1998 (3) TMI 67 - HC - Income Tax

Summary

Issues:
1. Interpretation of provisions of section 40A(5)(a) for determining the nature of expenditure and the quantum of remuneration.
2. Application of limits under section 40(c) and the first proviso to section 40A(5) for director-employees.
3. Exclusion of exempt remuneration under section 10(6)(vii) for determining the quantum of remuneration.
4. Exclusion of tax payable to employees under section 10(6)(viia) for applying the limit under section 40A(5).
5. Impact of collaboration agreement with a foreign company on expenditure incurred by the assessee.

Analysis:
The High Court of MADRAS considered two questions of law referred by the Revenue for the assessment year 1976-77. The first issue involved the interpretation of section 40A(5)(a) in determining the nature of expenditure and the quantum of remuneration for director-employees. The court held that the provisions of section 40A(5)(a) must be considered for applying the limit of Rs. 72,000 under section 40(c) and the first proviso to section 40A(5). The second issue focused on the exclusion of exempt remuneration under section 10(6)(vii) and tax payable to employees under section 10(6)(viia) for determining the quantum of remuneration. The court ruled that the exempted amounts should not be subject to the ceiling limit under section 40A(5), and only the balance amount should be considered for the limit. The court referred to a previous decision and concluded that the provisions of section 40A(5) do not apply to the extent of exemption granted by the Central Government. The collaboration agreement with a foreign company was also considered, where the deputation of technicians was approved by the Government of India, impacting the expenditure incurred by the assessee. The court upheld the Tribunal's decision, stating that the provisions of section 40A(5)(a) are applicable to director-employees, but exempt remuneration and tax should be excluded for determining the ceiling limit. Consequently, both questions of law were answered in favor of the assessee, who was awarded costs of Rs. 750.