Sc Dismisses Tax Dept Appeal On Foreign Directors

The Supreme Court yesterday dismissed the appeal of the tax department against the Delhi High Court judgment which had held that any expenditure in respect of an employee-director posted abroad shall not be taken into account for calculating the aggregate expenditure for the ceiling specified in Sections 40A and 40(c) of the Income Tax Act.

The judgment involving the employee-directors of Continental Constructions Ltd stationed abroad was delivered by a division bench consisting of Justice Sujata Manohar and Justice S S M Quadri.

According to the company, the amount paid to its employee-directors in respect of their employment outside India was not to be taken into account while calculating the ceiling under the two sections. This view was rejected by the tax authorities, who insisted that so long as the employee is also a director, expenditure referred to in the two sections could not excluded from the expenditure while calculating the ceiling. The exclusion was permissible only in the case of employees who were not directors when the expenditure was incurred. The Supreme Court stated that an employee-director did not cease to be an employee nor were his requirements less than those of an employee.

 

Therefore what was considered reasonable by the legislators must be allowed. Thus, while calculating the expenditure and allowances spent on employee-directors under the two sections, the expenditures mentioned therein should be excluded.