1979 (3) TMI 142 - HC - Companies Law

Summary

Issues Involved:

1. Validity of "profession tax" levied on directors of companies under the Karnataka Tax on Professions, Trades, Callings and Employments Act, 1976.
2. Whether directors of companies are engaged in a profession, calling, trade, or employment.
3. Discrimination in tax exemption for directors nominated by the Government.
4. Liability of directors not residing in the State to pay the profession tax.

Issue-wise Detailed Analysis:

1. Validity of "Profession Tax" Levied on Directors:

The petitioners, directors of companies registered under the Companies Act, 1956, challenged the validity of the "profession tax" levied on them under the Karnataka Tax on Professions, Trades, Callings and Employments Act, 1976 (the Act). Section 3 of the Act charges every person engaged in any profession, trade, calling, or employment in the State to pay taxes as specified in the Schedule. Entry 6 of the Schedule specifies that directors (other than those nominated by Government) of companies registered under the Companies Act, 1956, are liable to pay Rs. 250 per annum as profession tax.

2. Whether Directors of Companies are Engaged in a Profession, Calling, Trade, or Employment:

The primary contention was that directors are not exercising any profession, calling, or are engaged in any trade or hold any appointment in the State of Karnataka. The court examined the scope of the Act and the legislative entry under Entry 60 in the State List in the Seventh Schedule of the Constitution, which reads: "Taxes on professions, trades, callings, and employments." The court referred to dictionary meanings and legal interpretations of "profession," "calling," and "trade," concluding that these terms are wide in conception.

The court analyzed relevant provisions of the Companies Act, 1956, and established that directors are not employees of the company. Directors are not required to give continuous attention to the affairs of the company, and their duties are intermittent, performed at periodical board meetings. The court concluded that directors cannot be said to be engaged in any profession, calling, or business as it is the company that carries on business. The court also referred to the Income Tax Act, 1961, noting that fees paid to directors are taxed as income from other sources, not as profits or gains of business or profession, reinforcing that directors are not engaged in any profession or calling.

3. Discrimination in Tax Exemption for Directors Nominated by the Government:

The petitioners argued that Entry 6 discriminates unreasonably by exempting directors nominated by the Government from payment of tax. The court noted that directors, whether nominated by the Government or appointed by the company, fall into one class concerning their functions and powers. The court rejected the contention that Government-nominated directors, usually Government servants, are only interested in safeguarding Government investment. The court observed that Government nominees need not necessarily be Government servants and that their duty encompasses the overall performance of the company. The court found no reasonable basis for the exemption and deemed it discriminatory.

4. Liability of Directors Not Residing in the State:

An additional contention was raised that directors not ordinarily residing in the State should not be liable to pay the profession tax. The court did not find it necessary to decide this question, given the conclusions reached on the other issues.

Conclusion:

The court held that Entry 6 in the Schedule under section 3 of the Act is beyond the legislative competence and the scope of section 3, and therefore, void. The rule was made absolute, and the petitioners were not liable to pay the profession tax as directors of companies.