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Issues Involved:
1. Deduction limits for salary and gratuity payments to an employee who retires during the assessment year. 2. Interpretation of Section 40A(5)(c)(i) of the Income-tax Act, 1961. Summary: Issue 1: Deduction Limits for Salary and Gratuity Payments The case revolves around the income-tax assessment of Hindustan Motors Ltd. for the assessment year 1974-75. An employee, M. S. Rao, retired on September 1, 1973, after receiving a salary of Rs. 22,000 and retirement benefits including gratuity amounting to Rs. 61,600. The ITO disallowed the deduction of Rs. 22,000 paid as salary, citing the limit u/s 40A(5)(c)(i) of the I.T. Act, 1961, which permits a maximum deduction of Rs. 60,000 for salary and gratuity payments. The AAC upheld this decision, treating the employee as a former employee for the entire year. The Tribunal also dismissed the appeal, maintaining that the total payment exceeded the prescribed limit for a former employee. Issue 2: Interpretation of Section 40A(5)(c)(i) The assessee argued that the salary paid during the employment period should be considered separately from the gratuity paid upon retirement, each within their respective limits. The Tribunal, however, treated the employee as a former employee for the entire year, combining the salary and gratuity payments under a single limit of Rs. 60,000. Upon review, the High Court found the assessee's interpretation more acceptable. The Court held that an individual could be considered both an employee and a former employee within the same year. Payments made during the employment period should be deductible within the monthly limit of Rs. 5,000, and payments made after retirement should be deductible within the Rs. 60,000 limit for former employees. This interpretation prevents rendering any part of the section nugatory. The Court concluded that the sum of Rs. 22,000 paid as salary is allowable u/s 40A(5)(c) of the I.T. Act, 1961, and answered the question in favor of the assessee. The Court did not express an opinion on the exclusion of Rs. 30,000 u/s 10(10)(iii) as it was not relevant to the determination of the limits of deduction for the employer. Separate Judgment by AJIT KUMAR SENGUPTA J. Justice Ajit Kumar Sengupta added that Section 40A has an overriding effect on the computation of income under "Profits and gains of business or profession." He emphasized that Section 40A(5) provides for two contingencies: salary paid during employment and sums paid after cessation of employment, each with separate limits. He argued that accepting the Revenue's interpretation would lead to employers deferring payments to circumvent the ceiling, which is not the Legislature's intention. He concluded that the interpretation favorable to the assessee should be accepted, agreeing with the main judgment.
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