COMMISSIONER OF INCOME TAX Vs. CHAPHEKAR V R

JUDGEMENT

(1.) THE question that has been referred to us for our determination in this reference at the instance of the CIT, Bombay City II, Bombay, runs as follows :

(2.) THE question relates to the asst. yrs. 1961 62 and 1962 63. During the relevant accounting years for the said assessment years, four assessees, Shri V. R. Chaphekar, M. P. Apte, D. B. Joshi and R. B. Joshi, received certain sums as additional remuneration in consideration of the additional responsibilities that were required to be undertaken by them from a company called M/s. S. B. Joshi & Co. Ltd., of which these persons were directors and from whom each one of them also received a regular remuneration of Rs. 1,000 per month. The four assessees mentioned above received sums of Rs. 24,594, Rs. 24,594, Rs. 24,594 and Rs. 24,594, respectively, during the accounting year relevant for the asst. year 1961 62, while Mr. Chaphekar and Mr. D B. Joshi received sums of Rs. 25,000 and Rs. 25,000, respectively, as additional remuneration during the accounting year relevant for the asst. year 1962 63. In the individual assessment of these four persons who were directors of M/s. S. B. Joshi & Co. Ltd., a common question arose as to whether the amount or amounts of such additional remuneration that was received by each one of them in addition to the regular remuneration of Rs. 1,000 per month were to be treated as income under the head "salary" or were to be treated as income under the head "business or profession". It appears that two separate resolutions had been passed by the said limited company sanctioning the regular remuneration of Rs. 1,000 per month and the said additional remuneration, in terms whereof the amounts mentioned above for the respective years came to be received by the assessees. By a letter dt. 22nd July, 1963, the authorised representative of the assessees contended before the ITO that whereas the amount of Rs. 1,000 per month was liable to be treated as income from salary, the other amounts received by them fell properly to be treated as income from business or profession. It was emphasized that the amounts paid as additional remuneration were debited in the accounts of the limited company separately and shown under the head "director's remuneration" as required by the Indian Companies Act, 1956. By a further letter written on 28th Oct., 1963, the nature of the work done by the assessees as technical advisers for which additional remuneration was sanctioned by the second resolution was further explained to the ITO. The ITO, however, did not accept the contention of the assessees. He took the view that since it was admitted that these four assessees, who were directors of M/s. S. B. Joshi & Co. Ltd., were also working in the capacity as employees and were receiving a specific salary of Rs. 1,000 per month, it was not possible to differentiate between the work done by them which was of administrative nature as an employee and the work done as technical advisers; that the additional amounts had been paid as additional remuneration and since the relationship of employers and employees was admitted by the assessees between them on one hand the limited company on the other, the additional amounts received by them were clearly taxable as salary under S. 7 of the Indian IT Act, 1922 (s. 15 of IT Act, 1961). The assessees preferred appeals to the AAC and the AAC passed a common order, whereby he ultimately confirmed the view of the ITO. On the question as to whether this additional amount should be regarded as business income, he principally relied upon the fact that all fresh contracts that were taken by the limited company since the passing of the said resolutions were taken by the limited company, executed by the limited company itself and the profit and loss thereof belonged to the limited company and that the assessees had no interest in this business nor were they concerned with the profit and loss except for their fixed remuneration. He pointed out that in the earlier years when the execution of the contract undertaken by the company were given by the company to other firms with which one or the other assessees was associated as a partner dealing with others, the assessees could undoubtedly be said to be carrying on a business. But the position in the relevant assessment years was entirely different and that since the contracts had been executed by the company, itself which alone could be said to be carrying on this business, the amounts received by the assessees could not possibly be treated be business income. He also considered the question from another angle, viz., as to whether these receipts could be regarded as income received by the assessees in exercise of their profession as an engineer or technical adviser, and examining the question from that angle, he took the view that one of the basic ingredients of a profession was that professional services should be available to any person in need of the technical skill and that, in the case of these assessees, there was not a single instance of any one of them having ever acted as a technical consultant for any outside party. He pointed out that no such income had ever been shown nor was it the contention of the assessees that any one of them had ever acted in such capacity for anybody else and that merely because the assessees were partners, that fact need not necessarily convert their receipts into professional income if the facts showed otherwise. In this view of the matter, he held that the income could not be possibly taxed as professional income. The matter was carried further in second appeals that were preferred by the assessees to the Tribunal and the Tribunal also consolidated all the appeals and passed a common order. On a consideration of several fresh facts that were placed before the Tribunal along with those that had been already placed before the lower taking authority, the Tribunal relying upon three decision, (1) CIT vs. L. Armstrong Smith (1646) 14 ITR 606 (Bom) : TC58R.154, (2) CIT vs. Lady Navajbai R. J. Tata (1947) 15 ITR 8 (Bom) : TC58R.157 (3) CIT vs. Mrs. Durga Khote (1952) 21 ITR 22 (Bom) : TC58R.221 took the view that the assessees, merely because they were directors were not servants of the limited company and further that it was difficult to hod that these engineers who were professional men and carried on business become employees of the limited company when they agreed to give technical advice merely because they had earlier agreed to do some administrative work on a salary of Rs. 1,000 per month. The Tribunal did not agree with the AAC's observation that there was not a single instance of any of the assessees having acted as a technical consultant for any outside party, for, in its view, the limited company and the various partnerships were all different persons as recognised by the Department itself in its assessment and that the assessees at the time they were giving technical advice to the company were also partners in one or the other of the various partnerships and that those partnerships must be regarded as outside parties so far as the limited company was concerned. It, therefore, held that the assessees could not be regarded as mere servants of the limited company. The Tribunal finally concluded that on the facts and circumstances of the case and having regard to the various decisions of the Bombay High Court (referred to above), the remuneration which was received by the assessees, under the second resolution should be regarded as income from business or profession and not as income from salaries, notwithstanding their position as directions of the limited company and notwithstanding the receipt to a regular remuneration under the first resolution (Rs. 1,000). In other words, the Tribunal allowed the appeals of the assessees holding that the additional remuneration was income from business against which it was permissible to set off the loss brought forward from the earlier years under S. 24(2) of the Indian IT Act, 1922, which really was what the assessees ultimately wanted by raising such a question before the taxing authorities and before it. As stated earlier, at the instance of the CIT, the question set out at the commencement of the judgment has been referred to us for our determination.

(3.) THE point, however, is as to in respect of the fresh or new contracts which were taken by the limited company in the relevant assessment years under consideration, when such contracts were executed by the limited company itself enjoying the profits, if any, and at the same time suffering loss, if any, arising therefrom and which were not entrusted by the limited company to any partnership firm, what would be the legal position with regard to the additional remuneration that was received by the assessees from the limited company under the second resolution dt. 20th June, 1959; and the question is whether such additional remuneration should be treated as income under the head "Salary" or should be treated as income under the head "Business or profession". It would, therefore, be necessary to set out both the resolution dt. 20th June, 1959, under which remuneration in terms called "salary" at the rate of Rs. 1,000 per month was payable to each one of these assessees and the resolution under which additional remuneration was payable to these assessees. Under the first resolution that was passed by the board of directors of S. B. Joshi & Co. Ltd., in its meeting held on 20th June, 1959, it was resolved thus :