Sabyasachi Mukharji, J. - (1.) In this reference arising out of the assessment orders for the assessment years 1973-74 and 1974-75, we are faced with a very short question. The assessee paid remuneration of Rs. 97,682 and Rs. 1,20,000, respectively, in the assessment years 1973-74 and 1974-75 to the managing director. The ITO disallowed Rs. 25,682 and Rs. 48,000, respectively, in the assessment years 1973-74 and 1974-75, being in excess of Rs. 72,000. On appeal, the AAC upheld the ITO's orders.
(2.) There was a further appeal before the Appellate Tribunal and it was contended before the Tribunal that the provisions of Section 40(c)(i) of the I.T. Act, 1961, placed a limit on the allowance of remuneration to a director of Rs. 72,000, but it only applied to a case where the ITO came to the conclusion that the payment of the remuneration to the director was excessive or unreasonable having, regard to the legitimate business needs of the assessee. It is common ground that in this case there is no such finding by the ITO. In the premises, it was urged before the Tribunal on behalf of the assessee that the disallowance was unreasonable. On the other hand, the Tribunal was of the view, accepting the revenue's contention, that Section 40(c)(i) empowered an ITO to disallow the payment of remuneration paid to a director which was excessive and unreasonable, having regard to the legitimate business needs of the assessee. But apart from this, according to the Tribunal, it had also placed a limit on the allowable amount of remuneration and that was Rs. 72,000 for the whole year. In that view of the matter, the Tribunal upheld the order of the ITO.
(3.) Upon these, the following question has been referred to this court under Section 256(1) of the I.T. Act, 1961 : "Whether the Tribunal was correct in interpreting Section 40(c)(i) of the Income-tax Act, 1961, as laying down an overall limit of Rs. 72,000 in respect of the amount to be allowed spent as remuneration and other expenses of a director ?" Section 40(c) of the I.T. Act, 1961, as it was in the relevant year, with which we are concerned, reads as follows: "40. Amounts not deductible.--Notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head ' Profits and gains of business or profession ',--... (c) in the case of any company- (i) any expenditure which results directly or indirectly in the provision of any remuneration or benefit or amenity to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case may be, (ii) any expenditure or allowance in respect of any assets of the company used by any person referred to in Sub-clause (i) either wholly or partly for his own purposes or benefit, if in the opinion of the Income-tax Officer any such expenditure or allowance as is mentioned in Sub-clauses (i) and (ii) is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom, so, however, that the deduction in respect of the aggregate of such expenditure and allowance in respect of any one person referred to in Sub-clause (i) shall, in no case, exceed- (A) where such expenditure or allowance relates to a period exceeding eleven months comprised in the previous year, the amount of seventy-two thousand rupees; (B) where such expenditure or allowance relates to a period not exceeding eleven months comprised in the previous year, an amount calculated at the rate of six thousand rupees for each month or part thereof comprised in that period : Provided that in a case where such person is also an employee of the company for any period comprised in the previous year, expenditure of the nature referred to in Clauses (i), (ii), (iii) and (iv) of the second proviso to Clause (a) of Sub-section (5) of Section 40A shall not be taken into account for the purposes of Sub-clause (A) or Sub-clause (B), as the case may be........." Now, in this case, it is common ground that the assessee is a company and it is also common ground that the payment had been made to a director. Therefore, there is no dispute that Section 40(c)(i) applies. The question, is, whether there are two limitations for disallowance, i.e., the ITO must first come to a conclusion that the expenditure of remuneration was excessive or unreasonable, having regard to the legitimate business needs of the company and even if it was not unreasonable the overall limit was Rs. 72,000.;