Ajit K. Sengupta, J.:— At the instance of the Commissioner of Income-tax, West Bengal III, Calcutta, the following question of law has been referred to this court for the assessment year 1972-73 under section 256(1) of the Income-tax Act, 1961:
“Whether, on the facts and in the circumstances of the case and on a correct interpretation of Section 40(c) and section 40A(5) of the Income-tax Act, 1961, the Tribunal was correct in holding that an expenditure incurred by the assessee-company in respect of its employee-directors did not fall for consideration under the latter section for the purpose of determining the portion of such expenditure which could be disallowed in computing the profits and gains of the assessee's business?”
2. The facts of this case are in a narrow compass. The assessee-company had four directors who were also employees of the assessee-company. In the relevant previous year, they were paid salary and various perquisites. The assessee-company felt that section 40A(5) was applicable to employee-directors and, on that basis, it filed its computation before the Income-tax Officer according to which Rs. 26,705, would be disallowed as excessive expenditure. Later on, the assessee revised its opinion and filed another computation before the Income-tax Officer along with a revised return. On the basis of that, Section 40(c) applied to employee-directors of the companies and according to this computation, only Rs. 10,196 could be disallowed. The Income-tax Officer, however, took the view that section 40A(5) was applicable and he disallowed Rs. 29,495, on that basis. In appeal, the Appellate Assistant Commissioner held that section 40A(5) did not apply to employee-directors and that the proper provision was Section 40(c). He accepted the assessee-company's determination of the excessive expenditure under Section 40(c) at Rs. 10,196 and reduced the disallowance from Rs. 29,495 to Rs. 10,196. The Department came up in appeal to the Tribunal. The Tribunal held that the employee-directors of the company are covered by Section 40(c) of the Act and not by section 40A(5). At the hearing, Dr. Pal, for the assessee, contended that directors, even though they are employees, will be governed by the provisions relating to directors.
3. On the other hand, learned counsel for the Revenue contended that such directors are also employees. They shall be treated as employees and the disallowance has to be made accordingly.
4. The question which calls for determination in this case is whether the provisions of section 40A(5) would be applicable in disallowing the perquisite of the employees, who were also directors of the company. To appreciate the contentions of the parties, it is necessary for us to set out the legislative history of Section 40(c), section 40(a)(v) and section 40A(5).
5. Section 40(c)(iii) was introduced by section 6 of the Finance Act, 1963, with effect from April 1, 1963. Section 40(c) as it stood after the insertion of clause (iii) is as follows:
“(c) in the case of any company—
(i) any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person as the case may be,
(ii) any expenditure or allowance in respect of any assets of the company used by any person referred to in sub-clause (i) either wholly or partly for his own purposes or benefit,
if, in the opinion of the Income-tax Officer, any such expenditure or allowance as is mentioned in sub-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,
(iii) any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to an employee who is a citizen of India to the extent such expenditure exceeds the amount calculated at the rate of five thousand rupees per month for any period of his employment after the 28th day of February, 1963:
Provided that in computing the aforesaid expenditure, any payments by way of gratuity or any sums comprised in the transferred balance of an employee participating in a recognised provident fund referred to in clause (vii) of sub-section (1) of section 17, or the amount of any compensation referred to in clause (i) or any payment referred to in c???ause (ii) of subsection (3) of that section shall not be taken into account.
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 persons referred to in sub-clause (i) or in subclause (iii).”
6. Section 40(c)(iii) was substituted by the Finance Act of 1964, with effect from April 1, 1964. Section 40(c)(iii), as substituted by the Finance Act of 1964, is as follows:
“(iii) any expenditure incurred after the 29th day of 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 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.”
7. The proviso and the Explanations to the aforesaid clause are not however reproduced.
8. By the Finance Act of 1965, the second proviso was inserted in Section 40(c)(iii) which runs as follows:
“Provided further that nothing in this sub-clause shall apply to any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to an employee whose income chargeable under the head “Salaries” is seven thousand five hundred rupees or less.”
9. Minor changes were also introduced in the first proviso to Section 40(c)(iii) which are not relevant.
10. By the Finance Act of 1968, sub-clause (iii) of Section 40(c) and Explanation 2 thereof stood omitted with effect from April 1, 1969, and Explanation 1 remains attached to clause (c). By the said Finance Act, section 40(a)(v) was inserted with effect from 1st April, 1969. section 40(a)(v), as introduced by the Finance Act of 1968, is as follows:
“(a) in the case of any assessee…
(v) any expenditure 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 assessee in respect of any obligation which but for such payment would have been payable by such employee) or any expenditure or allowance in respect of any assets of the assessee used by such employee either wholly or partly for his own purposes or benefit, to the extent such expenditure or allowance exceeds one-fifth of the amount of salary payable to the employee, or an amount calculated at the rate of one thousand rupees for each month or part thereof comprised in the period of his employment during the previous year, whichever is less :”
11. The first proviso and the Explanation are not reproduced.
“Provided further that nothing in this sub-clause shall apply to any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite to an employee whose income chargeable under the head “Salaries” is seven thousand five hundred rupees or less.”
12. section 40(a)(v) was omitted by the Finance (No. 2) Act of 1971 with effect from April 1, 1972. In place of section 40(a)(v), a new clause was introduced, viz., section 40A(5), by the Finance (No. 2) Act of 1971 with effect from April 1, 1972. The new sub-section (5) of section 40A reads as follows:
“(5) (a) Where the assessee—
(i) incurs any expenditure which results directly or indirectly in the payment of any salary to an employee or a former employee, or
(ii) incurs any expenditure which results directly or indirectly in the provision of any perquisite (whether convertible into money or not) to an employee or incurs directly or indirectly any expenditure or is entitled to any allowance in respect of any assets of the assessee used by an employee either wholly or partly for his own purposes or benefit,
then, subject to the provisions of clause (b), so much of such expenditure or allowance as is in excess of the limit specified in respect thereof in clause (c) shall not be allowed as a deduction:
Provisos, Explanations and other provisions are not reproduced.
13. Section 40(c) makes special provisions applicable, in the case of company assessees, to remuneration, etc., inter alia, to a director. section 40(a)(v) enacted general provisions applicable to company as well as non-company assessees in relation to benefit, etc., to employees.
14. The legislative history of the provisions would indicate that a distinction has been maintained in the deductibility of, expenses made by the company in the case of directors and other employees. In Section 40(c)(i), it has been specifically mentioned about the directors and a reference has been made in Section 40(c)(iii) to employees. Section 40(c)(iii) was subsequently amended and the provisions are contained in section 40(a)(v) and in section 40A(5) so far as employees are concerned. The scheme regarding the disallowance of expenses or allowances made by the company which resulted directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to such a person who has substantial interest in the company or to a relative of such a director or of such a person, as the case may be, on the one hand, and the expenses which resulted directly or indirectly in the provision of any benefit or amenity or perquisite to an employee of the company remained intact even after the amendments made from time to time, which we have already extracted. The Legislature, all throughout, maintained the distinction between a person qua director and the person who is an employee of the company. In our view, the main consideration is whether a person is a director as such although he may also be an employee. If he is a director of the company, he will be governed by the provisions of Section 40(c)(i). So far as the employees are concerned, they will be governed by the provisions of section 40(a)(v) or section 40A(5), as the case may be. In our view, the provisions contained in Section 40(c)(i) or section 40(a)(v) or section 40A(5), as the case may be, broadly deal with the amenity, benefit and perquisite of two categories of persons, namely, (i) the directors of the company or their relatives, and (ii) the employees of the company. When there is a general enactment as well as a special enactment in respect of the same head in a statute, the particular or special enactment would override the general enactment. Section 40(c) which deals with the disallowance in respect of benefit, etc., to a director or his relative, is a special enactment whereas section 40(a)(v) which deals with the case of the employees is a general enactment. We are, therefore, of the view that the case of the directors who may be also employees of the company will be governed by the provisions of Section 40(c) of the Act. The view we have taken is supported by the decision in the case of Addl. CIT v. Tarun Commercial Mills Ltd., [1978] 113 ITR 745 (Guj).
15. For the reasons aforesaid, we answer the question referred to this court in this reference in the affirmative and in favour of the assessee. There will be no order as to costs.
K.M Yusuf, J.:— I agree.
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