Court excludes 'borrowed capital' from capital computation for section 80J, upholds higher disallowance of managing director's remuneration.

The court held that 'borrowed capital' must be excluded from the computation of capital for section 80J purposes. It also ruled that the disallowance of managing director's remuneration under section 40A(5)(c)(i) should be Rs. 20,000, not the reduced amount of Rs. 8,000 as determined by the Tribunal. The court found in favor of the Revenue and against the assessee on both issues, with no costs awarded due to statutory complexity. The judgment will be shared with the Tribunal as mandated.

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Issues Involved:
1. Exclusion of 'borrowed capital' from the computation of capital for purposes of section 80J.
2. Limitation of disallowance of managing director's remuneration u/s 40A(5)(c)(i) for the assessment year 1973-74.

Summary:

Issue 1: Exclusion of 'borrowed capital' from the computation of capital for purposes of section 80J

The common question for both assessment years 1972-73 and 1973-74 was whether the Tribunal was right in law in not excluding 'borrowed capital' from the computation of capital for purposes of section 80J. The court referred to the decision in Traco Cable Co. Ltd. v. CIT [1982] 138 ITR 385 (Ker), which held that amounts borrowed must be deducted for determining the capital employed for the purpose of section 80J. Consequently, the court answered the question in the negative, in favor of the Revenue and against the assessee, holding that the borrowed capital must be deducted from the computation of capital for the purpose of section 80J.

Issue 2: Limitation of disallowance of managing director's remuneration u/s 40A(5)(c)(i) for the assessment year 1973-74

The second question pertained to whether the Tribunal was right in law in limiting the disallowance to Rs. 8,000 as against Rs. 20,000 disallowed by the Income-tax Officer (ITO). The managing director of the assessee was paid Rs. 80,000 as remuneration, including salary, house rent allowance, and payments for electricity, gas, etc. The ITO invoked the provisions of section 40A(5)(c)(i) and disallowed payment of salary in excess of Rs. 5,000 per month, arriving at a disallowance of Rs. 20,000. The Tribunal, however, restricted the disallowance to Rs. 8,000 based on a misinterpretation of Explanation 2 to section 40A(5).

The court clarified that the definition of 'salary' u/s 40A(5) includes certain modifications to section 17, excluding 'perquisites' from sub-clause (iv) and the whole of sub-clause (vii). The court held that the entire amount received by the managing director falls under section 40A(5)(a)(i), and the maximum deduction claimable is Rs. 60,000. Therefore, the disallowance of Rs. 20,000 by the ITO was correct, and the Tribunal's view was erroneous. The court answered the question in the negative, in favor of the Revenue and against the assessee.

Conclusion:

The references were answered in favor of the Revenue and against the assessee for both issues. There was no order as to costs due to the complexity of the statutory provisions. A copy of the judgment will be forwarded to the Tribunal as required by law.

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