Ajit K.Sengupta J. - (1.) At the instance of the Commissioner of Income-tax, West Bengal III, Calcutta, the following question of law has been referred to this court for the assessment year 1972-73 under Section 256(1) of the Income-tax Act, 1961 : "Whether, on the facts and in the circumstances of the case and on a correct interpretation of Section 40(c) and Section 40A(5)of the Income-tax Act, 1961, the Tribunal was correct in holding that an expenditure incurred by the assessee-company in respect of its employee-directors did not fall for consideration under the latter Section for the purpose of determining the portion of such expenditure which could be disallowed in computing the profits and gains of the assessee's business ?"
(2.) The facts of this case are in a narrow compass. The assessee-company had four directors who were also employees of the assessee-company. In the relevant previous year, they were paid salary and various perquisites. The assessee-company felt that Section 40A(5) was applicable to employee-directors and, on that basis, it filed its computation before the Income-tax Officer according to which Rs. 26,705, would be disallowed as excessive expenditure. Later on, the assessee revised its opinion and filed another computation before the Income-tax Officer along with a revised return. On the basis of that, Section 40(c) applied to employee-directors of the companies and according to this computation, only Rs. 10,196 could be disallowed. The Income-tax Officer, however, took the view that Section 40A(5) was applicable and he disallowed Rs. 29,495, on that basis. In appeal, the Appellate Assistant Commissioner held that Section 40A(5) did not apply to employee-directors and that the proper provision was Section 40(c). He accepted the assessee-company's determination of the excessive expenditure under Section 40(c) at Rs. 10,196 and reduced the disallowance from Rs. 29,495 to Rs. 10,196. The Department came up in appeal to the Tribunal. The Tribunal held that the employee-directors of the company are covered by Section 40(c) of the Act and not by Section 40A(5).
(3.) At the hearing, Dr. Pal, for the assessee, contended that directors, even though they are employees, will be governed by the provisions relating to directors.;