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TMI Blog1984 (7) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... and superannuation fund are allowable as deductions ? " These references have arisen under the following circumstances:- Karamchand Premchand Private Limited, Ahmedabad, is the assessee-company and the relevant year for these references is the assessment year 1968-69, previous year being the financial year which ended on March 31, 1968. Mr. Gautam Sarabhai, Mrs. Geera Sarabhai and Mr. Vikram Sarabhai were the directors in the management of the assessee-company. The assessee-company decided to pay an amount of Rs. 5,14,157 by way of remuneration to the said three directors for the year of account ended on March 31, 1967, and an amount of Rs. 6,30,450 for the year of account ended on March 31, 1968. For that purpose, the assessee-company passed two resolutions, one on September 29, 1967, and another on January 22, 1968. Both these amounts were claimed by the assessee-company as deduction in the assessment year in question. The ITO held that the amount of Rs. 5,14,157 could not be allowed as deduction as the liability to pay the said amount did not arise in the year 1967-68. He also came to the conclusion that the said amount was not allowable also in the assessment year 1968-69 u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid to the directors for the accounting year ending March 31, 1967 ? " The learned advocate, Shri B.R. Shah, who appeared for the Revenue, referred to certain facts which are necessary for the purpose of deciding these references. It is an admitted position that the three directors were rendering services to the assessee-company from 1943 onwards, and it is also not in dispute that they were rendering extra services. Article 120 of the articles of association prescribes that any director who performs extra services shall be paid remuneration to be fixed by the company in general meeting. The said article 120 reads as under: " Remuneration for extra services: If a director being willing, shall be called upon to perform extra services or to make any special exertions in going or residing abroad or otherwise for any of the purposes of the company, the company shall remunerate such director, in such manner, as may be determined by the directors and such remuneration may be in addition to the fee payable to him under the preceding clause, provided, however, that if any director shall be required to render services in connection with the conduct, management or supervision of the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was also provided that the appointment may be terminated by the company on giving six months' notice and that the directors shall be similarly entitled to resign or retire on giving six months' notice to the company. Now, on the above facts, we have to decide as to whether the two amounts fixed to be paid as remuneration to the three directors were allowable as deduction in the assessment year 1968-69. The ITO discussed the relevant rulings to which we will refer shortly and on a reference to those rulings, he came to the conclusion that there was no relationship of master and servant between the assessee-company and the three directors. This was confirmed by the AAC and the learned advocate, Shri Shah, for the Revenue, also referred to some rulings and his submission to begin with was that as required by s. 314 of the Companies Act, 1956, no special resolution was passed and the resolution which was on record was adopted in an ordinary meeting and it was an ordinary resolution and not a special resolution as contemplated by s. 314 of the Indian Companies Act and his second contention was that the resolution was not passed in the relevant assessment year. Now the first question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be could be paid remuneration for that particular extra work but that would not make him a salaried person and an employee of the company. According to him, something more was necessary. His submission was that unless the work is of a continuing nature and there was supervisory control only, periodical work done by a particular individual cannot make him a salaried employee of the assessee-company. On that point, be submitted that no contract was produced and in fact it is not the case of the assessee-company that any contract was ever entered into. It was further submitted that the resolutions do not throw any light and though the resolutions fix the remuneration, no duties are prescribed. According to him, at best what could be said in regard to those directors was that they were the agents of the company and in no case they could be considered salaried employees. It may be stated here that if one looks at the submissions made, it would immediately appear that the learned advocate, Shri Shah, for the Revenue, was submitting something in regard to burden of proof and nothing more. So far as the assessee-company is concerned, it is more than clear that these three directors were d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Excess Profits Tax Regulation, Hyderabad. There the appellants were registered as a private limited company with the objects, inter alia, of acting as agents for Governments or authorities or for any joint stock companies and carrying on all kinds of agency business. They were appointed under an agency agreement as the agents of a company for period of 30 years. The appellants were entitled to assign the agreement and their rights thereunder in certain circumstances and also to sub-delegate all or any of the powers, authorities and discretions for the time being vested in them. They were entitled to a remuneration by way of commission of a certain percentage on the amount of sale proceeds of the produce of the company. The question was whether the appellants were acting as employees of the company and whether their remuneration was liable to excess profits tax. In that case, it was held that the appellants were the agents and not merely the servants of the company remunerated by wages or salary. It was observed as under (at p. 450): " It is the nature and scope of these activities and not the extent of the operations which are relevant for this purpose. " It was a clear case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ided that two of the members, for the time being of the appellants, were at the option of the appellants to be the ex-officio directors of the company and clause 9 empowered the appellants to assign the agreement and the rights of the appellants thereunder subject to the approval and sanction of the board to any person, firm or company having authority by its constitution to become bound by the obligations undertaken by the appellants. On the aforesaid materials, the court came to the conclusion that it was an agency agreement and there was no relationship of master and servant. The Supreme Court in that case referred to Powell's Law of Agency and extracted a passage from that which reads as under (at p. 456): The distinction between a servant and an agent is thus indicated (a) Generally a master can tell his servant what to do and how to do it. (b) Generally a principal cannot tell his agent how to carry out his instructions. (c) A servant is under more complete control than an agent. Again at page 20 in Powell's Law of Agency, what is stated is as under " (a) Generally, a servant is a person who not only receives instructions from his master but is subject to his ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the cash section of the bank. He had power to suspend, transfer or dismiss any member of the staff and to appoint another person in his place. He was responsible for the protection of the property of the bank and for the receipt of any bad money or base money, coin or bullion or any forged or fraudulently altered currency notes. Now this in terms clearly shows that it was a contract of agency, because the treasurer, though he was assigned duties, was free to perform his duties in the manner he chose, though in the interest of the Allahabad Bank. It was held that the treasurer in that case was not a servant of the Allahabad Bank. The third case to which reference was made is the case of CIT. v. Lady Navajbai R.J. Tata [1947] 15 ITR 8 (Bom). The assessee was a permanent director in a limited company. The articles of association of the company did not appoint her either as manager or managing director and she had no contract with the company outside the articles. She did not attend office every day like the other directors of the company, but she attended the board meeting. She was also consulted in all important matters by the directors. Under the articles of association of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 48,000 as his remuneration in the year of account." It was held as under (headnote): " The remuneration of Rs. 48,000 received by the assessee was for managing the company's business and arose from his contractual relation with the company provided by the articles for performing the services of managing the company's business and that, therefore, his remuneration fell to be taxed under section 7 and not under section 12 of the Income-tax Act." This case also would not help the Revenue. On the contrary, this case would help the assessee-company. The last case which was cited by Shri B. R. Shah is the case of Stya Paul v. CIT [1979] 116 ITR 335 (Cal). In that case, the assessee was the managing director of Surrendra (Overseas) Pvt. Ltd. for life and Aminchand Pyarelal (Calcutta) Ltd. for 20 years. The question arose whether his remuneration from the two companies would be taxed under the head " Salary ". The control of Aminchand Pyarelal was vested in the directors under art. 133. It was held as under (headnote) : " The assessee's powers under art. 62 of Surrendra (Overseas) Pvt. Ltd. were of pivotal importance. He could from time to time and at any time appoint any person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee was found to be acting otherwise than in the interests of the company or was found to be not diligent in his duties. In addition to his monthly remuneration and a fixed monthly car allowance, the assessee was entitled to receive a commission of 10 per cent. of the gross profits of the company. The question was whether sum of Rs. 53,913 which he received by way of a commission was taxable under s. 7 of the Indian I.T. Act, 1922. It was held that a sum of Rs. 53,913 was payable to the assessee as salary and was chargeable under s. 7. It was held that under the articles and the agreement, the assessee was not an agent of the company but a servant. It was observed as under (headnote) : " A managing director may have a dual capacity. He may both be director as well as an employee. In the capacity of a managing director he may be regarded as having not only the capacity as persona of a director but also has the persona of an employee, or an agent depending upon the nature of his work and the terms of his employment. Where he is so employed, the relationship between him as the managing director and the company may be similar to a person who is employed as a servant or an agent, for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the management of the company was vested in the board of directors, the managing director or managing directors appointed by the board was/were to hold office for such period as the board of directors may fix, that by an extraordinary resolution whereupon he had to automatically cease to be a managing director and that in the discharge of their duties and functions the managing directors were subject to the supervision, control and directions of the board of directors who had power to impose restrictions and conditions subject to which alone the management of the affairs of the company was to be carried on by the managing directors. There was also a further provision that the managing directors shall receive such remuneration (whether by way of salary, commission or participating in profits or partly in one way and partly in another) as the company in general meeting might from time to time determine. The two managing directors were, therefore, ' employees ' and the assessee-company was entitled to claim deduction in respect of the remuneration paid to them, subject only to the provisions of s. 40A(5) The principle emerging from the cases which have been dealt with is that ult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held as under (headnote) : " It was only in 1949 that the claim to profit bonus was settled by an award of the Industrial Tribunal and the only year to which the liability under the award could be properly attributed was 1949 and that, there fore, the sum of Rs. 1,08,325-9-3 had to be deducted in the calendar year 1949 relevant to the assessment year 1950-51. An employer who follows the mercantile system of accounting incurs a liability towards profit bonus only when the claim, if made, is settled amicably or by industrial adjudication. The system of reopening of accounts does not fit in with the scheme of the Income-tax Act. As far as receipts are concerned, there can be no re opening of accounts, and the position is the same in respect of expenses. " We are in agreement with this view. The tax is, on the accrual of the income and if the income, though related to services rendered in an earlier year did not accrue in that year, there would be no scope for recording that income as of the earlier year. There is no question of re opening the accounts merely because the income arose out of an earlier transaction if the income did actually accrue only later. In the case befo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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