Section 10 - Amendment of Section 40A - Finance (No. 2) Act, 1971

10. Amendment of Section 40A In section 40A of the Income-tax Act, with effect from the 1st day of April, 1972, - (a) in sub-section (2), in the proviso to clause (a), for the words provisions of this section , the words provisions of this sub-section shall be substituted; (b) after sub-section (4), the following sub-sections shall be inserted, namely :- (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 : Provided that where the assessee is a company, so much of the aggregate of - (a) the expenditure and allowance referred to in sub-clauses (i) and (ii) of this clause; and (b) the expenditure and allowance referred to in sub-clauses (i) and (ii) of clause (c) of section 40, 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, as is in excess of the sum of seventy-two thousand repees, shall in no case be allowed as a deduction : Provided further that in computing the expenditure referred to in sub-clause (i) or the expenditure or allowance referred to in sub-clause (ii) of this clause or the aggregate referred to in the foregoing proviso, the following shall not be taken into account, namely :- (i) the value of any travel concession or assistance referred to in clause (5) of section 10; (ii) passage moneys or the value of any free or concessional passage referred to in sub-clause (i) of clause (6) of section 10; (iii) any payment referred to in clause (iv) or clause (v) of sub-section (1) of section 36; (iv) any expenditure referred to in clause (ix) of sub-section (1) of section 36. (b) Nothing in clause (a) shall apply to any expenditure or allowance in relation to - (i) any employee in respect of any period of his employment outside India; (ii) any employee being an individual referred to in sub-clause (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 plant thereof comprised in the period of his employment in India during the previous year, and in the case of a 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; (ii) in respect of the aggregate of the expenditure and the allowance referred to in sub-clause (ii) of clause (a), one-fifth of the amount of the 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 employment in India of the employee during the previous year, whichever is less. Explanation 1 : The provisions of this sub-section shall apply notwithstanding that any amount not to be allowed under this sub-section is included in the total income of the employee or, as the case may be, the former employee. Explanation 2 : In this sub-section, - (a) salary has the meaning assigned to it in clause (1) read with clause (3) of section 17 subject to the following modifications, namely :- (1) in the said clause (1), the word perquisites occurring in sub-clause (iv) and the whole of sub-clause (vii) shall be omitted; (2) in the said clause (3), the references to assessee shall be construed as references to employee or former employee and the references to his employer of former employer and an employer or a former employer shall be construed as references to the assessee ; (b) perquisite means - (i) rent-free accommodation provided to the employee by the assessee; (ii) any concession in the matter of rent respecting any accommodation provided to the employee by the assessee; (iii) any benefit or amenity granted or provided free of cost or at concessional rate to the employee by the assessee; (iv) payment by the assessee of any sum in respect of any obligation which, but for such payment, would have been payable by the employee; and (v) payment by the assessee of any sum, whether directly or through a fund, other than a recognised provident fund or an approved superannuation fund, to effect an assurance on the life of the employee or to effect a contract for an annuity. (6) Where the assessee incurs any expenditure by way of fees for services rendered by a person who at any time during the twenty-four months immediately preceding the previous year was an employee of the assessee, - (a) such expenditure by way of fees, or (b) where the assessee has also incurred in relation to such person any expenditure by way of salary referred to sub-clause (i) of clause (a) of sub-section (5), the aggregate of such expenditure by way of fees and by way of salary, shall not be allowed as a deduction to the extent such expenditure by way of fees or, as the case may be, the aggregate of such expenditure by way of fees and by way of salary exceed sixty thousand rupees..