(Underlining ours)
8. The permissible limit of deduction for expenditure falling under sub-clauses (i) and (ii) of Section 40A(5)(a) is laid down in clause (c). In respect of salaries to an employee or former employee, the permissible deduction is up to an amount at a rate of Rs. 5,000/- per month during the period of an employee's employment in India during the previous year. In respect of expenditure on perquisites under Clause (a) (ii), the permissible deduction is up to ⅕th of the amount of the salary payable to the employee or an amount calculated at the rate of Rs. 1,000/- for each month or part thereof comprising the period of employment in India of the employee during the previous year, whichever is less. Thus ceiling for expenditure deductible under Clause (a)(i) is Rs. 60,000/- and Clause (a)(ii) is Rs. 12,000/-. However, in the case of an employee or a former employee who is also a Director of the company, the proviso to Section 40-A(5)(a) provides that the ceiling for deduction is an overall ceiling of Rs. 72,000/- in respect of a sum total of expenditure, i.e. the expenditure and allowances referred to in Section 40A(5)(a)(i) and (ii) which cover expenditure on an employee, plus expenditure and allowances referred to (in) Section 40(c)(i) and (ii) which relate, inter alia, to a Director. 9. In the case of an employee, however, Section 40-A(5)(b) provides that while calculating the expenditure or allowance in relation to an employee under Section 40A(5)(a), certain expenditure will not be taken into account. This includes, inter alia, any expenditure or allowance in relation to an employee in respect of any period of his employment outside India. The question we have to consider is whether such expenditure when incurred in connection with an employee who is also a Director, will be similarly excluded while calculating the aggregate of expenditures under Section 40A(5)(a)(i) and (ii) plus expenditure and allowances under Section 40(c)(i) and (ii) incurred in connection with that employee-Director. According to the department, so long as the employee is also a Director, expenditure of the kind referred to in Section 40A(5)(b) cannot be excluded from expenditure while calculating the ceiling limit under Section 40(c) or Section 40A(5)(a). The department has submitted that such an exclusion is permissible only in the case of an employee who is not a Director at the relevant time when the expenditure was incurred. 10. The question of interpreting the provisions of Sections 40(c) and 40A(5) in connection with persons who are both employees and Directors of the company has come up for consideration in a number of cases before the High Court and before this Court. In the impugned judgment before us (which is reported in 185 ITR 178 , the Delhi High Court has looked at the legislative history of these two provisions with a view to examining their effect. Section 40(c) as it originally stood and the amendments made in Section 40(c) have been set out in the High Court's judgment. Originally, Section 40(c) itself contained sub-clause (iii) dealing with expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to an employee. The ceiling prescribed was Rs. 5,000/- per month for any period of employment after 28th day of February, 1963. The expenditure on perquisites with a ceiling of ⅕th of the amount of the salary payable to the employee was subsequently also added. The expenditure on employees is now removed from Section 40(c) and incorporated in Section 40A(5). 11. The two Sections 40(c) and 40A(5) are, however, not mutually exclusive. In Section 40(c), the proviso, for example, refers to a case where the Director (or a person who had a substantial interest in the company or a relative of the Director or of such person) is also an employee of the company for any period prescribed in the previous year. In that situation, expenditure of the nature referred to in Clauses (i), (ii), (iii) and (iv) of the second proviso to Clause (a) of Section 40A(5) shall not be taken into account for the purpose of calculating the ceiling under Section 40(c). These excluded items are items such as the value of any travel concession, passage money, payment referred to in Section 36(1)(iv) and (v) and expenditure referred to in Section 36(1)(ix). These items in Section 36 deal with contribution towards provident fund, approved gratuity fund and promotion of family planning. Similarly Section 40A(5) does not deal only with employees. It also deals with employee-Directors in the first proviso to sub-section (5)(a). In the case of employee-Directors both these sections are applicable. 12. There have been a number of cases in the various High Court as well as this Court which have dealt with the question : which ceiling applies when a person holds the positions both of a Director and an employee. Section 40(c) prescribes an overall ceiling of Rs. 72,000/- on expenditure covered in Section 40(c). Under Section 40A(5) there is a ceiling of Rs. 60,000/- on expenditure in respect of salary and Rs. 12,000/- in respect of perquisites totalling Rs. 72,000/-. This Court considered this question in the case of Commissioner of Income-tax v. Indian Engineering and Commercial Corporation Pvt. Ltd., (1993) 201 ITR 723. This Court has held (page 728) (of ITR) that in the case of Directors who are also employees both these sections will be attracted and the higher of the two ceiling has to be applied. The same view had earlier been taken by the Andhra Pradesh High Court in the case of Commissioner of Income-tax v. D.B.R. Mills, 172 ITR 366 , and by the Bombay High Court in the case of Commissioner of Income-tax v. Hico Products Pvt. Ltd., 201 ITR 567 , where the Bombay High Court emphasised the first proviso to Section 40A(5)(a) where an express provision is made that if an employee is also a Director or a person specified in Section 40(c) the aggregate of expenditure and allowances specified in Section 40(c), sub-clauses (i) and (ii) as well as expenditure and allowances specified in Section 40A(5)(a)(i) and (ii) shall not exceed Rs. 72,000/-. In other words, the total emoluments and perquisites of Directors who are also employees will be allowed up to the limit of Rs. 72,000/- as a deductible expenditure. In such cases, therefore, though the Directors are also employees, the separate ceilings prescribed of Rs. 60,000/- and Rs. 12,000/- under Section 40A(5)(c) will not apply. The contrary view taken by the Kerala High Court in Travancore Rayons Ltd. v. Commissioner of Income-tax, 162 ITR 732 , is, therefore, no longer good law. 13. We need not, in this connection, refer to the earlier judgments of the Gujarat High Court which have been discussed at length in the impugned judgment. After the decision of this Court in the case of Commissioner of Income-tax v. Indian Engineering and Commercial Corporation, (supra), the Gujarat High Court has now, in the case of Commissioner of Income-tax v. Synpol Products Pvt. Ltd. (1996) 217 ITR 154, held that in the case of Directors who are also employees, both the provisions will be attracted. The higher of the two ceilings will have to be applied. 14. We have now to consider in this light whether the provisions of Section 40A(5) (b) will apply for the purpose of calculating the expenditure so covered when the expenditure is incurred in connection with a Director who is also an employee. Under Section 40A(5)(b) (i) nothing in Clause (a) which deals with expenditure on salaries and perquisites of an employee shall apply, inter alia, to any expenditure in relation to an employee in respect of any period of his employment outside India. Therefore, for example, in calculating the expenditure on the salary of an employee, the salary paid in respect of his employment outside India will not be taken into account for the purposes of calculating the ceiling. This expenditure is outside the expenditure which is subject to a ceiling limit. Under Section 40A(5)(b)(ii) and (iii), similarly certain other expenditures in connection with an employee are also excluded from the ceiling limit. The question is whether such expenditure will be excluded from the ceiling limit of a Director-employee. If for the purpose of ceiling on expenditure, both Sections 40(c) and 40A(5) are to be applied to employee-Directors, there is no reason why for the purpose of deciding what is to be excluded from the expenditure subject to such ceiling, both the sections cannot be taken into account. Both sections constitute a composite scheme. In the case of employee-Directors, both will operate. After all, the purpose of prescribing a ceiling on expenditure in connection with Directors and employees under Section 40(c) and Section 40A(5), is to discourage a company or an organisation from paying excessive salaries, remuneration, perquisites etc. to its employees and/or Directors. If it does so, the organisation will not be able to claim the entire expenditure as deduction, but only expenditure up to the ceiling limit. However, from this ceiling limit, certain kinds of expenditure on employees have been excluded - presumably because this kind of an expenditure was considered as reasonable and permissible. One such category of expenditure is expenditure on an employee in respect of his period of employment outside India. Presumably the organisation may have to pay to an employee posted outside India amounts which may be much higher than what he may be entitled to in India in view of the exigencies of the situation, his requirements at the place of posting and the fact that the amount may have to be paid in a foreign country. This expenditure is, therefore, not subject to a ceiling. The same considerations would apply to a Director-employee also who is posted outside the country in the course of his work. A Director-employee does not cease to be an employee nor are his requirements less than those of an employee. Therefore, in his case also what the Act itself has viewed as reasonable allowable expenditure, should be allowed. We do not see any reason to hold that Section 40A(5)(b) will not apply to employee-Directors when this Court, in the case of employee-Directors has held, both Sections 40(c) and 40A(5) as applicable. For determining the ceiling, the higher ceiling has to be taken into account. Similarly, for determining permissible expenditure which is outside the ceiling limit also, both the sections will have to be applied. Therefore, expenditure under Section 40A(5)(b) which is excluded from the expenditure on which a ceiling is placed under Section 40A(5)(a), will have to be excluded in the case of an employee-Director also. Under the proviso to Section 40A(5)(a), in the case of an employee-Director, for the purposes of ceiling, expenditure which has to be taken into account is both under Section 40A(5)(a) as well as under Section 40(c). For calculating the expenditure and allowances under Section 40A(5)(a), one has to exclude the expenditure and allowances referred to in Section 40A(5)(b). Therefore, in the case of a Director-employee also while calculating the expenditure and allowances spent on a Director-employee under Section 40A(5)(a) and Second 40(c), expenditure of the kind referred to in Section 40A(5)(b) has to be necessarily excluded. 15. A similar view has been taken by the Madras High Court in the case of Commissioner of Income-tax v. Lucas TVS Ltd., (1997) 226 ITR 281. The Madras High Court was concerned with foreign technicians working under a contract in India and falling under Section 10(6) (vii-a). Under Section 40A(5)(ii) expenditure incurred in relation to such an employee is to be excluded from the expenditure for which a ceiling is prescribed under Section 40A(5)(a). The Madras High Court held that in the case of a Director-cum-employee also, if he is covered by Section 10(6)(vii-a), such expenditure would be excluded from the ceiling limit prescribed under Section 40(c) as well as Section 40A(5)(a). The Madras High Court has rightly observed (page 291) that there is nothing to suggest that the remuneration which is excluded from the scope of consideration in Section 40A(5)(a) of the Act by virtue of Section 40A(5)(b) of the Act, should be taken into consideration for the purpose of Section 40(c) of the Act. Both Sections 40(c) and 40A(5) have to be read together in determining the ceiling prescribed under Section 40A(5) of the Act which includes ceiling prescribed for Director-employees. Also if certain items go out of reckoning in Section 40A(5) of the Act, then on the principle of harmonious construction, the same will have to go out of reckoning in calculating a common ceiling prescribed for Director-employees both under Sections 40(c) and 40-A(5)(a) proviso. 16. The Delhi High Court was, therefore, right in coming to the conclusion that any expenditure covered by Section 40A(5)(b)(i) in respect of an employee-Director shall not be taken into account for the purposes of calculating the aggregate of expenditure under the proviso to Section 40A(5)(a) for the application of the ceiling limit prescribed there. 17. The question, therefore, is answered in the affirmative and in favour of the assessee. The appeals are dismissed with costs. Appeals dismissed.