Ajit K.Sengupta, J. - (1.) In this reference under Section 256(1) of the Income-tax Act, 1961, for the assessment year 1979-80, the following questions of law have been referred to this court : "1. Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the provisions of Section 40(c) are applicable to the expenditure on remuneration payable or benefits or amenities provided to the wholetime directors of the assessee-company when there is no finding that such expenditure is excessive or unreasonable having regard to the legitimate business needs of the company Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the excess payment of Rs. 8,721 made on account of fluctuations in the exchange rate of dollars, at the time of repayment of the dollar loan, raised from ICICI for purchasing machinery from abroad was a capital expenditure and not an allowable revenue expenditure ? Whether, on the facts and in the circumstances of the case, the Tribunal ought to have allowed depreciation on the assets representing the capital expenditure on scientific research fully allowed as deduction in computing the total income for the earlier years ? Whether, on the facts and in the circumstances of the case, the Tribunal should have held that the issue of additional capital having been made for the preservation of the existing business the expenditure incurred for such issue was of a revenue nature wholly and exclusively incurred for the purpose of the assessee's business ? Whether, on the facts and in the circumstances of the case and on a true construction of Clause (47) of Section 2 and Section 45 of the Income-tax Act, 1961, the Tribunal erred in holding that the amount received from the insurance company in respect of plant and machinery and furniture and fittings destroyed during the riots by the workers on a 'transfer' and, therefore, taxable under the head 'Capital gains' ? Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that expenses on freight, insurance charges and interest on packing credit incurred in connection with its exports, were not entitled to weighted deduction under Section 35B of the Income-tax Act, 1961"
(2.) The first question relates to disallowance of expenditure by way of remuneration payable or benefits or amenities provided to the wholetime directors of the assessee-company under Section 40(c). The Assessing Officer, in his assessment order, disallowed the sum of Rs. 3,06,935 being the remuneration paid in excess of the prescribed limits. The assessee's contention has been that Section 40(c) contemplates disallowance under Section 40(c) only on the finding of such remuneration being excessive or unreasonable, having regard to the legitimate business needs of the company and the benefit derived by or accruing to it therefrom and that, in the absence of a finding as to excessiveness or unreasonableness, the disallowance is unauthorised. The Commissioner of Income-tax (Appeals), however, held that the provisions of Section 40(c), apart from authorising disallowance on grounds of excessiveness or unreasonableness, prescribes a ceiling limit to the aggregate of such remuneration including the value of any benefit or amenity provided to a director. He, therefore, upheld the addition of the excess of the remuneration over the ceiling limit prescribed by that provision. He, over and above this, relied upon a decision of this court on this issue in Bilaspur Spinning Mills and Industries Ltd. v. CIT [1982] 135 ITR 496. The Tribunal also affirmed the Income-tax Officer's action.
(3.) Section 40(c) imposes in express terms an overall ceiling limit to the allowance of expenditure on remuneration paid or benefit or amenity provided to a director or a person having substantial interest in the company or a relative of the director of such an interest-holder. Such limit appears in Sub-clauses (A) and (B) of Clause (c) of Section 40. The Sub-clauses are set out below : "(A) where such expenditure or allowance relates to a period exceeding 11 months comprised in the previous year, the amount of Rs. 72,000 ; (B) where such expenditure or allowance relates to a period of 11 months or lesser period comprised in the previous year an amount calculated at the rate of Rs. 6,000 for each month or a part thereof.";