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Issues Involved:
1. Applicability of section 40A(5) vs. section 40(c) for the assessment year 1972-73. 2. Applicability of section 40A(5) vs. section 40(c) for the assessment year 1973-74. 3. Applicability of section 40A(5) vs. section 40(c) for the assessment year 1974-75. Summary: Issue 1: Applicability of section 40A(5) vs. section 40(c) for the assessment year 1972-73 The Tribunal held that the salary, bonus, commission, and perquisites payable to the managing director were allowable only to the extent permitted u/s 40A(5) and that the provisions of section 40(c) were not attracted. Consequently, the amount to be disallowed was Rs. 24,938 and not Rs. 18,417. Issue 2: Applicability of section 40A(5) vs. section 40(c) for the assessment year 1973-74 The Tribunal held that for the assessment year 1973-74, the provisions of section 40A(5) were to be invoked and not the provisions of section 40(c). Issue 3: Applicability of section 40A(5) vs. section 40(c) for the assessment year 1974-75 The Tribunal held that for the assessment year 1974-75, the provisions of section 40A(5) were to be invoked and not the provisions of section 40(c). Comprehensive Details: Analysis of Sections 40(c) and 40A(5) The court analyzed sections 40(c) and 40A(5) of the Income-tax Act, 1961, to determine whether the expenditure incurred in respect of a director who was also an employee should be deducted solely with reference to section 40A(5) or section 40(c). Section 40(c) refers to non-deductible expenditure of a company in respect of its director or a person having a substantial interest in the company. Section 40A(5) refers to non-deductible expenditure of an employer in respect of an employee or a director-employee. Tribunal's Interpretation The Tribunal concluded that for periods during which a person was both a director and an employee, the computation should be made solely with reference to section 40A(5), and section 40(c) has no application. Court's Conclusion The court held that section 40A, in relation to the computation of profits and gains of business, operates non obstante any other provision to the contrary. The maximum allowable deduction of Rs. 72,000 as provided u/s 40(c) must be understood, in respect of a director who was also an employee, as restricted by the words of limitation contained in section 40A(5)(a) and (c). The court concluded that the permissible deduction in respect of salary and perquisite is limited to the respective amounts mentioned under sub-clauses (i) and (ii) of clause (c) of sub-section (5). Disagreement with Gujarat High Court The court disagreed with the Gujarat High Court's decision in CIT v. Bharat Vijay Mills Ltd., which held that the headwise limit prescribed under clause (c) in relation to salary and perquisite did not apply to an employee who was also a director. The court held that the first proviso to section 40A(5)(a) must be understood with reference to subsequent provisions and not in isolation. Final Decision The court answered the questions in the affirmative, in favor of the Revenue and against the assessee, stating that the expenditure could be allowed only with reference to section 40A(5) and section 40(c) had no application. The parties were directed to bear their respective costs.
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