TMI Blog1980 (4) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... l Instruments (P.) Ltd., Bangalore, for the assessment year 1972-73. N. Krishnan was the managing director of the company. The articles of association provided that he shall be the managing director of the company for period of 10 years from the time of incorporation of the company and thereafter for such period or periods as the directors may from time to time determine. This was provided under art. 35 of the articles of association. Article 37 provided that the remuneration of the managing director shall be fixed by the board of directors from time to time. It transpires that an agreement had been entered into in regard to the remuneration on December 9, 1960, and the period of the agreement expired on August 18, 1968. The board of direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n other disallowances which are not relevant for the purposes of this case. The assessee preferred an appeal to the AAC contending, inter alia, that the disallowance of Rs. 12,000 was untenable in the light of the first proviso to s. 40A(5)(a). The AAC accepted that contention and set aside the disallowance. However, the department preferred an appeal before the Tribunal and the Tribunal came to the conclusion that the AAC was in error and restored the disallowance made by the ITO. At the instance of the assessee, this reference has been made. The relevant provisions of ss. 40(c) and 40A(5)(a) of the Act are as follows: "40. Amounts not deductible.-Notwithstanding anything to the contrary in sections 30 to 39, the following amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also an employee of the company for any period 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. Explanation.-The provisions of this clause shall apply notwithstanding that any amount not to be allowed under this clause is included in the total income of any person referred to in sub-clause (i); .. " 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 rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roviso to section 40A(5) it appears that before the proviso is made applicable, it is not enough that a company is the assessee. Another ingredient must also be satisfied, i.e., there must have been a disallowance or allowance under section 40(c). The proviso deals with the aggregation of the disallowance under two different sections and it will not come into play unless there is a case for aggregation. It would be, therefore, possible to say that the proviso would be applicable only to the case of an employee who, for part of the year, was a director or a, per-son having substantial interest in the company and for another part of the year was an employee. Only then both the sections would be considered and there would be an aggregation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal is unsupportable having regard to the effect of s. 40A(5)(a) read with the proviso. The view of the Tribunal that there must have been a disallowance under s. 40(c) on the ground that the employee was, for part of the year, a director and for another part of the year only an employee and the proviso could be applied only when the provisions of both ss. 40(c) and 40A(5)(a) were to be considered, is not warranted by the provisions. First proviso to s. 40A(5)(a) refers to expenditure incurred in respect of an employee or a former employee, being a director or a person who has a substantial interest in the company or a relative of the director or of such person. It does not, like proviso to s. 40(c), speak of the period for which he was a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any. What is provided is regarding the aggregate expenditure or allowance referred to in sub-cls. (i) and (ii) of s. 40A(5)(a) and the expenditure and allowance referred to in sub-cls. (i) and (ii) of s. 40(c) incurred in respect of an employee being a director, and that the excess over Rs. 72,000 cannot be allowed as deduction. Therefore, the maximum amount that could have been allowed as a deduction is Rs. 72,000 and there could not be a deduction out of that amount. Accordingly, disallowance made in a sum of Rs. 12,000 was unwarranted. Therefore, the question is answered in the negative: that the Tribunal was not right in disallowing Rs. 12,000 out of the remuneration of Rs. 72,000 paid to the managing director of the assessee-company. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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