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TMI Blog1985 (4) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the employee concerned ceased to be an employee of the assessee during the relevant previous year and, therefore, the limit of Rs.. 60,000 prescribed in s. 40A(5)(c)(i) in the case of a former employee applied to the facts of the case. The assessee preferred a further appeal against the assessment to the Income-tax Appellate Tribunal. It was contended before the Tribunal that the salary paid to the said employee during the previous year was less than Rs. 5,000 per month and was within the permissible limit for salary as laid down in the said s. 40A(5)(c)(i). The payment of Rs. 61,600 byway of gratuity to the said employee after he retired during the relevant previous year was covered by the limit of Rs. 60,000 also laid down in the said section and, therefore, only Rs. 1,600 ought to have been disallowed. The Tribunal held that under the said s. 40A(5)(c)(i), the said employee came within the definition of a former employee in the relevant assessment year. As a former employee, the terminal benefits by way of gratuity paid to him by the assessee came within the definition of salary in the said section and the total amount in the said year including his salary and g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xtent to which it does not consist of contributions by the assessee or interest on such contributions. Section 40A.-(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 : ... (c) The limits referred to in clause (a) are the following, namely (i) in respect of the expenditure referred 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 part thereof comprised in the period of his employment in India during the previous year and in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th s. 10(10)(iii) and be given an harmonious construction and Rs. 30,000 should, in any event, be excluded before imposing the limit of Rs. 60,000. Learned advocate for the Revenue contended to the contrary. He submitted that there was no bar on an assessee to pay any amount he chose to his employee or his former employee. But the limit of the deductions which the assessee would be allowed was categorically fixed in the said section. On a consideration of s. 40A(5)(c), it appears that the construction of the said section as suggested on behalf of the assessee is more acceptable. Limits have been fixed under the said section for deductions which can be claimed in respect of payments to an employee as also a former employee. An employee can be paid up to Rs. 5,000 per month which could be claimed as deduction. A former employee can be paid in aggregate or at a time up to Rs. 60,000 in the year. The section itself indicates that an employee who retires during a particular previous year would be a former employee. Therefore, it is possible for a person to be an employee for a part of the relevant previous year, i.e., up to the date of his retirement. For that period, he has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s status as on the last day of the previous year should be taken into consideration for the purpose of fixing the limit of deduction. In other words, his contention is that, in this case, the employee concerned ceased to be an employee during the previous year and, as such, the assessee would be entitled to the deduction in respect of gratuity paid to such an employee to the extent of Rs. 60,000 only. If this contention is accepted, then the salary paid to the employee while he was in employment cannot be taken into account in determining the ceiling of allowable deduction under s. 40A(5). Section 40A(5) provides for two contingencies, one with regard to the salary paid to an employee who is in employment and the other with regard to the gratuity or any other sum paid when such employee ceases to be an employee. For each of these contingencies, provisions have been made. In the case of an employee, allowable deduction is Rs. 5,000 for each month or part thereof comprised in the period of his employment. In other words, the maximum allowable deduction is Rs. 60,000. If the employee ceases to be an employee, then the deduction will be allowed to the extent of Rs. 60,000 in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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