1968-VIL-220-ALH-DT

Equivalent Citation: [1969] 72 ITR 512

ALLAHABAD HIGH COURT

Date: 10.12.1968

LAKSHMIPAT SINGHANIA

Vs

COMMISSIONER OF INCOME-TAX, UTTAR PRADESH.

BENCH

Judge(s)  : V. G. OAK., T. P. MUKHERJEE.

JUDGMENT

The judgment of the court was delivered by

T. P. MUKERJEE J. - The question raised in this reference relates to the situs of accrual of income being remuneration paid to a director of a company limited by shares.

The assessee was one of the six directors of M/s. Straw Products Ltd. (hereafter referred to as the company). The company was registered in Bhopal where the manufacturing operations were carried on. At all material times, Bhopal was an Indian State to which the Indian Income-tax Act, 1922, as it then stood (hereafter referred to as the Act), did not apply.

The directors were entitled to receive sitting fees for attending meetings of the board under article 105A and further remuneration from the company under article 105B of the articles of association, the terms of which were as follows:

" In the event of the company making profits, the directors shall be entitled to appropriate out of such profits, either a sum which is sufficient to allow a further remuneration of Rs. 5,000 to each director or a sum equal to 5 per cent. of the net profits as defined under section 105 of the Bhopal State Companies Act, 1945, whichever is higher, and, in the latter case, the directors may distribute among themselves the sum as appropriated in such proportion as they may mutually agree upon, or, in the absence of any agreement, equally. In either case, the sum appropriated shall be considered to be a part of the working expenses of the company."

The dispute in this case relates to the place of accrual of the further remuneration earned by the assessee as a director in terms of article 105B. It may be noted that article 105B is silent about the place where such remuneration is payable but there is no dispute that the remuneration was credited to the accounts of the directors in the books of the company maintained at Bhopal and it was not received at or brought into British India during any of the relevant years of account.

In the assessments for the accounting years 1942-43 to 1948-49 the assessee claimed that the director's remuneration received by the assessee during the relevant periods had accrued in Bhopal which was an Indian State, and, therefore, it was exempt under section 14(2)(c) of the Act. The Income-tax Officer, however, did not accept the claim. He noted that in the relevant years the affairs of the company were managed and controlled by the directors entirely from Cawnpore, and he held that, as the assessee was a resident in British India, the remuneration paid to him for his services were assessable to Indian Income-tax.

The Appellate Assistant Commissioner also found that the assessee performed the duties attaching to his office almost entirely from Cawnpore. He observed as follows in his appellate order for the accounting year 1942-43:

" During the year the appellant himself never went to Bhopal to attend a meeting of that company. From the copies of the resolution filed by the Straw Products Ltd., Bhopal, in connection with its own assessment, it is evident that almost all the resolutions of this company were being passed by the directors by circulating drafts among the different directors... Even the resolution with regard to the interim dividend was adopted in like manner. It has thus to be further held that the services rendered were not rendered outside British India but from the place of residence of the appellant which was in British India."

In the appellate order for 1944-45, the Appellate Assistant Commissioner recorded the number of the meetings held by the board of directors and the manner in which they were held. He stated:

" Even in the account years 1943, 1944, 1945 and 1946 the meetings of the board of directors of Straw Products Ltd., Bhopal, were held by circulation, 2 meetings in the year 1943, 2 in 1944, 1 in 1945 and 2 in 1946, besides one regular meeting held in 1944, at Cawnpore. There are thus materials for holding that even in these years the office was exercised from Cawnpore and that income accrued and arose in British India."

These findings formed the basis of the orders of the Appellate Assistant Commissioner for the other years, and he concurred in the view taken by the Income-tax Officer that the further remuneration earned by the assessee in all the relevant years was assessable to Indian Income-tax.

Being unsuccessful before the Appellate Assistant Commissioner, the assessee appealed before the Appellate Tribunal. The Tribunal noted that the six directors seldom visited the company's registered office at Bhopal and the directors' meetings were rarely held in Bhopal. It was contended before the Tribunal that, as the further remuneration payable to the directors in terms of article 105B comprised of a share of the profits of the company and inasmuch as such profits arose in Bhopal, the director's remuneration also arose in Bhopal. The Tribunal negatived this contention. The Tribunal's view was that article 105B of the articles of association merely laid down that the remuneration of the director would depend upon the net profits of the company, and it did not indicate where such remuneration accrued or arose. In the end the Tribunal concluded as follows:

" In the present case we find that there is ample material to infer that the control and management of the company was in the hands of the directors who resided in British India and virtually the control and management of the company was done from British India. The assessee's remuneration cannot therefore be said to have accrued or arisen in the State of Bhopal as the services mainly of supervision and control were exercised in British India. In view of this fact we are of opinion that the remunerations were properly brought to tax by the Income-tax Officer."

Taking the view as aforesaid the Tribunal dismissed all the appeals filed by the assessee.

The Tribunal has at the instance of the assesgee, referred the following question to this court for opinion:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee's remuneration as director of Straw Products Ltd., a company registered in Bhopal, did not accrue or arise to him within the State of Bhopal, then an Indian State, and that the provisions of section 14(2)(c) of the Income-tax Act, 1922, were, therefore, not attracted ?"

Under the Act as it then stood the charge under section 4(1)(b) in respect of a resident extended not only to his income accruing or arising within British India, but also to income which accrued or arose without British India in any year. Section 14(2)(c) of the Act, however, allowed an exemption only in respect of income accruing or arising to an assessee in the then Indian States provided that such income was not received or brought into British India. Section 14(2)(c) of the Act provided as follows:

" The tax shall not be payable by an assessee-

in respect of any income, profits or gains accruing or arising to him within an Indian State, unless such income, profits or gains are received or deemed to be received in or are brought into British India in the previous year by or on behalf of the assessee, or are assessable under section 12B or section 42."

Section 14(2)(c) of the Act thus provided an exception to the general liability of an assessee, resident in British India, to pay tax in respect of foreign income arising under section 4(1)(b). In the present case, the assessee was a resident of British India and he was assessed in the status of a resident. There is no dispute as to his status. The only dispute centres round the question as to whether the directors' remuneration accrued or arose to him within Bhopal which was then an Indian State.

In affirming the assessment of the directors remuneration the Tribunal proceeded solely on the basis that the directors, including the assessee, had rendered services to the company almost entirely from Cawnpore. Although the question of the place of accrual of the remuneration is a question of law, the finding of the Tribunal as regards the place from where such services were performed is a question of fact not questionable in this court.

Mr. C. S. P. Singh, appearing for the assessee, contended that the directors are not servants of the company and they are not paid remuneration for the services they render. He argued, therefore, that it would not be correct to hold that the situs of accrual of the remuneration is the place from where the assessee as a director performed the functions and duties assigned to him. He contended that remuneration paid to the directors is to be regarded as gratuity not for services rendered by them. In this connection he relied upon the judgment of Sir Leonard Stone C.J. of the Bombay High Court in the case of Commissioner of Income-tax v. Lady Navajbai R. T. Tata . The decision, however, does not support the proposition contended for by Mr. Singh, as we shall see presently. But before we advert to that decision we would like to refer to the relevant provisions of the Indian Companies Act, 1913, as it prevailed at the material time, relating to directors, their position, powers, duties, etc. These provisions are contained in section 83A, sections 86A to 86L, sections 91A to 91D, sections 100, 130, 131, 132, 235, 237, 238A and regulations 71 to 75 of Table A of the Indian Companies Act, 1913 (as amended in 1936). We would also examine the nature of the remuneration payable to them and see whether there is any nexus between such remuneration and the duties they have to perform.

The word " company " imports an association of a number of individuals formed for a common purpose. When such an association is incorporated it becomes a body corporate and a legal entity separate and distinct from such individuals. The Indian Companies Act recognizes several types of companies. In this case, we are concerned with a public company limited by shares. A company being an artificial juridical person cannot act by itself; it acts through its directors. The Companies Act provides that a public company shall have at least three directors and a private company shall have a minimum number of two directors. The first directors are named in the articles of association. Otherwise, they are appointed by the members in a general meeting. The members may remove any director from office by an ordinary resolution of which special notice has been given. The executive authority of the company is vested ordinarily in its board of directors. In short, the directors are responsible for proper management of the company. It is their duty to lay before the company in general meeting every year a balance-sheet and profit and loss account, etc. The directors are also required to make a report annually to the shareholders with respect to the company's affairs and other relevant matters and they have to advise the shareholders about the distribution of profits to be made by the company. In meetings of the board of directors, duly convened, they may exercise the powers of making of calls in respect of unpaid money on shares, borrowing money by issue of debentures, or otherwise, or investing funds of the company. The board is also vested with powers of appointing a managing director if none has been named in the memorandum or articles of association and it may also, with the consent of the company in a general meeting, appoint sole-selling agents. Besides these, there are other powers and duties enjoined upon directors by the statute. Even when there is a managing director or a manager or managing agents, as in the present case, to manage the affairs of the company, the board of directors has to exercise general supervision and control over such managerial personnel and they continue to remain responsible for the discharge of the statutory functions.

Mr. Singh is not, therefore, correct when he contends that as the affairs of the assessee-company were managed by managing agents, the six directors had nothing to do and they were paid the remuneration prescribed in the article 105B of the articles of association for rendering no service whatever. Further, his argument that there is no nexus between the services rendered by the directors and the remuneration paid to them is equally incorrect. In this connection the material portion of section 132(3) of the Indian Companies Act, 1913, as amended in 1936, may be quoted, " The profit and loss account shall include particulars showing the total of the amount paid whether as fees, percentages or otherwise to the managing agent, if any, and the directors respectively as remuneration for their services ......."

Section 132(3) clearly contemplates that remuneration is paid to directors for services rendered by them. The same is the position under the English company law. In this context, we may quote from Halsbury's Laws of England (third edition by Lord Simonds), volume 6, page 289 :

" Right to remuneration.- Directors are not, in the absence of a clause in the memorandum or articles of association providing for their being paid for their services, entitled to be paid any remuneration ; ...... as the remuneration of a director is a payment for services rendered, the fact that a director holds his qualification shares as a trustee does not make him accountable for his remuneration to his cestui que trust. " (underlined by us)

Both under the Indian as well as the English company law, directors cannot claim remuneration as of right, but when they are paid remuneration, it is relatable to the services they render.

We may now return to the decision relied upon by Mr. Singh in Lady Navajbai Tata's case referred to above. In that case, Lady Navajbai Tata was a director of Messrs. Tata Sons Limited and the question was whether the sum of Rs. 40,000 received by her as her remuneration in the relevant account year was salary chargeable under section 7 of the Income-tax Act, 1922. Sir Leonard Stone C.J., who delivered the leading judgment, held that the amount paid to the lady was neither salary nor wages because she, as a director, was not an employee of the company. He observed that the payment was in the nature of a gratuity and, although a gratuity is taxable under section 7(1) of the Act, the amount in question could not be taxed under section 7(1) as the lady was not a servant of the company. Stone C.J , therefore, held that the sum of Rs. 40,000 was assessable under section 12 as income from other sources. Chagla J. (as he then was), who delivered a separate judgment, agreed in holding that the amount was taxable under section 12 as income from other sources. The decision in the case is no authority for the proposition adumbrated by Mr. Singh that a director is not paid remuneration for rendering services to the company concerned, and, consequently, the place where a director renders services to the company cannot be regarded as the place of accrual of the remuneration he receives.

As already adverted to above, the income-tax authorities as well as the Appellate Tribunal have held that the remuneration in question which was received by the assessee as a director of the company was assessable to Indian income-tax and the basis for their decision in point is that the assessee performed his duties qua director from Cawnpore which was in British India, notwithstanding the fact that the company itself was registered in Bhopal where the manufacturing operations were carried on. The decision of the Tribunal must be upheld in view of the law laid down by the Supreme Court in the case of Shoorji Vallabhdas & Co. v. Commissioner of Income-tax . That case relates to the place of accural of remuneration paid to managing agents of a company for their services. Mr. C.S.P. Singh, for the assessee, contended that cases relating to the place of accrual of managing agency commission cannot be regarded as authority for cases in which the question relates to the place of accrual of director's remuneration. We fail to see, however, any substance in this contention. It is no doubt true that directors are not, strictly speaking, agents of the company, in the sense managing agents are, but, as found above, remuneration is paid to them for services rendered in the management and direction of the affairs of the company. There is, therefore, no reason why the principle laid down in regard to the place of accrual of managing agency commission payable to managing agents for services rendered by them should not be applicable to the place of accrual of director's remuneration. The material facts in the case of Shoorji Vallabhdas decided by the Supreme Court, put very briefly, were that the assessee was a firm resident in British India, and it acted as the managing agent of shipping companies which plied cargo boats touching ports in British India as well as in the then Indian States of Cochin, Travancore and Saurashtra. The remuneration of the managing agents was stipulated at a percentage of the freight and the passage money earned in the several places where the boats of the managed companies used to touch. The managed companies had office in Cochin to secure freight. The income-tax authorities accepted the position that the profits of the managed company accrued partly in British India and partly in the Indian States. It was, however, found that the assessee-firm, as the managing agents, performed all the services in British India. In the assessment for the three years 1945-46, 1946-47 and 1947-48, the assessee-firm claimed that the part of the managing agency commission attributable to the income from freights and fares received by the two managed companies from the ports pertaining to the said Indian States, should be exempted from tax under section 14(2)(c) of the Indian Income-tax Act, 1922. The Supreme Court held that managing agency commission accrues at the places where the managing agent is rendering its services to the managed company and the place of accrual of the commission has no relation to the place or places where the managed company carries on business and earns its profit even though the commission is payable to the managing agent on the basis of a percentage of the net profits of the managed company. The Supreme Court observed:

"On the findings reached, the position in law is quite clear. The decisions to which we have referred clearly establish that normally the commission payable to the managing agents accrues at the place where the business is actually done, that is, where the services of the managing agents are performed. In this case the appellant practically performed all the services at Bombay, and, therefore, the commission which it earned, though computed on the percentage of freight and/or passage money in respect of two of the managed companies, accrued or arose in British India."

There being no difference in principle, the rule laid down by the Supreme Court in the above cases is also determinative of the place where directors' remuneration accrues. It may be stated here that, in laying down the principle aforesaid, the Supreme Court had considered the decision of the Privy Council in Commissioner of Income-tax v. Chunilal B. Mehta, on which reliance was placed by Mr. Singh in support of his contention that the place from where a business is directed cannot be regarded as the place of accrual of business profits. In that case the Privy Council observed that the mere fact that the profits made depended on the exercise in British India of knowledge, skill and judgment by the assessee did not necessarily mean that such profits arose or accrued in British India. The Privy Council was considering the assessability under section 10 of the Act, of profits of a business earned by a trader by exercise of his special knowledge and skill, and the decision has no relevance to the place of accrual of remuneration for services assessable under section 12 of the Act. The Privy Council did not purport to lay down any general rule or principle regarding the situs of accrual of profits of a business which depends upon the skill and judgment on the part of the assessee. On the contrary, Sir George Rankin, speaking for the judicial Committee, remarked that it would be nearly impossible and wholly unwise to lay down any general test in such cases.

Another contention of Mr. Singh is that the place of receipt of the remuneration is a material consideration in the determination of the place of accrual and he cited two cases to substantiate it. The first case is a decision of the Lahore High Court in the case of Dewan Bahadur Sir T. Vijayaraghavacharya v. Commissioner of Income-tax and the second is a decision of the Rangoon High Court in Commissioner of Income-tax v. Phra Phraison Salarak. Both these cases, which are clearly distinguishable, were decided on the terms of section 4(1) of the Act. Under section 14(2)(c) of the Act exemption is allowable only if such income " accrues or arises " in an Indian State. Income may accrue or arise at one place and may be received at a different place. It is clear, having regard to the clear language of section 14(2)(c), that if income accrues or arises in British India and is received in an Indian State, it would not be allowed exemption from Indian income-tax. Hence the mere fact that the remuneration of the assessee was credited in the books of M/s. Straw Products Ltd. at Bhopal cannot be a decisive factor in this case.

Lastly, Mr. Singh argued that in the case of a director his remuneration accrued at the head office of the managed company and he relied on the decision of the Calcutta High Court in Birla Brothers Ltd. v. Commissioner of Income-tax, and a decision of the House of Lords in McMillan v. Guest, which, in fact, has been fully discussed in the Calcutta case. We do not, however, think that either of the two cases lends support to the contention of Mr. Singh in point. In the Calcutta case, M/s. Birla Bros. was a limited company having its registered office at Calcutta. It used to act as the managing agent of M/s. Jiageerao Cotton Mills Limited at Gwalior, which was then an Indian State, and it also carried oh other business activities. The managing agents had a number of directors, who were appointed under their articles of association and were paid a remuneration which had been fixed under those articles. In the assessment of the total income of the managing agents for the assessment years 1943-44, 1944-45 and 1945-46, the commission arising to the assessee from the Gwalior Mills was not taxed in view of section 14(2)(c) of the Act. The assessee had claimed deduction in respect of the entire remuneration which was payable to its directors for each of the three years. The income-tax authorities, however, disallowed a part of such remuneration which, in their opinion, could be properly attributable to the earning of the commission from the Gwalior Mills which had been exempted from tax. It was held that the apportionment of the directors' fees made by the income-tax authorities was unwarranted and that the entire amount paid to its directors by M/s. Birla Bros. was debitable as legitimate expenses of the managing agency business. Chief Justice Harries, who delivered the leading judgment in the case, observed :

" In my judgment as the directors' fees are fees earned and payable in Calcutta by directors who must be deemed to carry on the business of the company in Calcutta, these fees must be regarded as expenses of the company incurred in earning the income upon which it is taxed."

It should be noted that in this case the directors worked for their company, namely, M/s. Birla Bros. Ltd., at its head office in Calcutta, and earned their fees there. The fees were also payable at Calcutta. In the instant case, the directors, including the applicant, worked from Kanpur while the head office of their company was at Bhopal. There is also no evidence that their fees were payable at Bhopal. The case of Birla Bros. is, therefore, clearly distinguishable. It is true, no doubt, that Harries C. J. observed, relying on the decision of the House of Lords in McMillan v. Guest, that even " if the directors of M/s. Birla Bros. Ltd. deputed one of their number to look after their interests in Gwalior and that such a director lived in Gwalior and gave the whole of his time to the Gwalior business, nevertheless the director would be regarded as earning his director's fees in Calcutta " but this observation must be regarded as obiter. Moreover, with the greatest respect, no such conclusion can be deduced from McMillan v. Guest which was decided on the English income-tax law as it then prevailed.

In the case of McMillan v. Guest the facts were that the assessee was a director of M/s. A. Wander Ltd., a company incorporated in and governed from England. During the relevant period the assessee resided wholly in North America performing work to further the interest of the company in that country. The question before the House of Lords was whether the remuneration received by the assessee was liable to tax in England under Schedule E, rule 6. Schedule E of the Income Tax Act,, 1918, provided:

" Tax under Schedule E shall be charged in respect of every public office or employment of profit."

Rule 6 laid down:

" The tax shall be paid in respect of all the public offices and employments of profit within the United Kingdom..."

It was held that the assessee, as a director of an English company, held " a public office within the United Kingdom " and he was, therefore, liable to be charged under Schedule E to the Income Tax Act, 1918.

The decision, however, is no longer good law even in England. By the Income Tax Act, 1952, as amended by the Finance Act, 1956, it was provided that for the years 1956-57 and subsequent years income-tax under Schedule E in respect of any office or employment is chargeable on the emoluments therefrom which fall under Case I or Case II or Case III. The present position is thus summed up in Halsbury's Laws of England (3rd edition) at page 308 :

" The charge, and the relevance of the place where duties are performed... (1) If a person holding an office or employment is ordinarily resident in the United Kingdom in the year of assessment and performs the duties of the office or employment wholly outside the United Kingdom, his emoluments in the year of assessment are not within the charge under Case I; and (2) if he does not so perform the duties his emoluments are within the charge of Case I whether they are or not received in the United Kingdom. Moreover, if the person holding the office or employment is not ordinarily resident in the United Kingdom his emoluments for the year of assessment will be chargeable in so far as they are in respect of duties performed in the United Kingdom."

The charges which fall under Case II or Case III are not relevant to our purpose. It would be seen that under the old law, tax was payable if the situs of the " public offices " and " employment of profits " was the United Kingdom. The old law made no reference to the residence of the assessee during the relevant year. Under the new law, as it prevails in the United Kingdom, it is not only the situs of the office or employment but also the residence of the assessee which determines the charge under Case I. In the case before the House of Lords, referred to above, director McMillan was not resident in the United Kingdom during the years of charge; he also performed his duties entirely in North America. It is obvious that, although he was chargeable under rule 6 of Schedule E, as it then prevailed, he would not be liable to tax under Case I of Schedule E from and after the year 1956-57 in view of the amendment introduced by the Finance Act, 1956. It would, therefore, be wrong to hold that the case of McMillan v. Guest laid down, as a matter of law, that the situs of remuneration of a director is the place where the office of the company is located. It is obvious, therefore, that after the amendment of the law by the Finance Act, 1956, the decisions in McMillan v. Guest and Barson v. Airey, relied on by the income-tax authorities in this case, have been rendered obsolete.

In our opinion, the principle laid down by the Supreme Court in the case of Shoorji Vallabhdas v. Commissioner of Income-tax squarely applies to the facts of the present case, and regard being had to the fact that the assessee as a director rendered services to the company from Kanpur, the further remuneration under article 105B accrued or arose to him in British India and not in the Indian State of Bhopal. The question referred to this court by the Tribunal must, therefore, be answered in the affirmative and against the assessee. The Commissioner of Income-tax will get Rs. 200 from the assessee as costs of this reference.

 

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