COMMISSIONER OF INCOME TAX, DELHI (CENTRAL-I) versus M/S. CONTINENTAL CONSTRUCTION LTD.

Citation: [1998] 1 S.C.R. 519 · Decided: 03-02-1998 · Supreme Court of India · Bench: SUJATA V. MANOHAR · Disposal: Dismissed

Judgment (excerpt)

COMMISSIONER OF INCOME TAX, DELHI (CENTRAL-I) 
A 
--
'( 
v. 
MIS. CONTINENTAL CONSTRUCTION LTD. 
FEBRUARY 3, 1998 
[MRS. SUJATA V. MANOHAR AND S.S.M. QUADRI, JJ.] 
B 
Income Tax Act, I961 : Sections 40(c), 40A(5)(a) and (b)-Assessee-
Civil construction company-Employee-Directors posted outside India-
Remuneration paid in excess to the ceiling limit-Deductions claimed on the 
ground that amount paid to employee-Directors posted outside India not c 
subjected to ceiling-Income Tax Officer disallowed the excess amount paid-
On appeal, held, employee-Directors do not cease to be an employee-The 
_expenditure incurred on an employee-Director is reasonable and necessary-
Hence not subject to ceiling. 
-( 
The respondent-assessee was a civil construction company which had D 
... 
projects outside India. For the assessment year 1983-84, the assessee claimed 
deduction of the amount paid towards remuneration to its Directors. The 
Income Tax Officer disallowed the amount paid in excess over the limit 
prescribed under section i!O( c) and 40A(S)(a) of the Income Tax Act, 1961. 
The respondent did not dispute the disallowance of the amount over the E 
ceiling limit to the Indian based Directors but claimed that the amount paid 
to its employee-Directors employed outside India could not be taken into 
account, while calculating the ceiling under section 40A(S) or section 40(c). 
The Commissioner of Income Tax allowed the claim of the assessee. The 
Revenue unsuccessfully challenged the matter before the Tribunal and High 
Court. Hence the present appeal. 
F 
""'. 
The contention of the Revenue was that so long as the employee was 
also a Director, expenditure of the kind referred to in section 40A(S)(b) 
cannot be excluded from expenditure while calculating the ceiling limit 
under section 40(c) or section 40A(S)(a) such an exclusion is, however 
permissible only in the case of an employee who is not a Director at the G 
relevant time when the expenditure was incurred. 
r-
Dismissing the appeal, this Court 
HELD : I.I. The High Court was right in holding that any expenditure 
covered by Section 40A(S)(b)(i) of the Income Tax Act, 1961 in respect of an H 
519 
t 
520 
SUPREME COURT REPORTS 
[1998] I S.C.R. 
A employee-Director shall not be taken into account for the purposes of 
calculating the aggregate of expenditure under the proviso to Section 
40A(5)(a) for the application of the ceiling limit prescribed there. Section 
40A(5)(b) will apply to employee-Directors. 1530-B-CI 
1.2. Under Section 40A(5)(b) (i) nothing in clause (a) which deals with 
B expenditure on salaries and perquisites of an employee shall apply, inter alia, 
to any expenditure in relation to an employee in respect of any period of his 
employment outside India. Therefore, in calculating the expenditure on the 
salary of an employee, the salary paid in respect of his employment outside 
India will not be taken into account for the purposes of calculating the 
c 
ceiling. This expenditure is outside the expenditure which is subject to a 
ceiling limit. Under Section 40A(5)(b) (ii) and (iii), similarly certain other 
expenditure in connection with an employee are also excluded from the 
ceiling limit. [528-C-DI 
1.3. For calculating the expenditure and allowances under Section 
D 40A(5)(a), one has to exclude the expenditure and allowances referred to in 
section 40A(5)(b). Therefore, in the case ofa Director-employee also while 
calculating the expenditure and allowances spent on an employee-Director 
under Section 40A(5)(a) and Section 40(c), expenditure of the kind referred 
to in Section 40A(5)(b) has to be necessarily excluded. Both sections constitute 
a composite scheme. In the case of employee-Directors, both will operate. 
E 
1529-DI 
2. The purpose of prescribing a ceiling on expenditure in connection 
with Directors and employees under Section 40(c) and Section 40A(5), is to 
discourage a company or an organisation from paying excessive salaries, 
remuneration, perquisites etc. to its employees and/or Directors. However, 
F from this ceiling limit, certain kinds of expenditure on employees have been 
excluded-presumably because this kind of an expenditure was considered as 
reasonable and permissible. One such category of expenditure is the amounts 
which the organisation may have to pay to an employee posted outside India 
in view of the exigencies of the situation, his requirements at the place of 
G 
posting and the fact that they have to be pai

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