Dipak Kumar Sen, J.
1. This reference arises out of the income-tax assessment of Hindustan Motors Ltd., Calcutta, the assessee, in the assessment year 1974-75, the relevant previous year ending on March 31, 1974.
2. One M.S. Rao, an employee of the assessee, retired from service on September 1, 1973. From April 1, 1973, till August 31, 1973, the employee received from the assessee his salary aggregating to Rs. 22,000. On his retirement, he received from the assessee a further Rs. 61,600 on account of his retirement benefits including gratuity.
3. The ITO held that under Section 40A(5)(c)(i) of the I.T. Act, 1961, the permissible limit up to which an assessee could claim deduction for payment of amounts to its employees on account of salary or gratuity was Rs. 60,000. He disallowed the deduction of Rs. 22,000 paid to the employee as claimed by the assessee.
4. On appeal by the assessee, the assessment was confirmed by the AAC who 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 Section 40A(5)(c)(i) in the case of a former employee applied to the facts of the case.
5. 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 Section 40A(5)(c)(i). The payment of Rs. 61,600 by way 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.
6. The Tribunal held that under the said Section 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 gratuity exceeded the limit prescribed for a former employee. The Tribunal dismissed the appeal.
7. On an application by the assessee under Section 256(1)of the I.T. Act, 1961, the Tribunal has referred to this court for its opinion, the following question stated to be a question of law arising out of its order :
'Whether, on the facts and in the circumstances of the case, the sum of Rs. 23,600 was allowable out of salary and gratuity paid to Sri M.S. Rao, an employee of the assessee, under Section 40A(5)(c) of the Income-tax Act, 1961 ?'
8. Learned advocate for the assessee drew our attention to the relevant sections of the I.T. Act, 1961, the material parts whereof are noted hereafter :
' Section 10.--In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included......
'(10) (iii) any other gratuity received by an employee on his retirement or on his becoming incapacitated prior to such retirement or on termination of his employment, or any gratuity received by his widow, children or dependants on his death, to the extent it does not, in either case, exceed one-half month's salary for each year of completed service, calculated on the basis of the average salary for the three years immediately preceding the year in which the gratuity is paid, subject to a maximum of thirty thousand rupees or twenty months' salary so calculated, whichever is less :...
Explanation.--In this clause, 'salary' shall have the meaning assigned to it in Clause (h) of Rule 2 of Part A of the Fourth Schedule;'
Section 17.--For the purposes of Sections 15 and 16 and of this section,--
(1) 'salary' includes--...
(iv) any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages:...
(3) ' profits in lieu of salary ' includes--
(i) the amount of any compensation due to or received by an assessee from his employer or former employer at or in connection with the termination of his employment or the modification of the terms and conditions relating thereto;
(ii) any payment (other than any payment referred to in Clause 10, Clause (10A), Clause (10B), Clause (11), Clause (12) or Clause (13A) of Section 10), due to or received by an assessee from an employer or a former employer or from a provident or other fund (not being an approved superannuation fund), to the extent 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 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: ...
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 or former employer' and 'an employer or a former employer ' shall be construed as references to ' the assessee'; '
9. Learned advocate for the assessee submitted that Section 40A(5) provided for deduction for payments made to an employee and also to a former employee within two different limits prescribed for each. Payments to an employee by way of salary and payments to a former employee at or after his retirement both come within the expression 'salary' in the said section read with Section 17, Sub-sections (1) and (2).
10. He submitted further that it was possible- that a particular person could be an employee as well as a former employee of an assessee in any particular year within the meaning of Section 40A(5)(c). In such a case, both the limits should be taken into account for the purpose of allowing the deductions prescribed under the said section.
11. If an employee was treated only as a former employee in any particular assessment year on the ground that he had retired at any point of time during the relevant previous year, then the limit set by Section 40A(5)(c) for payment to an employee could be given a go-by because irrespective ofthe limit fixed for the monthly salary, he could be paid up to Rs. 60,000. On the other hand, if he was treated only as an employee and not as a former employee, then it may not be possible for the assessee to pay him his retirement benefits over Rs. 5,000 per month or at a time and claim deduction for the same.
12. Learned advocate submitted further that gratuity up to the limit of Rs. 30,000 if paid to an employee at or after his retirement could not be included in the income of the employee as salary under Section 10(10)(iii) of the Act. Sub-sections (1) and (3) of Section 17 and Section 40A(5)(c) should be read along with Section 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.
13. 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.
14. On a consideration of Section 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.
15. 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 be treated as an employee and all payments made to him as an employee would be allowed as a deduction within the permissible monthly limit. After that period, when such an employee retires, he has to be treated as a former employee and payments made to him as a former employee again ought to be deductible within the permissible limit. Any other construction of the said section under which such an employee is treated only as an 'employee' or as a 'former employee' in the year in question would render one part of the said section or the other nugatory.
16. In this view of the matter, it is not necessary for us to express any opinion on the other contention of Mr. Bajoria raised for the first time before us, as regards the exclusion of Rs. 30,000 under Section 10(10)(iii) in determining the limits imposed by Section 40A(5)(c). What is exempt in the hands of the employee may not be a relevant consideration in determining the limits of deduction in computing the income of the employer.
17. For the above, reasons, we answer the question referred saying that the sum of Rs. 22,000 paid as salary to the employee is allowable under Section 40A(5)(c) of the I.T. Act 1961. There will be no order as to costs.
Ajit Kumar Sengupta, J.
18. I would like to add a few words of my own. Section -40A relates to expenses or -payments which are not deductible in certain circumstances. Section 40A has an overriding effect in the computation of income under the head 'Profits and gains of business or profession'. Under Sub-section (5) of Section 40A, expenditure incurred by an assessee on payment of salary to an employee will not be allowed as deduction in computing the income under the head ' Profits and gains of business or profession' to the extent it exceeds an amount calculated at the rate of Rs. 5,000 for each month or part thereof comprised in the period of his employment in India during the previous year. Similarly, expenditure incurred by the assessee on payment of salary to a former employee, i.e., an individual who ceased or ceases to be the employee of the assessee during the previous year or any earlier previous year will not be allowed as deduction in computing the taxable profits to the extent it exceeds Rs. 60,000 for the year. It has been contended by Mr. Bhattacharjee, learned counsel for the Revenue, that if during the previous year, an employee of the assessee ceases to be an employee, his 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 Section 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 gratuity or any other sum paid to such employee. Under Section 40A(5)(c)(i), an upper limit is prescribed in each of the two cases. Section 40A(5)(c) read with Section 40A(5)(c)(i) does not prescribe any overall limit whereas the first proviso to Section 40A(5)(c) provides a ceiling of Rs. 72,000 on the permissible deduction or of expenditure or allowances consisting of the aggregation offour different types of expenses and allowances mentioned therein. Similarly, under Section 40A(6), expenditure incurred by an assessee on payment of fees for services rendered by a person who at any time during the 24 months immediately preceding the relevant previous year was his employee is not to be allowed deduction in computing the taxable profits of the assessee to the extent it exceeds Rs. 60,000. In a case where the assessee also incurs in relation to such person, any expenditure on payment of salary referred to in Section 40A(5)(c)(i), the deduction in respect of expenditure on payment of fees and that on payment of salary is to be limited to Rs. 60,000 in the aggregate. Wherever the Legislature has intended to limit the expenditure taking the different contingencies into account, it has made the appropriate provision by prescribing an aggregate ceiling. Section 40A(5)(c)(i) read with Section 40A(5)(c)(i) of the Act does not refer to any aggregate amount of deduction although two different contingencies are provided therein. If the interpretation as suggested by the Revenue is accepted, the employer would defer the payment of the gratuity or any other sum payable to an employee on cessation of his employment to the subsequent accounting year to get out of the mischief of the ceiling prescribed under Section 40A(5)(c)(i) of the Act. This cannot be the intention of the Legislature. If a provision of a taxing statute is reasonably capable of more than one interpretation, that interpretation which is favourable and beneficial to the assessee must be accepted, even if it results in his obtaining a double advantage. This is a well-accepted Rule of construction.
19. For the reasons aforesaid, I entirely agree with My Lord that the question should be answered in favour of the assessee.