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TMI Blog1988 (9) TMI 38X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 ?" 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 expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : "(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." The proviso and the Explanations to the aforesaid clause are not however reproduced. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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." 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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