Holding

Salary exempt under Section 10(6)(vii) is treated as nil for the purposes of the proviso to Section 40(c)(iii), rendering the main provision inapplicable.

Summary

Brakes India Ltd paid a foreign technical director a total remuneration of Rs 66,000, of which Rs 28,576 were perquisites. The Assessing Officer disallowed the portion of perquisites exceeding one‑fifth of the salary under Section 40(c)(iii) of the Income‑Tax Act, 1961. The Appellate Assistant Commissioner allowed the deduction, holding that the director’s salary was exempt under Section 10(6)(vii) and therefore the provision of Section 40(c)(iii) did not apply. The Tribunal reversed this view, contending that the exemption under Section 10(6)(vii) was only available where the salary chargeable under ‘Salaries’ did not exceed Rs 7,500, and thus the proviso of Section 40(c)(iii) was not triggered. The High Court treated the exempt salary as ‘nil’ for the purpose of the proviso, held that the proviso applied and the main provision of Section 40(c)(iii) was inapplicable, allowing the perquisites. The Supreme Court affirmed the High Court’s reasoning and dismissed the appeal.

Issues considered

Whether salary exempt under Section 10(6)(vii) is to be treated as ‘nil’ income for the purposes of the second proviso to Section 40(c)(iii).
Whether Section 40(c)(iii) applies to the perquisites paid to a foreign technical director whose salary is exempt under Section 10(6)(vii).

Legislation cited

Income Tax Act, 1961s. 10(6)(vii), s. 40(c)(iii)

Subjects

Income TaxSalary exemptionForeign technical directorSection 10(6)(vii)Section 40(c)(iii)PerquisitesNil incomeProviso

Judgment

C.l.T., MADRAS A
v.
BRAKES INDIA LTD.

APRIL 6, 1993

(B.P. JEEVAN REDDY AND N. VENKATACHALA, JJ.) B

Income tax Act, 1961:

- Sections 10(6)(vii) and 40(c)(iii)-Salary paid to Foreign Technical
Directol'-Exempt under the head 'Sa/aries'-Whether could be included in C
tfle total income.

During the accounting order relevant to assessment year 1965-66,
the Respondent-assessee paid to its foreign technical director a total
remuneration of Rs. 66,000 including a sum of Rs. 28,576 paid by way of
perquisites. The Income-tax Officer allowed only a sum of Rs. 13,200 by D
way of perquisites and disallowed the balance of Rs. 15,376 in view of
Section 40(c)(iii) of the Income-tax Act, 1961.

On an appeal by the assessee, the Appellate Assistant Commissioner
held that since the salary of the foreign technical director was exempt E
under S.10(6)(vii), the provision contained in Sec.40(c)(iii) was not ap-
plicable. Revenue preferred an appeal and the Tribunal held that
S.40(c)(iii) was applicable. At the instance of the Assessee, Tribunal
referred the question to the High Court. Since the High Court answered
the question in favour of the assessee, Revenue preferred the present
appeal. F
Dismissing the appeal, this Court,

HELD: Under section 10(6)(vii) of the Income-tax Act, 1961 the
remuneration due to any technician, who was not a resident in any of the
four financial years immediately preceding the financial ye'!r in which he G
arrived in India, chargeable under the head 'salaries', for services
1-- rendered as a technician, was exempt. Thus in the instant case, the salary
paid to the foreign technical director was admittedly exempt under Section
10(6)(vii) of the Income-tax Act, 1961. In other words, it was nil for the
purposes of the Act. If so, the second proviso to sub-clause (iii) of S.40(c) H
993
994 SUPREME COURT REPORTS (1993] 2 S.C.R.

A is attracted, inasmuch as 'nil' incoote, under the head "salaries" is less
than Rnpees seven thousand live hundred. By virtue of the said proviso,
the main provision in sub-clause (iii) goes out of picture. The High Court
reasoned that if income of one rupee is less than Rs. 7,500, there is no
reason for saying that 'nil' income is not an income less than Rs. 7,500.
The High Court was right in taking the view that since the income ex·
B empted under Section 10 is not liable to be included in the total income, .
such exempted salary income should be treated as 'nil' income for the
purposes of Section 40(c)(iii) of the Act. [996 B·E)

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1287{NT)
C of 1982.
"#

From the Judgment and Order dated 22.2.1978 of the Madras in Tax ~
Case No. 24 of 1975.

M. Gaurishankar Murthy, C. Ramesh, P. Parmeswaran and Ms. A.
D Subhashini for the Appellant.

Ms. Janki Ramachandran fo: the Respondent.

The following Order of the Court was delivered

Iii this appeal preferred against the Judgment of the Madras High
E
Court, the words "whose income chargeable under the head 'salaries'

-
occurring in the second proviso to sub-clause (iii) of clause (c) of section
40 fall for interpretation. The assessment year concerned is 1965-66.
During the accounting year rclevar.t to the said assessment year, the
assessee paid to its foreign technical director a total remuneration of Rs.
F 66,000 including a sum of Rs. 28,576 paid by way of perquisites. The
Income-tax Officer held that by virtue of section 40(c)(iii) perquisites
exceeding one-lifth amount of the salary cannot be allowed as a deduction.
He held further, the second Proviso to the said sub-clause is not applicable
inasmuch as the income chargeable under the head salaries was not Rs.
G 7,500 or less. ~ccordingly he allowed only a sum of Rs. 13,200 by way of
perquisites. He disallowed the balance of Rs. 15,376.

The Appellate As;istant Commissioner, however, allowed the
assessee's appeal holding that inasmuch as the salary of the foreign tech-
nical director was exempt from tax under section 10(6)(vii), the provision
H contained in section 40(c)(iii) was not applicable. The appeal filed by the
C.I.T. v. BRAKES INDIA LTD. 995

Revenue was allowed by the Tribunal. The Tribunal opined that merely A
because the salary is exempt under section 10(6)(vii), the provision in
section 40(c)(iii) does not cease to apply. Under the proviso to the said
sub-clause, only an employee whose income chargeable under the head
salaries was Rs. 7,500 or less is exempted. Inasmuch as the income char-
geable under the head salaries in this case is more than Rs. 7,500, the
B
exemption does not operate. Since the said foreign technical director was
an .employee of the assessee, he was certainly governed by the provision

- section 40(c)(iii), said the Tribunal. At the request of the assessee, it stated
the following question for the opinion of the High Court:

"Whether on the facts and circumstances of the case, the
Tribunal was justified in holding that the provisions of
c
Section 40(c)(iii) were rightly invoked for the assessment
year 1965-66 in relation to the remuneration of the Tech-
nical Director of the assessee - company."

Section 40(c)(iii) as applicable to the assessment year 1965-66, read D
as follows:

"40. Notwithstanding anything to the contrary in Sections
30 to 39, the following amounts shall not be deducted in
computing the income chargeable under the head 'profits
and gains of business or profession". E'

- (c) in the case of any company.....

(iii) any expenditure incurred after the 29th day of F
y February, 1964, which results directly or indirectly in 'the
provision of any benefit or amenity or perquisite, whether
convertible into money or not, to an employee (including
any sum paid by the company in respect of any obligation
which but for such payment would have been payable by
G
such employee), to the extent such expenditure exceeds
one-fifth of the amount of salary payable to the employee
for any period of his employment after the aforesaid
date: .......................... ..

Provided further that nothing in this sub-clause shalf H
996 SUPREME COURT REPORTS (1993) 2 S.C.R.

A apply to any expenditure which results directly or indirect-
iy in the provision of any benefit or amenity or perquisite
to an employee whose income chargeable under the bead
"Salaries' is seven thousand five hundred rupees or less'

Under section 10(6)(vii) of the Act, the remuneration due to any
B technician, who was not a resident in any of the four financial years
immediately preceding the financial year in which be arrived in India,
chargeable under the head 'salaries', for SLrvices rendered as a technician,
was exempt. In this case, the salary paid to the foreign technical director
-
was admittedly exempt under section 10(6)(vii). The contention of the
C assessee which has been accepted by the High Court, runs thus: the salary
payable to the said director was exempt by virtue of Secdon 10(6)(vii). in
other words, it is nil for the purposes of the Act. If so, the second proviso
to the sub-clause is attracted, inasmuch as 'nil' income, under the head
"salaries" is less than Rupees seven thousand five hundred. By virtue of the
said second proviso, the main provision in sub-clause (iii) goes out of
D picture. The High Cou~~fea~dned that if income of one rupee is less than
Rs. 7,500, there is no ~l!afiin for saying that 'nil' income is not an income
less than Rs. 7,500. Since the income exempted under Section 10 is not
liable to be included in the total income, such exempted salary income
should be treated as 'nil' income for the purposes of Section 40(c)(iii),
E opined the High Court.

After hearing the counsel for the parties, we are of the opinion that -
the view taken by the High Court is a reasonable one and does not call for
any interference.

F The appeal accordingly fails and is dismissed. No costs.

G .N. Appeal dismissed.