1988 (9) TMI 38 - HC - Income Tax

Summary

Issues involved: Interpretation of sections 40(c) and 40A(5) of the Income-tax Act, 1961 regarding disallowance of expenditure incurred by an assessee-company in respect of its employee-directors.

Judgment Summary:

Issue 1 - Application of Section 40A(5) vs. Section 40(c):
The case involved a dispute over whether the provisions of section 40A(5) or section 40(c) of the Income-tax Act, 1961 should apply to the disallowance of expenditure incurred by an assessee-company in respect of its employee-directors. The assessee initially applied section 40A(5) but later revised its opinion to apply section 40(c). The Income-tax Officer disagreed and disallowed the expenditure under section 40A(5). The Appellate Assistant Commissioner favored section 40(c), reducing the disallowance amount. The Tribunal ultimately held that employee-directors are covered by section 40(c) and not section 40A(5).

Issue 2 - Legislative History and Interpretation of Sections:
The court delved into the legislative history of sections 40(c), 40A(5), and 40(a)(v) to determine the applicability of these provisions to the case at hand. Noting the distinctions made between directors and employees in the provisions, the court emphasized that a person who is a director will be governed by section 40(c), while employees are covered by section 40(a)(v) or section 40A(5). The court highlighted that when a general and special enactment exist for the same subject, the special enactment prevails. Citing a previous decision, the court concluded that directors who are also employees are governed by section 40(c).

Conclusion:
The court answered the question referred in the affirmative and in favor of the assessee, affirming that the disallowance of expenditure for employee-directors falls under section 40(c). No costs were awarded in the case.

This judgment clarifies the distinction between the treatment of directors and employees in the context of disallowance of expenditure under the Income-tax Act, providing guidance on the applicable sections for such scenarios.