Directors' remuneration and weighted deduction claims allowed, while enhanced depreciation rate applied only prospectively.

Directors' remuneration was held to fall under the specific disallowance provision for directors rather than the general employee-remuneration rule, and the disallowance was to be recomputed accordingly; commission paid to directors was also excluded from remuneration for that purpose. Weighted deduction was allowed on commission paid for procuring orders and related expenditure. By contrast, the enhanced depreciation rate applied prospectively only, because the prescribed rate affects substantive rights and liabilities and does not operate on pending assessments before the amendment took effect. The assessee obtained partial relief overall.

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Issues: (i) Whether remuneration paid to directors fell for disallowance under section 40(c) of the Income-tax Act, 1961 and not under section 40A(5) of the Income-tax Act, 1961; (ii) whether commission paid to directors formed part of remuneration for the purposes of section 40(c) of the Income-tax Act, 1961 and section 40A(5) of the Income-tax Act, 1961; (iii) whether the enhanced rate of depreciation on plant and machinery introduced by the amended rules applied to pending assessments for assessment year 1980-81; and (iv) whether weighted deduction under section 35B of the Income-tax Act, 1961 was allowable on commission paid for procuring orders and related expenditure.

Issue (i): Whether remuneration paid to directors fell for disallowance under section 40(c) of the Income-tax Act, 1961 and not under section 40A(5) of the Income-tax Act, 1961.

Analysis: The dispute turned on the proper field of operation of the two provisions. The Tribunal followed the Special Bench view that remuneration paid to directors was governed by the specific provision dealing with directors' remuneration rather than the general provision for employee remuneration.

Conclusion: The issue was decided in favour of the assessee; section 40(c) applied and the disallowance had to be recomputed accordingly.

Issue (ii): Whether commission paid to directors formed part of remuneration for the purposes of section 40(c) of the Income-tax Act, 1961 and section 40A(5) of the Income-tax Act, 1961.

Analysis: The Tribunal treated the question as already covered by an earlier Chandigarh Bench decision and held that commission paid to directors did not have to be included in remuneration for the relevant disallowance provisions.

Conclusion: The issue was decided in favour of the assessee; the commission paid to directors was directed to be excluded from remuneration.

Issue (iii): Whether the enhanced rate of depreciation on plant and machinery introduced by the amended rules applied to pending assessments for assessment year 1980-81.

Analysis: The Tribunal held that the rate of depreciation was not merely procedural. It reasoned that the prescribed rate determines the vested rights of both sides, that the earlier rate continued until the amendment took effect, and that the new rate operated only from its commencement date.

Conclusion: The issue was decided against the assessee; the enhanced depreciation rate applied prospectively and not to the pending assessment year.

Issue (iv): Whether weighted deduction under section 35B of the Income-tax Act, 1961 was allowable on commission paid for procuring orders and related expenditure.

Analysis: The Tribunal followed the Special Bench view that the claim for weighted deduction on such expenditure was allowable.

Conclusion: The issue was decided in favour of the assessee; weighted deduction under section 35B was directed to be allowed on the commission paid for procuring orders.

Final Conclusion: The appeal succeeded on the principal disallowance and deduction issues except for depreciation, where the assessee failed; the overall relief granted was therefore partial.

Ratio Decidendi: Where a later amendment changes a prescribed tax rate, the change is prospective if the rate confers substantive rights and liabilities, and a specific provision governing directors' remuneration prevails over a general employee-remuneration disallowance provision.

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