The first proviso to section 40A(5)(a) sets a maximum deduction of Rs. 72,000 for the aggregate expenditure or allowance incurred in respect of an employee being a director.

Srinivasa Iyengar, J.—The Income Tax Appellate Tribunal, Bangalore Bench, has referred the following question of law for the opinion of this court :

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in disallowing Rs. 12,000 out of the remuneration of Rs. 72,000 paid to the managing director of the assesses company ?"

2. The matter relates to the assessment of M/s. International Instruments (P.) Ltd., Bangalore, for the assessment year 1972-73. N. Krishnan was the managing director of the company. The articles of association provided that he shall be the managing director of the company for a period that he shall be the managing director of the company for a period of 10 years from the time of incorporation of the company and thereafter for such period or periods as the directors may from time to time determine. This was provided under art. 35 of the articles of association. Article 37 provided that the remuneration of the managing director shall be fixed by the board of directors from time to time. It transpires that an agreement had been entered into in regard to the remuneration on December 9, 1960, and the period of the agreement expired on August 18, 1968. The board of directors passed a resolution on August 12, 1968, appointing N. Krishnan as the managing director of the company for a period of five years from August 19, 1968, and, thereafter, an agreement was entered into setting out the terms and conditions of his appointment for the period commencing from August 19, 1968, to August 18, 1973. The board of directors again passed another resolution on February 13, 1971, revising the terms of the remuneration to be effective from January 1, 1971, and an agreement was entered into detailing the terms agreed upon which would be effective till August 18, 1973. He was to be paid a monthly remuneration of Rs. 6,000 plus certain perquisites, viz. (1) actual medical benefits at the expense of the company including hospitalisation for Mr. N. Krishnan for a sum of Rs. 2 lakhs, and (3) gratuity benefit as applicable to the executives of the company from time to time.

3. During the year ending December 31, 1971, the relevant assessment year being 1972-73, the company paid Sri N. Krishnan Rs. 72,000 by way of remuneration and certain other perquisites, viz., Rs. 501 as personal accident premium and Rs. 614 as medical allowance. The ITO being of the opinion that s. 40A(5)(a) of the I. T. Act, 1961 (hereinafter referred to as "the Act"), applied to the facts of the case, disallowed a sum of Rs. 12,000 from out of the remuneration of Rs. 72,000 paid to Sri N. Krishnan. There were also certain other disallowances which are not relevant for the purposes of this case.

4. The assessee preferred an appeal to the AAC contending, inter alia, that the disallowance of Rs. 12,000 was untenable in the light of the first proviso to s. 40A(5)(a). The AAC accepted that contention and set aside the disallowance. However, the department preferred an appeal before the Tribunal and the Tribunal came to the conclusion that the AAC was in error and restored the disallowance made by the ITO. At the instance of the assessee, this reference has been made.

5. The relevant provisions of ss. 40(c) and 40A(5)(a) of the Act are 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