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TMI Blog1982 (8) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... in holding that the assessee was entitled to relief u/s. 84 at 6% of the capital employed (Rs. 5,51,365) though the Systronix division worked only for nine months in the accounting year ? The assessee is a private limited company and the assessment year involved in this reference is assessment year 1967-68, the year of account being financial year 1966-67 ending on March 31, 1967. It would be convenient to first deal with questions Nos. 1 and 2, which arise out of the assessee-company's claim for deduction in respect of the remuneration paid to Mr. Gautam Sarabhai, chairman of the board of directors of the assessee-company. The facts in so far as they are relevant to the first two questions may be briefly stated as under. Late Dr. Vikram Sarabhai, who was the chairman of the board of directors of the assessee-company, resigned as chairman with effect from June 30, 1966. Dr. Vikram Sarabhai was not paid any remuneration for the services which he rendered to the assessee-company. He was paid entertainment allowance of Rs. 400 per month. After his resignation, he was not paid even this entertainment allowance. Mr. Gautam Sarabhai was appointed as chairman of the board of directo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assesseecompany by filing a revised return of income. In the original return of income, the assessee-company had not claimed deduction even of Rs. 14,750, the provision made for remuneration to be paid to the directors as stated above. The ITO while framing the assessment for the assessment year 1967-68, disallowed the assessee-company's claim for deduction of Rs. 1,75,000. In his view, deduction of Rs. 14,750, the provision made as aforesaid, also could not be allowed as there was no resolution sanctioning the payment of such remuneration during the relevant year of account. So far as the balance of remuneration of Rs. 1,60,750 was concerned, the ITO took the view that the claim for deduction of expenditure is allowable only when it is actually taken into the account books and since the above expenditure of Rs. 1,60,750 was considered for deduction in the accounts for the assessment year 1968-69, no question of admissibility of the expenditure as deduction arises in the assessment year under reference, that is, the assessment year 1967-68. In the result, the ITO disallowed the above claim for deduction made by the assessee-company. The AAC, before whom the assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for the first time after the holding of such office or place of profit. The facts on record show that no resolution sanctioning the remuneration to Mr. Gautam Sarabhai was passed at the annual general meeting held on September 29, 1967, which it may be assumed for the sake of argument, was the first general meeting of the company after Mr. Gautam Sarabhai held the office or place of profit. Consequently, Mr. Gautam Sarabhai should be deemed to have vacated his office under sub-s. (2) of s. 314 and the remuneration, even if paid to him, was liable to be refunded. It was, therefore, urged that no liability to pay remuneration to Mr. Gautam Sarabhai had accrued at all. But even apart from that, it was urged, no remuneration had become payable to Mr. Gautam Sarabhai till the resolution was passed at the extraordinary general meeting of the assessee-company held on January 22, 1968. It was this resolution, which created the liability of the company and the right in favour of Mr. Gautam Sarabhai to claim the remuneration. Therefore, the liability to pay remuneration, even if it arose, arose for the first time on January 22, 1968, which fell outside the relevant year of account. In othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first time after the holding of such office or place of profit Provided further that where a relative of a director or a firm in which such relative is a partner, is appointed to an office or place of profit under the company or a subsidiary thereof without the knowledge of the director, the consent of the company may be obtained either in the general meeting aforesaid or within three months from the date of the appointment, whichever is later. Explanation.-For the purpose of this sub-section, a special resolution, according consent shall be necessary for every appointment in the first instance to an office or place of profit and to every subsequent appointment to such office or place of profit on a higher remuneration not covered by the special resolution, except where an appointment on a time scale has already been approved by the special resolution. " On a plain reading of sub-s. (1) of s. 314, it would appear that consent of the company accorded by a special resolution would not be necessary in the case of a managing director or manager, banker or trustee for the holders of debentures of the company. It was, however, urged on behalf of the Revenue that cl. (b) of sub-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contrary, the commentaries on s. 314 by the different authors indicate that the exception applies to both the categories specified in cls. (a) and (b) of sub-s. (1) of s. 314. We do not consider it necessary to reproduce what is observed by different authors on the above subject in their commentaries on the company law. Clarification made in the book entitled Clarifications and Circulars on the Company Law published by the Ministry of Law, justice and Company Affairs, Department of Company Affairs, Govt. of India, also support the view which we are inclined to take. In Chap. XXIII of the said book, at p. 205, while answering a query on s. 314, it is stated : " If a director of a company functions as manager and secretary and draws remuneration therefor, then, he in fact, is a managing director, and holds office of profit in the capacity of a secretary. Section 314 does not apply if the director holds office as managing director, and ss. 198 to 269 and 309, etc., will be attracted. " It is clear from the language of s. 314 that the exception governs both the cls. (a) and (b) of s. 314(1). In other words, a managing director or manager, banker or trustee for the holders of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act as urged on behalf of the Revenue. In other words, Mr. Gautam Sarabhai did not hold the office or place of profit for which consent of the assessee-company by a special resolution as laid down in s. 314 was necessary. There is, therefore, no contravention of the provisions of s. 314 as urged on behalf of the Revenue. It is not in dispute that Mr. Gautam Sarabhai did render services to the assessee-company from April 1, 1966, to March 31, 1967, in managing its business and affairs. In other words, Mr. Gautam Sarabhai rendered his services to the assessee-company in the year of account relevant to the assessment year 1967-68. Mr. Gautam Sarabhai had not agreed to render his services gratuitously or in other words without any remuneration. The assessee-company was, therefore, liable to pay remuneration to Mr. Gautam Sarabhai. The liability of the assessee-company to pay remuneration arose no sooner the services were rendered by Mr. Gautam Sarabhai to it. Such remuneration did not depend upon the passing of resolution by the assessee-company. Irrespective of the resolution passed by the assessee-company, Mr. Gautam Sarabhai could have sued the assessee-company for remuneration. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d only for nine months during the year, the ITO allowed rebate only to the extent of Rs. 24,811 as against the claim of Rs. 33,081 made by the assessee-company. In the appeal preferred by the assessee-company, the AAC accepted the plea of the assessee-company and granted it relief as claimed by it. Feeling aggrieved by the order passed by the AAC, the Revenue went in appeal before the Tribunal. The Tribunal, however, following its earlier decision, confirmed the view taken by the AAC. Revenue has challenged the view taken by the Tribunal and at its instance question No. 3 set out above has been referred to us for our opinion. For the purpose of resolving the controversy raised before us, it is necessary to read only sub-s. (1) of s. 84 of the Act. It may be mentioned here that s. 84 under which the assessee-company claimed relief is no longer on the statute book as it stands deleted. Sub-section (1) of s. 84 as it then stood read as under : " 84. Income of newly established industrial undertakings or hotels.(1) Save as otherwise hereinafter provided, income-tax shall not be payable by an assessee on so much of the profits and gains derived from any industrial undertaking or b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annum " to be surplusage, we cannot accept the view which is canvassed on behalf of the assessee. However, the question is no longer res integra as we find that s. 84(1) has been construed by the High Courts of Madras and Madhya Pradesh. In CIT v. Simpson Co. [1980] 122 ITR 283, the Madras High Court was called upon to construe the words " 6 per cent. per annum " used in s. 84 of the Act. A Division Bench of the Madras High Court observed that as matter of practice of the administration of the above provision, six per cent. per annum has all along been applied on the computation of the capital as made under r. 19. Section 84 had its predecessor in s. 15C of the Indian I.T. Act, 1922, introduced in the year 1949. Section 15C contained more or less identical words. The rule framed earlier under s. 15C was almost on the same lines as the present r. 19. After referring to this old practice of administration of the above provision, the Division Bench stated principles on which fiscal statute had to be construed and then proceeded to construe words " 6 per cent. per annum " used in s. 84. The Division Bench observed that the above expression was not surplusage. According to it, the wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e operation. The reason which weighed with the Division Bench of the Madhya Pradesh High Court was (p. 624): " Section 80J of the Act nowhere further provides for reduction of the amount of deduction on time basis, with reference to the working of the industrial undertaking. " It may be mentioned here that the relevant provision of s. 80J was similar to the provision of s. 84. We are told that the Bombay High Court has taken the same view which is taken by the Madras High Court while rejecting application made on behalf of the Revenue under s. 256(2) of the Act. It appears that the Tribunal allowed full relief at 6 per cent. of the capital employed as claimed by the assessee and refused to make reference to the Bombay High Court under s. 256(1) of the Act. Thereupon the Revenue approached the Bombay High Court under s. 256(2) of the Act to direct the Tribunal to refer the question for opinion to the Bombay High Court. The Bombay High Court, however, rejected the Revenue's application. We are told that all such applications made by the Revenue have so far been rejected by the Bombay High Court. It was, therefore, urged that the Bombay High Court has also taken the same view whic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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