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TMI Blog1998 (3) TMI 129X X X X Extracts X X X X X X X X Extracts X X X X ..... ctor is a perquisite and, therefore, is to be considered for the purpose of disallowance under section 40A(5) [/40(c)] in the hands of the company ?" In the appellate order, the Tribunal had in this context observed "the next ground is in respect of an expenditure of Rs. 1,20,274 in respect of medical treatment of the managing director, not required to be considered for allowance under section 40A(5)/40(c) of the Act". In the body of the order there is also a reference to the contention regarding the applicability of the provisions of section 40(c) of the Act. Therefore, while referring the aforesaid two questions while mentioning section 40A(5), the Tribunal has, as it appears, through oversight not mentioned section 40(c) in respect of which also these questions arise from its order. We have, therefore, refrained the questions by adding "/40(c)" in both the above questions. In the return of income filed by the assessee for the assessment year 1980-81, the assessee-company had claimed medical expenditure incurred for a sum of Rs. 1,47,527 for the medical treatment of the chairman and managing director. According to the assessee, its chairman and managing director had undergone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that as per the definition of "salary" as given in section 17(1), read with the definition of "perquisite" given in section 17(2)(iv), medical benefits given to the employee would be a sum paid by the employer in respect of an obligation which, but for such payment, would have been payable by the employee and that such payment was covered under the provisions of section 40A(5) and, therefore, the Income-tax Officer was justified in treating the medical benefits as perquisite. The assessee filed two appeals in respect of the assessment years 1980-81 and 1981-82 against the orders of the Commissioner of Income-tax (Appeals) before the Tribunal. It was contended before the Tribunal by the assessee that the said expenditure in respect of medical treatment of the managing director was not required to be considered for disallowance under section 40A(5) or 40(c) of the Act. It was contended that since the amount was paid in cash, it was outside the term "perquisite". The Tribunal following the decision of the Special Bench of the Income-tax Appellate Tribunal in the case of Glaxo Laboratories to the effect that the provisions contained in section 40A(5) of the Act were applicable and ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) 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 amount not to be allowed under this clause is included in the total income of any person referred to in sub-clause (i) ; . . ." "40A. Expenses or payments not deductible in certain circumstances.--(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'. (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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee ; (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." As can be seen from the provision of section 40, it indicates as to what amounts will not be deductible notwithstanding anything to the contrary contained in sections 30 to 39 which provided for deductions on various counts which could be made while computing the income referred to in section 28 under the head "Profits and gains of business or profession". Clause (c) of section 40 is a special provision made in respect of expenditure incurred by a company, 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 a relative of such director or a person. If such expenditure is excessive or unreasonable, then it will not be deducted in computing the income chargeable under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "remuneration" in the context of remuneration to a director of a company is a known concept. In section 309 of the Companies Act, 1956, there is a provision for remuneration of the directors and it is provided that the remuneration payable to the directors of a company, including any managing or whole-time director, shall be determined in accordance with and subject to the provisions of sections 198 and 309, either by the articles of the company or by a resolution or, if the articles so required, by special resolution, passed by the company in general body meeting and the remuneration payable to any such director so determined, shall be inclusive of the remuneration payable to such director for services rendered by him in any other capacity, provided that any remuneration for services rendered by any such director in any other capacity shall not be so included if the services rendered are of a professional nature, and in the opinion of the Central Government, the director possesses the requisite qualifications for the practice of the profession. Under sub-section (3) of section 309, it is provided that the remuneration shall not exceed five per cent. of the net profits to a directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of remuneration paid to a managing director and a director, is entirely different from a salary payable to an employee, the foremost distinction being, the connection of remuneration of such directors with the percentage of profits of the company, which would imply that if no profits are there, no such remuneration can be paid to the directors including a managing director. Under section 2(26) of the Companies Act, managing director means, a director who, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its board of directors or by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called. It would appear from the provisions relating to directors and managing directors, who are also directors, in Chapter II of the Companies Act, that the directors have a special position in the company and they are not in their capacity as directors, employees of the company. However, the fact that a person is a managing director or a director of a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion), 1994. However, when by virtue of a contract of service with the company a managing director or other director is employed by the company, then in that capacity he would be getting separate emoluments as per the terms of employment, the expenditure in respect of which, of course, would not be covered by clauses (i) and (ii) of section 40(c) but would fall under section 40A(5)(i) and (ii) of the Act. It would appear from what we have said above that whatever expenditure is incurred by the company in respect of a managing director or other director by way of remuneration or benefit or amenity that would be covered under section 40(c) and whatever expenditure by way of salary or perquisites is incurred by it in respect of the person, having a dual role of director and employee, in his capacity as an employee, that expenditure will be computed under clauses (i) and (ii) of section 40A(5)(a) of the said Act. There will, thus, be no overlapping between the expenditure incurred by a company over a director which falls in clauses (i) and (ii) of section 40(c) and the expenditure incurred by the company of the nature falling in clauses (i) and (ii) of section 40A(5)(a), which would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure incurred by the assessee for reimbursement of medical expenses to the managing director was premature. It is clear from the approval that was sought under section 310 of the Companies Act from the Government that the expenditure in question related to the managing director in his capacity as a director and not an employee of the company. Thus, the expenditure was required to be computed under section 40(c)(i) of the Act. The said clause takes within its sweep any expenditure on remuneration or benefit or amenity to a director and the word "remuneration" would therefore obviously include direct cash payments to the director. Therefore, expenditure incurred on cash reimbursement of medical expenses to the managing director would fall within sub-clause (i) of clause (c) of section 40 and not under section 40A(5)(a) under which only expenditure incurred on a person in his capacity of an employee could be computed where such employee is also a director. We are fortified in this view by the decision of this court in Gujarat Steel Tubes Ltd. v. CIT [1994] 210 ITR 358, in which it was held that the phrase "any remuneration or benefit or amenity" in section 40(c)(i) is of wide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid to the employees, but they cannot be brought within the purview of the words "any expenditure" which results directly or indirectly in the provision of any amenity, benefit or perquisite--more so because of the following words "whether convertible into money or not". It was held that the position was not different even after the enactment of section 40A(5)(a)(ii), which, except for certain structural changes, was similar in all material aspects to the earlier section 40(a)(v) of the Act. It will be noted that these words "whether convertible into money or not" are conspicuously absent in section 40(c)(i) and the clause speaks of any expenditure which results in the provision of any remuneration or benefit or amenity to a director. A provision for remuneration to a director would obviously include any cash payment to the director by way of remuneration and so will the word "benefit" include any such monetary benefit in the absence of the words "whether convertible into money or not" which made the difference in construing the provisions of section 40A(5)(a)(ii) in Mafatlal Gangabhai's case [1996] 219 ITR 644 (SC). Therefore, Mafatlal Gangabhai's case [1996] 219 ITR 644 (SC) ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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