1984 (2) TMI 264 - HC - Companies Law

Articles of association - Regulations required in case of unlimited company, company limited by guarantee or private company limited by shares

Summary

Issues:
Interpretation of Companies Act provisions regarding payment of directors' remuneration, Validity of retrospective resolution authorizing directors' remuneration, Jurisdiction of Commissioner under section 263 of the Income Tax Act, 1961, Tribunal's authority to confirm Commissioner's order disallowing directors' remuneration.

Interpretation of Companies Act provisions regarding payment of directors' remuneration:
The case involved a dispute over the payment of directors' remuneration amounting to Rs. 38,188 to the directors of a company for a specific period. The Commissioner of Income-tax, under section 263, disallowed this remuneration as the company's articles of association did not explicitly provide for such payments. However, the Tribunal argued that as per section 28 of the Companies Act, Table A in Sch. I, which includes provisions for directors' remuneration, should be applicable to the company since the articles did not exclude it. The Tribunal held that the remuneration could be justified under these provisions, especially considering a retrospective resolution rectifying the payment.

Validity of retrospective resolution authorizing directors' remuneration:
The company passed a resolution retrospectively justifying the payment made to the directors as remuneration. The Tribunal considered this resolution as a valid authorization for the payment, despite the absence of a specific clause in the articles of association regarding directors' remuneration. This retrospective resolution played a crucial role in justifying the payment and was a key argument in favor of allowing the directors' remuneration.

Jurisdiction of Commissioner under section 263 of the Income Tax Act, 1961:
The Commissioner, exercising jurisdiction under section 263, set aside the assessment order allowing directors' remuneration, stating that the company lacked the authority to make such payments without a specific clause in the articles of association. The Commissioner's order directed the ITO to reassess the company's income tax liability in accordance with the law. This action by the Commissioner triggered an appeal by the assessee, leading to a detailed examination by the Tribunal.

Tribunal's authority to confirm Commissioner's order disallowing directors' remuneration:
The Tribunal, in its order, upheld the Commissioner's decision to disallow the directors' remuneration. Despite sending the matter back to the ITO for reassessment, the Tribunal maintained that the Commissioner's exercise of jurisdiction under section 263 was justified. The Tribunal emphasized that the company's retrospective resolution did not rectify the lack of authorization for directors' remuneration as per the articles of association. Ultimately, the Tribunal confirmed the disallowance of the directors' remuneration.

In conclusion, the High Court of Madhya Pradesh, in response to the reference made by the Tribunal, held that the Tribunal was not justified in confirming the Commissioner's order directing the disallowance of directors' remuneration. The Court emphasized the applicability of Table A in Sch. I of the Companies Act, the validity of the retrospective resolution, and the limitations of the Commissioner's jurisdiction under section 263. The Court's decision favored the assessee, highlighting the interpretation of relevant legal provisions and the necessity of explicit authorization for directors' remuneration in the company's articles of association.