TaxTMI 
TaxTMI 
TaxTMI 
1980 (10) TMI 49
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....ading to this reference, in so far as they are relevant, may now be briefly stated. The assessee is a public limited company incorporated under the Companies Act, 1956. The relevant assessment year is 1972-73. At that time, it was carrying on business of manufacturing cotton textile goods in Kalol in Mehsana District. It filed a return of income on 24th June, 1972, declaring a total income of Rs. 9,49,483. The assessee company had claimed certain deductions from its total income and amongst others, one claim of deduction centered round certain medical benefits given by the company to its two employees, viz., D. B. Patel and A. P. Patel, who were two executives of the company and who were relatives of the directors at the relevant time. Out of the total perquisites made available by the assessee-company to its aforesaid employees, the ITO disallowed an amount of Rs. 3,554 by treating the said amount as excess perquisites which, according to the ITO, could not be allowed as per the provision of s. 40A(5) of the Act. The ITO further found that the assessee had paid Rs. 1,53,675 as compensation to the Textile Commissioner for non-production of controlled variety of cloth. The ITO fou....
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....common ground between the learned advocates of the respective parties that the answer to the said question is covered by a decision of this court in Addl. CIT v. Rustam Jehangir Vakil Mills Ltd.[1976] 103 ITR 298.In the said decision, this court has held that if the assessee was required to pay certain amounts under s. 21C(1)(b) of the Cotton Textiles (Control) :Order, 1948, as the assessee had failed to carry out the directions of the Textile Commissioner during the relevant previous year to pack the minimum of the particular types of cloth as mentioned therein, the said amount could be claimed by the assessee by way of deductible expenses. It was observed that this payment is an incident of the production of cloth by the manufacturer depending upon the exercise of option which be will do in view of the technical or technological reasons of his own production machinery. Under the circumstances, the payments made under s. 21C(1)(b) can never be said to be by way of a payment extracted or required for an infraction of the law and there is no question of any amount being paid as penalty or akin to penalty Thus, the first question is fully covered by the aforesaid Division Bench judgm....
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....ng on business of manufacturing textile goods. Its income, therefore, was liable to be brought to tax under the head of " Profits and gains of business or profession " as provided by s. 28 of the Act. As per s. 29 of the Act, the income referred to in s. 28 shall be computed in accordance with the provisions contained in ss. 30 to 43A. In that group of sections falls s. 40A, with which we are directly concerned in the present case. Section 40A pertains to expenses or payments which are not deductible in certain circumstances. Sub-section (1) thereof provides: "(1) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other provision of this Act relating to the computation of income under the head 'Profits and gains of business or profession'." Thus, s. 40A has overriding effect in the computation of income under the head " Profits and gains of business or profession ". Non obstante clause with which sub-s. (1) of s. 40A starts clearly indicates that if any other contrary provisions exist on the statute book, they have to give way to the clear and express provision of s. 40A. It is in the light of the aforesaid setting of sub-....
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....se (vii) or sub-clause (viia) of clause (6) of section 10 in respect of any period during which he is entitled to the exemption under sub-clause (vii) or, as the case may be, sub-clause (viia) aforesaid; (iii) any employee whose income chargeable under the head 'Salaries' is seven thousand and five hundred rupees or less. (c) The limits referred to in clause (a) are the following, namely: (i) in respect of the expenditure referred to in sub-clause (i) of clause (a), in the case of an employee, an amount calculated at the rate of five thousand rupees for each month or part thereof comprised in the period of his employment in India during the previous year, and in the case of former employee, being an individual who ceases or ceased to be the employee of the assessee during the previous year or any earlier previous year, sixty thousand rupees: Provided that where the expenditure is incurred on payment of any salary to any employee or a former employee engaged in scientific research during any one or more of the three years immediately preceding the commencement of the business and such expenditure is deemed under the Explanation to clause (i) of sub-section (1) of section 35 to....
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....on for permissible deductions by way of perquisites would be Rs. 12,000 per year. But if the salary is less than Rs. 1,000 per month, deductions are permissible on the basis of 1/5th of the salary per month. But these general limits for the permissible deduction of expenditure incurred by an employer vis-a-vis its employee by way of salary or perquisites have to be read subject to the overriding exception laid down in cl. (b) of s. 40A(5). Sub-clause (iii) of cl. (b) of s. 40A(5) provides for small employees whose income chargeable under the head " Salaries " is seven thousand and five hundred rupees or less, that is, for the employees getting about Rs. 625 per month or round about. If an employer has incurred any expenditure which results directly or indirectly in the provision of any perquisites to such small employees, the entire expenditure would be available for deduction without inhibition of limits prescribed by cl. (c)(ii) of s. 40A(5). Bat for other highly paid employees, general limit prescribed by cl. (c) of s. 40A(5) would continue to apply so far as salary and perquisites to such employees. We may now notice the first proviso to s. 40A(5)(a) which provides that where....
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....ture will be one which results directly or indirectly in the payment of any salary to an employee or a former employee, while the other type of expenditure contemplated by s. 40A(5)(a)(ii) is one which results directly or indirectly in the provision of any perquisite to an employee or any expenditure resulting in any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit. To both these types of expenditure, subject of course to the overriding effect of cl. (b) are engrafted limits as provided by cl. (c) of s. 40A(5). Clause (c) of s. 40A(5) read with cl. (a) of the said section clearly represents a general scheme of upper limits for permissible expenditure by any assessee if such expenditure falls in category (i) or (ii) of cl. (a). In the case of any assessee, if he has incurred during any relevant previous year any such expenditure, the Legislature has provided an upper limit of such permissible expenditure for the purpose of its deductibility from the income of the assessee during the relevant previous year. We have already indicated above that the said general limit as provided by s. 40A(5)(c) lays down two....
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....clauses (i) and (ii) is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom, so, however, that the deduction in respect of the aggregate of such expenditure and allowance in respect of any one person referred to in sub-clause (i) shall, in no case, exceed (A) where such expenditure or allowance relates to a period exceeding eleven months comprised in the previous year, the amount of seventy-two thousand rupees: (B) where such expenditure or allowance relates to a period not exceeding eleven months comprised in the previous year, an amount calculated at the rate of six thousand rupees for each month or part thereof comprised in that period: Provided that in a case where such person is 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 ....
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....utory scheme of permissible deductions in the cases of assessee-companies, who have spent on a select band of employees specifically mentioned in the said proviso. In all cases where the assessee-company has spent on such selected employees, the only permissible expenditure and allowances available to such companies would be to the tune of Rs. 72,000 in all per each such employee in any given assessment year. Thus, the scheme represented by the first proviso to s. 40A(5)(a) differs in two aspects from the general scheme of permissible deductions as reflected by s. 40A(5)(a) read with s. 45A(5)(c). Firstly, the proviso will apply only to assessees who are companies and that too when such companies claim permissible deductions of expenditure made on certain types of employees who are either directors or their relatives. For those chosen few employees of the assessee-companies, the proviso has been enacted with a view to see that the maximum permissible expenditure which an assessee-company may incur for such select group of employees in any case, does not exceed the upper limit of Rs. 72,000 for each such employee. This is intended to act as a deterrent to the assessee-companies spen....
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.... of permissible deductions on the aggregation of different expense as contemplated by the first proviso comes into operation. To that extent, the proviso carves out entirely a separate field for its operation from the general field for the operation of s. 40A(5)(a) read with s. 40A(5)(c). It is further pertinent to note that the first proviso has been placed just after the main cl. (a) of s. 40A(5). The said proviso, therefore, represents different scheme and carves out an exception to the general provision of permissible deductions and the limits as contemplated therein and reflected by the main provisions of s. 40A(5)(a). Thus, the first proviso is an exception not only to s. 40A(5)(a) but is also an exception to the scheme of limits prescribed by s. 40A(5)(c). Mr. Raval for the, revenue submitted that even though the proviso is so placed in juxtaposition with the other clauses of s. 40A(5), really speaking, it operates at a stage when expenditure and allowances referred to in sub-cls. (i) and (ii) of cl. (a) of s. 40A(5) have been worked out as per the individual limits provided by cl. (c) of s. 40A(5). Mr. Raval submitted that even if the assessee-company has spent on an employ....
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....heads, two heads being reflected by s. 40(c)(i) and (ii) and the two other reflected by s. 40A(5)(a)(i) and (ii). Headwise limits contemplated by the general provision of s. 40A(5)(c) cannot be projected in interpreting the ceiling on the aggregation of expenditure and allowances on these four heads as contemplated by the proviso. In fact, both represent different sets of schemes altogether. Both operate on different fields as we have indicated above. It may be that the Legislature may have contemplated that while providing general limits in the case of any assessee vis-a-vis its expenditure on any of its employees during the relevant previous year, headwise limits of expenditure on salary and perquisites may be required to be separately laid down. But while coming to the case of a company in its relation to the select band of employees mentioned in the first proviso, instead of providing separate limits pertaining to each such head of expenditure, an overall ceiling of Rs. 72,000 on the permissible expenditure on the concerned employee belonging to this special class is provided. It is pertinent to note that out of the expenditures and allowances of four types as contemplated by c....
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....the upper limit of permissible expenditure operates at the end when an aggregation is made of the four types of expenditure and allowances, incurred on and made available by, the concerned assessee-company to its select band of employees. In this connection, it is necessary to note that the proviso in terms lays down that Rs. 72,000 will be the limit of permissible-aggregated expenditure and allowances covered by the said proviso. It is further interesting to note in this connection that the second proviso to s. 40A(5)(a) also indicates the legislative intent to the effect that the computations of expenditure referred to in sub-cl. (i) or expenditure or allowance referred to in sub-cl. (ii) of s. 40A(5)(a) or aggregation referred to in the first proviso have to be made separately and all these three types of computations are independent of each other and are to be arrived at without taking into consideration the items mentioned by the second proviso at (i) to (iv). Thus, the second proviso which immediately follows the first proviso to s. 40A(5)(a) clearly contemplates three types of computation for the purpose of s. 40A(5)(a): (1) Expenditure which results directly or indirectly....
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.... a general enactment as well as a special enactment in respect of the same head in a statute the particular enactment would override the general enactment. We have already noted above that under the setting of s. 40A(5) and its various clauses, the first proviso to s. 40A(5)(a) carves out an exception to the scheme of general limit of permissible expenditure as contemplated by s. 40A(5)(a) read with s. 40A(5)(c). But even apart from the fact that it is in substance a proviso to both these provisions, even on the ground that it reflects a special scheme as distinguished from the general scheme of permissible deductions of expenditure and allowance as contemplated by s. 40A(5)(a) read with s. 40A(5)(c), the proviso to the limited extent to which it operates would override the general provision in so far as the limited field occupied by it is concerned. The scope and ambit of the provisions of a proviso are also well settled. We may only refer to a Supreme Court judgment on this aspect in H. E. H. Nizam's Religious Endowment Trust v. CIT [1966] 59 ITR 582. The Supreme Court observed in connection with the effect of the proviso that the effect of an excepting or qualifying proviso, ac....