NETERWALLA D M Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THIS is a reference at the instance of the assessee under s. 66(1) of the Indian IT Act, 1922. We are concerned in this reference with the asst. yr. 1957-58, the accounting year being the financial year 1956-57. The assessee is a civil engineer who was for some time engaged in the execution of civil works and military contracts. From September, 1946, however, he stopped all such activities and thereafter took up appointment as director and manager of Western India Theatres Ltd. He was a wholetime director of the said company till 30th September, 1956 ; on this date he gave up that appointment with a view to work for a new concern proposed to be formed, viz., Cambata Ferro-Manganese (P) Ltd. Two private companies, viz., M/s Cambata Industries (P) Ltd. and M/s Shavax C. Cambata (P) Ltd. had obtained permission from the Government to put up a ferro- manganese plant under a licence dated 18th October, 1954, issued by the Ministry of Commerce and Industry under r. 15(4) of the Registration and Licensing of Industries Undertaking Rules, 1953. The said companies had also obtained a licence subsequently, dated 2nd September, 1955, for importing plant and machinery for the said project. These two companies had also completed negotiations for the purchase of machinery from a firm at Oslo and had entered into another contract with M/sContinental Ore Corporation, New York, for the purposes of the project. The assessee was neither a director nor a shareholder of these two companies nor was he concerned with the management thereof. However, he was one of the promoters and proposed director-in- charge of the new company to be formed, viz., M/s Cambata Ferro-Manganese (P) Ltd.

(2.) ON 11th October, 1956, a solicitors' firm acting on behalf of the promoters preferred an application to the Controller of Capital Issues ; a copy of the said application is to be found annexed as annex. "A" to the statement of case. In the said application, apart from the assessee, the following four persons were shown as promoters of the proposed company, 1. K. S. Cambata, 2. D. S. Cambata, 3. R.S. Cambata and 4. S. S. Cambata (See para. 5(a) of the letter). In the said application it was proposed that there would be a nominal capital of Rs. 150 lakhs (see para. 8), of which the subscribed capital was to the extent of Rs. 65 lakhs. Of these shares it was proposed that 1,150 ordinary shares of Rs. 1,000 each would be allotted free of payment to the promoters in consideration of their agreement not to start a competitive business at any time (see para. 9(b) of the letter). Subsequently, the Controller of Capital Issues authorised the issue of capital and formation of the company ; but as against the proposal to allot 1,150 shares of Rs. 1,000 each to the promoters, the Controller sanctioned the issue of only 600 such shares which were to be free of payment.

(3.) THE matter came up for consideration before the ITO of the assessee for the asst. yr. 1957-58. It was contended before the ITO by the representative of the assessee that shares worth Rs. 60,000 had been given to the assessee for his work in connection with the floatation of the company and that this was confirmed by the company in its letter dated 8th November, 1958. In this letter, according to the order of the ITO, the company had stated that 60 ordinary shares of the face value of Rs. 1,000 each were allotted to the assessee without any consideration as fully paid promoters' shares. According to the ITO, the assessee was required to be considered as an employee of the company and such amount received without consideration by him as an employee was taxable under s. 7 of the Act as benefit received for services, coming within Expln. 2 to s. 7(1) of the Indian IT Act, 1922.