TMI Blog1985 (10) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case, for the assessment year 1974-75, the Tribunal was right in holding that the provisions of section 40A(5) were the provisions which were to be invoked and not the provisions of section 40(c)? " The answers to these questions depend on the construction of sections 40(c) and 40A(5) of the Income-tax Act, 1961. The fundamental question is whether, in computing the income of a company chargeable under the head " Profits and gains of business or profession ", the expenditure arising or incurred in respect of its director, who was also its employee during the relevant year, has to be deducted solely with reference to section 40A(5) and without regard to section 40(c) ? This is in fact the proposition canvassed on behalf of the Revenue, while it is contended on behalf of the assessee that section 40(c) alone would apply in such a case, and recourse to section 40A(5) is not required in view of the specific provisions contained in section 40(c) which are applicable as much to a director as to a director-employee. We may at the outset point out that these two sections specify the amounts which are not allowed to be deducted in computing the income chargeable under the head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iod comprised in the previous year, expenditure of the nature referred to in clauses (i), (ii), (iii) and (iv) of the second proviso to clause (a) of sub-section (5) of section 40A shall not be taken into account for the purposes of sub-clause (A) or sub-clause (B), as the case may be: ........" This section is non obstante the deductions permitted under sections 30 to 39 in so far as they provide to the contrary. Clause (c) of this section says that, in the case of a company, the Income-tax Officer is empowered to disallow any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person having a substantial interest in the company or to a relative of either of them, or any expenditure or allowance in respect of any assets of the company used by such a person, if in the opinion of the Income-tax Officer such expenditure or allowance, having regard to the legitimate business needs of the company and the benefit derived by it, is excessive or unreasonable. However, in respect of any such person, the deduction of the aggregate of such expenditure and allowance must not in any case exceed the amounts specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of an employee or a former employee, being a director or person who has a substantial interest in the company or a relative of the director or of such person, as is in excess of the sum of seventy-two thousand rupees, shall in no case be allowed as a deduction: Provided further that in computing the expenditure referred to in sub-clause (i) or the expenditure or allowance referred to in sub-clause (ii) of this clause or the aggregate referred to in the foregoing proviso, the following shall not be taken into account, namely : (i) the value of any travel concession or assistance referred to in clause (5) of section 10; (ii) passage moneys or the value of any free or concessional passage referred to in sub-clause (i) of clause (6) of section 10; (iii) any payment referred to in clause (iv) or clause (v) of subsection (1) of section 36; (iv) any expenditure referred to in clause (ix) of sub-section (1) of section 36. (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; (ii) any employee being an individual referred to in sub-clause (vii) or sub-cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployment outside India; (ii) any employee being a foreign technician who is entitled to exemption from tax on his remuneration under section 10(6)(vii) or section 10(6)(viia) ; and, (iii) any employee whose income chargeable under the head " Salaries " does not exceed Rs. 7,500. The limit prescribed under clause (c)(i) with reference to clause (a)(i) regarding salary is an amount calculated at the rate of Rs. 5,000 for each month comprised in the period of his employment in India during the previous year, and in the case of a former employee, Rs. 60,000. The limit prescribed under clause (c)(ii) with reference to clause (a)(ii) regarding perquisite, etc., is one-fifth of the amount of the salary payable to the employee or an amount calculated at the rate of Rs. 1,000 for each month or part thereof comprised in the period of his employment in India during the previous year, whichever is less. The " expenditure " and " perquisite " mentioned under section 40A(5)(a) must be understood as those expressions are defined under Explanation 2(a) and (b) to the sub-section. The first proviso to sub-section (5)(a) of section 40A specifically deals with an assessee which is a company. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that sub-section, can be deducted in addition to salary and perquisite, in respect of a director-employee, provided the aggregate deduction under these heads in terms of section 40(c)(i), (ii)(A) and (B) and section 40A(5)(a)(i) and (ii) does not exceed the maximum of Rs. 72,000, as stipulated in the first proviso to section 40A(5)(a). In our view, in so far as the relevant provisions of sections 40 and 40A are concerned, there is no clash or inconsistency. The non obstante clause of section 40A(5) are words of caution, and even without them, the provisions of these two sections, in respect of a director-employee, can be read harmoniously. While the maximum permissible deduction in respect of remuneration and other benefits, in the case of a director, in relation to period exceeding eleven months comprised in the previous year, is Rs. 72,000, such deduction, in the case of a director who was also an employee, it is subject to the further restriction that the allowable deduction in respect of salary and perquisite should not exceed Rs. 60,000 and Rs. 12,000, respectively. Where, for example, the expenditure incurred by a company for a director-employee during the relevant year as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iso must, however, be understood with reference to what follows in the subsequent provisions and not in isolation. There is nothing in the proviso to derogate from clause (c) which has prescribed headwise limitation in respect of the expenditure referred to under clause (a). This means that while in respect of a director employee, the company can claim deduction up to Rs. 72,000, such claim is still subject to the limitation in respect of salary and perquisite as provided under clauses (a) and (c) of sub-section (5). In the present case, it is admitted that all the amounts paid to the managing director during the relevant accounting years were solely by way of salary and perquisite and no other amount was paid so as to attract the provisions of section 40(c). In the circumstances, the expenditure could be allowed only with reference to section 40A(5) and section 40(c) had no application. Accordingly, we answer the questions referred to us in the affirmative, that is, in favour of the Revenue and against the assessee. We direct the parties to bear their respective costs in these tax referred cases. A copy of this judgement under the seal of the High Court and the signature of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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