1952 (8) TMI 28 - HC - Income Tax

Summary

Issues:
Interpretation of director's remuneration under Excess Profits Tax Act and Income Tax Act.

Analysis:
The case involved a reference under Section 21, Excess Profits Tax Act read with Section 66(1), Income Tax Act, regarding the remuneration granted to a Governing Director of a private limited company. The key question was whether the remuneration paid to the director should be considered as director's remuneration for the purpose of calculating Excess Profits Tax. The company argued that the remuneration was paid to the director, while the Department contended that the entire amount was paid to him as a director, falling under Schedule 1, Rule 7 (2), Excess Profits Tax Act.

The definition of 'Director' under Section 2(10), Excess Profits Tax Act was crucial in determining the eligibility for director's remuneration. It was highlighted that a person must be a beneficial owner of not less than 20% of the ordinary share capital of the company to be considered a director. In this case, the director in question owned only 10% shares, leading to the argument that he was performing dual roles of a director and a manager.

The court delved into the distinction between the roles of a director and a manager, emphasizing that the remuneration paid to a director cannot be deducted as director's remuneration if the individual is performing managerial functions. Reference was made to the Indian Companies Act's definition of a manager, highlighting that the remuneration paid to a person in a managerial capacity must be under a contract of service to be considered manager's remuneration.

Drawing parallels from relevant case law, the court analyzed the nature of the director's duties and the distinction between a working director and a mere attending director. It was established that in this case, the director in question did not hold separate offices of a director and a manager. The court concluded that the remuneration granted to the director was indeed director's remuneration under Schedule 1, Rule 7 (1), Excess Profits Tax Act, in conjunction with Clause 2(a) of the same rule.

Ultimately, the court ruled in favor of considering the remuneration as director's remuneration, thereby upholding the decision of the Appellate Tribunal. The assessee was directed to pay the costs of the other party assessed at Rs. 500.