B.P.Jeevanreddy, J. - (1.) Leave granted in the Speical Leave Petition.
(2.) The only question in this batch of appeal is whether the payments made in cash by an assessee to its employees are within the mischief of Section 40(a) (v) and Section 40-A(5). Sub-clause(v) was inserted in clause (a) of Section 40 by the Finance Act, 1986 with effect from April 1, 1969. Section 40 (a) (v) reads as follows: "S 40. Amounts not deductible. _ Notwithstanding anything to the contrary in (Section 30 to 38), the following amounts shall not be decducted in computing the income chargeable under the head "Profits and gains of business or profession", (a) in the case of any assessee- (v) any expenditure which results directly or indirectly in the provision of any benefit or amenity or perquisite, whether converible into money or not, to any employee (including any sum paid by the assessee in respect of any obligation which but for such payment would have been payable by such employee) or any expenditure or allowance in respect of any assets of the assessee used by such employee either wholly or partly for his own purposes or benefit, to the extent such expenditure or allowance exceeds one-fifth of the amount of 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 pedriod of his employment during the previous year, whichever is less: Provided that in computing the aforesaid expenditure or allowance the following shall not be taken into account, namely:- (a) any payment by way of gratuity: (b) the value of any travel concession or assistance referred to in clause (5) of section 10; (c) passage moneys or the value of any free or concessional passage referred to in sub-clause (i) of clause (6) of Section 10; (d) any payment of tax referred to in sub-clause (vii) or sub-clause (vii-a) of clause(6) of Section 10; (e) any payment of tax referred to in sub-clause (vii) of clause(1) of Section 17; (f) any sum referred to in sub-clause (v) of clause (2) of Section 17: (g) the amount of any compensation referred to in sub-clause (i) or any payment referred to in sub-clause (ii) of clause (3) of Section 17; (h) any sum referred to in sub-clause (iv) or clause (v) of sub-section (1) of Section 36;and (i) any expenditure referred to in clause (ix) of sub-section (1) of section 36; 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. Explanation 1- The Provisions of this sub-clause shall apply notwithstanding that any amount not to be allowed under this sub-clause is included in the total income of the employee. Explanation 2. - In this sub-clause, the word 'salary' shall have the meaning assigned to it in clause(h) of rule 2 of Part A of the Fourth Schedule."
(3.) Sub-clause (v) of Section 40(a) was omitted by the Finance (No.2) Act, 1971, which simultaneously introduced sub-section(5) in Section 40-A. Sub-section (5) of Section 40-A omitting unnecessary clauses, reads thus; "S. 40 A. Expenses or payments not deductible in certain circumstances:- (1) The provision of this Section shall have effect not withstanding 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 provision of any perquisite or indirectly in the provision 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 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, a 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 relative of the director or of such person, as in excess of the sum of one hundred and two thousand rupees, shall in no case be allowed as deduction: Explanation 2. In this sub-section,- (a) 'salary' has the meaning assigned to it in clause (i) 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 reference to 'assessee' shall be construed as reference to 'employee 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 indirectly or through a fund, other than a recognised provident fund or and approved superannuation fund, to effect an assurance on the life of the employee or to effect a contract for an annuity." ;