Judgment :- N.V. BALASUBRAMANIAN, J. The following two questions of law, at the instance of the Revenue, have been referred for our consideration for the assessment year 1976-77, "1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that even in the case of two director-employees concerned the provisions of section 40A(5)(a), clauses (i) and (ii), will have to be considered for determining the nature of expenditure and the quantum of remuneration for the purpose of applying the limit of Rs. 72, 000 contained in section 40(c) and the first proviso to section 40A(5) ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that for he purpose of determining the quantum of remuneration on which the limit is to be applied whether under section 40A(5) or under section 40(c) the remuneration or tax payable to the employee under section 10(6)(vii) or under section 10(6)(viia) should altogether be excluded or ignored by virtue of sub-clause (b) to the second proviso to section 40A(5) and only on the balance the limit should be applied ?" The short facts leading to the reference are as under : The assessee is a company carrying on business of manufacturing dry cells and batteries. It entered into a collaboration agreement with one Matsushita Electric Industrial Company Limited, Japan, and the foreign company deputed certain technicians, viz., technical director and deputy managing director, and the terms of the agreement of deputation of the employees were also approved by the Government of India. The assessee during the previous year relevant to the assessment year 1976-77, incurred an expenditure by way of remuneration and perquisite of a sum of Rs. 90, 090 on the deputy managing director and a sum of Rs. 83, 700 on the technical director. The Income-tax Officer, in the assessment made, restricted the admissible expenditure for each of them at Rs. 72, 000 applying the provisions of section 40(c) of the Income-tax Act, 1961 (hereinafter to be referred to as "the Act"), and disallowed the excess amount in respect of both the directors. He also disallowed a sum of Rs, 68, 765 representing the tax liability incurred by the assessee on the remuneration paid by it to three of its employee-directors on the ground that it exceeded the permissible limit prescribed under section 40(c) of the Act. He also disallowed a sum of Rs, 68, 765 representing the tax liability incurred by the assessee on the remuneration paid by it to three of its employee-directors on the ground that it exceeded the permissible limit prescribed under section 40(c) of the Act. The Commissioner of Income-tax (Appeals) deleted the disallowance in the appeal preferred by the assessee and on appeal by the Department, the Appellate Tribunal came to the conclusion that in the case of directors who are also employees, the provisions of section 40A(5) of the Act operate for the purpose of determining the ceiling limit and to determine the quantum of the allowable remuneration of the directors by way of salary. The Tribunal also held that the remuneration received by the two directors which is exempt under section 10(6)(viia) of the Act cannot be taken into account for the purpose of applying the limit under section 40(c) of the Act. The Tribunal also held that to the extent the remuneration or tax paid to the technicians is exempt under section 10(6)(vii) of the Act, that remuneration should not be taken into account for the purpose of determining the quantum on which the ceiling should be applied either under section 40A(5) or under section 40(c) of the Act. It is this order of the Appellate Tribunal which is the subject-matter of this tax case referenceMr. It is this order of the Appellate Tribunal which is the subject-matter of this tax case referenceMr. C. V. Rajan, learned counsel for the Revenue, fairly brought to our notice an earlier decision of this court in CIT v. Lucas T.V.S. Ltd. 1997 Indlaw MAD 348, wherein a similar question of law, whether the entire amount of salary has to be taken into account or whether a portion of the salary which is exempt under section 10(6)(vii) of the Act can be excluded for the purpose of determining the ceiling under section 40A(5) of the Act, was considered and this court held that the reasonable construction of section 40A(5) of the Act would be that to the extent of the exemption granted by the Central Government, the exempted amount cannot be a subject-matter of the ceiling prescribed in section 40A(5) of the Act, We are of the opinion that the Tribunal has come to the correct conclusion in holding that to the extent to which exemption was granted by the Central Government, the provisions of section 40A(5) are not applicable and only, on the balance amount, the provisions of section 40A(5) will have to be applied. The same principle would also apply with reference to that portion of tax which is exempt and paid by the employer to three of its employees. Following the said decision, we hold that the Tribunal was correct in holding that even in the case of employee-directors, the provisions of section 40A(5)(a) of the Act are attracted and the limit of Rs. 72, 000 prescribed in section 40A(5) has to be applied even in the case of director-employees, but the ceiling provided under section 40A(5) is not applicable to the extent of remuneration that is exempt under section 10(6)(vii) or to the extent of the tax payable to the employees by the employer which is exempt under section 10(6)(vii) of the Act and to the extent to which it is exempt, the remuneration should be excluded altogether for the purpose of determining the ceiling under section 40A(5) of the Act. We, therefore, are of the opinion that the Tribunal was correct in accepting the case of the assesseeAccordingly, we answer both the questions of law referred to us in the affirmative and against the Revenue. The assessee is entitled to costs of Rs. 750.