COMMISSIONER OF INCOME TAX Vs. INDO NATIONAL LIMITED

JUDGEMENT

(1.) THE following two questions of law, at the instance of the Revenue, have been referred for our consideration for the assessment year 1976-77 :

(2.) THE short facts leading to the reference are as under : THE assessee is a company carrying on business of manufacturing dry cells and batteries. It entered into a collaboration agreement with one Matsushita Electric Industrial Company Limited, Japan, and the foreign company deputed certain technicians, viz., technical director and deputy managing director, and the terms of the agreement of deputation of the employees were also approved by the Government of India. THE assessee during the previous year relevant to the assessment year 1976-77, incurred an expenditure by way of remuneration and perquisite of a sum of Rs. 90,090 on the deputy managing director and a sum of Rs. 83,700 on the technical director. THE Income-tax Officer, in the assessment made, restricted the admissible expenditure for each of them at Rs. 72,000 applying the provisions of Section 40(c) of the Income-tax Act, 1961 (hereinafter to be referred to as "the Act"), arid disallowed the excess amount in respect of both the directors. He also disallowed a sum of Rs. 68,765 representing the tax liability incurred by the assessee on the remuneration paid by it to three of its employee-directors on the ground that it exceeded the permissible limit prescribed under Section 40(c) of the Act. THE Commissioner of Income-tax (Appeals) deleted the disallowance in the appeal preferred by the assessee and on appeal by the Department, the Appellate Tribunal came to the conclusion that in the case of directors who are also employees, the provisions of Section 40A(5) of the Act operate for the purpose of determining the ceiling limit and to determine the quantum of the allowable remuneration of the directors by way of salary. THE Tribunal also held that the remuneration received by the two directors which is exempt under Section 10(6)(viia) of the Act cannot be taken into account for the purpose of applying the limit under Section 40(c) of the Act. THE Tribunal also held that to the extent the remuneration or tax paid to the technicians is exempt under Section 10(6)(vii) of the Act, that remuneration should not be taken into account for the purpose of determining the quantum on which the ceiling should be applied either under Section 40A(5) or under Section 40(c) of the Act. It is this order of the Appellate Tribunal which is the subject-matter of this tax case reference.