee had sent two of its employees viz., S/Shri R.N. Langrana and A.E. Sequira on a foreign tour for few days. In its return of income, the assessee had worked out disallowance of Rs. 1,05,585 under Section 40A(5)/40(c) of the Act. In the draft assessment framed Under Section 143(3)/144B of the Act, the I.T.O. had worked out such disallowance at Rs. 1,48,250.
4. One of the objections raised by the assessee, against the aforesaid proposed disallowance of Rs. 1,48,250 worked out by the I.T.O. was the inclusion of proportionate salary/perquisite amounting to Rs. 29,948 paid to the aforesaid two employees while they were out of India on foreign tour. According to the assessee, the same should have been excluded in view of Section 40A(5)(b)(i) of the Act.
5. The Inspecting Asstt. Commissioner in his directions issued Under Section 1446 of the Act, over-ruled the assessee's objection as under: In my opinion, the section referred to by the assessee is not attracted. The persons for whom the deduction has been claimed, has merely gone on foreign tour in connection with company's work, and the salary they got in the period cannot be treated as salary for employment outside India. It is seen that the point has also been answered by the CIT(A) against the assessee in the earlier year.
Hence ITO's addition on this account is sustained.
Thereafter, the I.T.O. finalised the assessment, wherein he had disallowed Rs. 1,48,250 Under Section 40A(5)/40(c) of the Act.
6. In appeal before he Commissioner of Income-tax (Appeals) the assessee once again urged that proportionate salary/perquisite paid to the aforesaid two employees, during the period they were outside India, should not be considered for the purposes of working out disallowance Under Section 40A(5) of the Act. The C.I.T.(A) accepted the assessee's contention in the following manner: In my view since services were rendered outside India, the employment during that period must be considered as employment outside India. The section does not apply only to cases where employees may be wholly stationed abroad. In this view of the matter I uphold the appellant's contention and accordingly direct the Income-tax Officer to exclude salary relating to the period during which the employees were outside India.
7. Being aggrieved by the action of the CIT(A), the Revenue came up in appeal before the Tribunal. The Revenue, relying on the order of the Tribunal in the assessee's own case for the assessment year 1978-79 (ITA Nos. 1017 and 1689/Bom/1982, dated 15-7-1983), contended that the order of the CIT(A) on this point should be reversed. The assessee, on the other hand, relying on the order of the Tribunal in the case of Garware Shipping Corpn. Ltd. v. ITO [1984] 7 ITD 118 (Bom.) submitted that the order of the CIT(A) should be upheld. As there were contradictory decisions of the Tribunal, the aforesaid question is referred to the Special Bench.
8. The learned representative for the department strongly relied on the aforesaid order of the Tribunal in the assessee's own case and vehemently argued that the order of the CIT(A) on this point should be reversed. He also relied on the order of the Tribunal in the case of Hoechst Dyes & Chemicals Ltd. [IT Appeal Nos. 1406 and 1738 (Bom.) of 1976-77, 825 and 912 (Bom.) of 1977-78, dated 13-2-1979]. Wherein the Tribunal has taken a view similar to the one taken in the assessee's own case in respect of the assessment year 1978-79. Thereafter, he referred to the relevant provisions of Section 40A(5) of the Act and submitted that the words "period of employment outside India" mentioned in Clause (b)(i) referred to the period of posting of an employee outside India and not in a case where an employee is sent on foreign tour. According to him, these words indicate the normal and ordinary place where an employee works for his employer. Thereafter, the learned representative for the department took us through the historical background of the provisions brought on the statute right from 1963 by the Finance Act, 1963 onwards to impress upon us that in order to claim exclusion Under Section 40A(5)(b)(i) of the Act the employment/posting of an employee should be outside India. He also referred to the meaning of the word " employment" contained in Law Lexicon by Venkatramaiya as well as dictionary meaning of the word "salary" considered/noticed by the Hon'ble Supreme Court in the case of Gestetner Duplicators (P.) Ltd. v. CIT [1979] 117 ITR 1. He, therefore, urged that the CIT(A) was not justified in deviating from the earlier order of the Tribunal in the assessee's own . case for the assessment year 1978-79. He also pointed out that the permission of the Reserve Bank of India is required in the case of a foreign trip/tour undertaken by an employee employed in India, to meet the foreign tour expenses. However, such is not a case where the employment abroad is involved. In other words, he wanted to emphasise that it is only in the case of the salary paid to an employee who was posted abroad that the exclusion contemplated under Section 40A(5) (b)(i) of the Act would be available. Referring to the provisions of Section 6 and 40A(5) of the Act, he pointed out that the former section talks of period or periods, while the latter section talks of period only. In other words, according to him, the latter section would be applicable only in a case where an employee is posted abroad either temporarily or for a longer period. He also invited our attention to Section 10(6), (7) of the Act with a view to point out that if we were to accept the stand taken on behalf of the assessee, then these provisions may be jeopardised if a foreign technician who works in India goes abroad for a short period. Referring to the decision of the Tribunal in the case of Garware Shipping Corpn. Ltd. (supra), he submitted that the view taken by the Tribunal in that case had mainly turned on the fact that the employees were on board the ship for 286 days out of 365 days and they used to visit India only on vacation/holiday for a shortwhile. He, therefore, urged that the order of the CIT(A) on this point should be reversed.
9. The learned representative for the assessee, on the other hand, strongly supported the action of the CIT(A). According to him, the decision of the Tribunal in the case of Garware Shipping Corpn. Ltd. (supra) is of general nature, applicable to all types of employees going abroad and not limited to the employees of a shipping company.
Further, he submitted that the view taken by the Tribunal in this case is a better view than the one taken by it in the assessee's own case as well as in the case of Hoechst Dyes & Chemicals Ltd. (supra). He, therefore, urged that the view taken in the Garware Shipping Corpn.
Ltd.'s case (supra) should be adopted by us.
10. We have carefully considered the rival submissions of the parties as well as perused the aforesaid orders of the Tribunal and we find considerable force in the submissions made on behalf of the revenue. In order to appreciate the rival contentions of the parties, it would be necessary to reproduce below the relevant portion of Section 40A(5) of the Act.
40A. Expenses or payments not deductible in certain circumstances. - (1) The provisions of this section 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.
(i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or (ii) incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit, then, subject to the provisions of Clause (b), so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in Clause (c) shall not be allowed as a deduction: (b) Nothing in Clause (a) shall apply to any expenditure or allowance in relation to- (i) any employee in respect of any period of his employment outside India; (i) in respect of the expenditure referred to in Sub-clause (i) of Clause (a), in the case of an employee, an amount calculated at the rate of five thousand rupees for each month or part thereof comprised in the period of his employment in India during the previous year, and in the case of a former employee, being an individual who ceases or ceased to be the employee of the assessee during the previous year or any earlier previous year, sixty thousand rupees: 11. Clause (a) of Section 40A(5) requires to consider any salary/perquisite paid to an employee subject to the provisions of Clause (b) of the said section. Under Sub-clause (i) of Clause (b) salary/perquisite paid to an employee in respect of any period of his employment outside India has to be ignored. Clause (c) stipulates the limit in excess of which salary/perquisite paid to an employee is to be disallowed. Now, the crucial words which we are required to interpret in this case are "any period of employment outside India". As noted above, according to the revenue, Clause (b) would be applicable in case of an employee who is posted outside India either temporarily or for a long period, while, according to the assessee, this would cover a case of an employee who has gone abroad for a few days though posted in India. In our view, looking to the historical background of the provisions, the stand taken on behalf of the revenue has considerable force. In our considered opinion, when an employee working in India goes abroad for a few days, he cannot be said to have an "employment outside India". If such an employee were to be asked as to where he is employed, we have no doubt in our mind that his answer would be that he is employed in India. On the other hand, if a person has taken an employment and posted abroad, his answer would be that he has been employed abroad or outside India. It is the latter type of case which is covered under Sub-clause (i)(b) of Section 40A(5). It is pertinent to note that these provisions have been brought on the statute with a view to curb excess salary/perquisite given by the employers to the employees in India. The limits prescribed under Clause (c) also indicate that the Legislature wants to apply this restrictive provision only in a case of an employee who is in employment within India. If the exclusion carved out under Clause (b) was not there, then the limit prescribed in Clause (c) would be equally applicable in case of an employee employed outside India. This would have adversely affected not only the employers but also the employees employed outside India. In other words, according to us, the provisions of Section 40A(5) are made applicable in respect of salary/perquisite paid to an employee who is in employment within India. In this view of the matter, we do not agree with the submissions made on behalf of the assessee that the foreign trip undertaken by its employees, even though stationed in India, should be treated as "period of employment outside India". We have carefully gone through the order of the Tribunal in the case of Garware Shipping Corpn. Ltd. (supra) to which one of us was a party and are of the view that the decision of the Tribunal has turned on the peculiar facts obtaining in that case. It is no doubt true that certain observations made by the Tribunal apparently support the stand taken on behalf of the assessee. However, we are of the view that those observations have to be read in the context of the fact/situation obtaining in that case and cannot be generalised. We are in full agreement with the view taken by the Tribunal in the assessee's own case as well as in the case of Hoechst Dyes & Chemicals Ltd. (supra).
In this view of the matter, we hold that the C.I.T.(A) was not justified in accepting the assessee's contention for excluding the proportionate salary relating to the period during which the aforesaid two employees were outside India, for the purpose of working out disallowance Under Section 40A(5) of the Act. We, therefore, set aside the order of the C.I.T.(A) on this point and restore that of the I.T.O.