Per Vishwanathan - A question of some importance affecting the eligibi-lity for deduction of the remuneration paid to directors has arisen in these appeals. The department's view appears to be that whatever may be the services rendered by the director, the deduction cannot exceed Rs. 72,000 under section 40(c)/40A(5). The assessee's contention is that under certain circumstances it cannot be limited to Rs. 72,000.

2. The assessee is a private limited company having a business in film production. One of the shareholders and directors was one Manoj Kumar. The company had entered into an agreement with him, by a deed dated 21-3-1969 that Manoj Kumar should play a leading role in the film "Purab Paschim" to be made by the company, and he should also direct the picture and write and provide story. By clause 4, the company would pay as remuneration Rs. 2 lakhs. In the Schedule attached to the agreement the conditions of employment are given. Clause G of the Schedule says, as an artiste, Manoj Kumar would render his service to the best of his ability. Clause 7 says that all rights in photographs, records, etc., would vest with the company. Clause 8 gives the terms and conditions expected of the service as director of the picture : and clause 9 gives the terms and conditions as author of the story. A similar agreement was entered into on 5-1-1972 in respect of another film production named "Shor". The terms and conditions for playing the leading role, directing and writing the story are identical with the earlier agreement. He was to be paid a consolidated amount of Rs. 3 lakhs. The company closes their accounts on 30th June. For the year ended 30-6-1971, Rs. 1,09,500 was debited as payment to Manoj Kumar and for the year ended 30-6-1973, the debit was Rs. 2,41,300 for the respective assessment years 1972-73 and 1974-75, the company claimed and the ITO allowed these expenses as a deduction. The Commissioner held that the assessment orders were erroneous insofar as the ITO overlooking the provisions of section 40(c) had allowed fully the director's remuneration. He directed the ITO to disallow the excess over Rs. 72,000 for each of the years.

3. The assessee is in appeal before us. Shri S.P. Mehta, for the assessee-company, submitted that the provisions of section 40(c) would not apply to the facts of the case. The deduction is made under section 28 itself and not under sections 29 to 39. So, section 40 does not apply. He further submitted that we have to look at it as a cost of production of the film, which is the stock-in-trade of the assessee. It should not be seen as mere remuneration of the director. His third submission is that section 40(c) is intended to apply to remuneration paid to a person in the capacity of a director. That is where there is a contract of service with him as a director of the company. Where director is not employed by the company, the provisions of section 40(c) would not apply. He pointed out that the statute contains another provision regarding such remuneration, that is section 40A(2). That provision also contains certain limits on the payments to the directors. Therefore, the question would be which of the provisions would apply, section 40(c) or 40A(2). That question would be answered by looking into the capacity in which the director has rendered services. If he was an employee, then section 40(c) would apply, for other reasonable services, section 40A(2) would apply. He further pointed out that such a distinction is found in the provisions of the Companies Act, where approval of the Government had to be obtained only for direct remuneration for services of the director. Such approval is not necessary for professional services.

4. Shri Govindarajan, for the department, pointed out that section 40(c) as it stands, is unqualified by any conditions. It applies directly wherever any remuneration is payable to a director irrespective of the capacity. He pointed out that section 40A(2) contains a proviso