COMMISSIONER OF INCOME TAX Vs. BABUBHAI M CHINAI

JUDGEMENT

(1.) AS many as eight questions have been referred to us in this reference at the instance of the CIT under S. 256 (1) of the IT Act, 1961. However, all the questions may not be required to be answered. Indeed, this is so in the view that we take of the answers to be given to questions Nos. 1, 2 and 8. The questions referred to us are as follows :

(2.) THE assessee before us is an individual and we are concerned with the asst. yrs. 1962 63, 1963 64 and 1964 65, for which the respective accounting years were Samvat years 2017, 2018 and 2019, respectively. The assessee, as the head of what may be designated as Chinai group, was interested in the formation of a company called Bombay Oxygen Corporation Ltd., along with the Ruia group. The managing agents of the said company was a company called Ruia Chinai & Co. (P) Ltd. The Chinai group held 40 per cent shares in the said managing agency company, the remaining 60 per cent being held by the Ruia group. Ruia Chinai & Co. (P) Ltd., were appointed managing agents by Bombay Oxygen Corporation Ltd. under an agreement dt. 15th May, 1961, which agreement was to run for a period of ten years commencing from 10th Feb., 1961. Under cl. 2 of the said agreement the managing agents were to be paid by way of remuneration for the services rendered a commission at the rates mentioned in the said clause. There was, however, provision for a minimum remuneration of Rs. 35,000 per annum which would stand raised to Rs. 50,000 in certain cases. Clause 5 of the said agreement specified the duties of the managing agents. The other terms of the agreement are not material for the purposes of this reference. A separate agreement dt. 20th Dec., 1961, was entered into between the said managing agency company of the one part, Shri Kamalnayan Bajaj of the second part and M Ramnarain (P) Ltd. and Babubhai Maneklal Chinai (the assessee) jointly of the third part. In the said agreement, the parties of the third part were appointed as supervisors. The duties of the supervisors were described in cls. (1) and (2) of the agreement. Under cl. 73(4) of the agreement 40 per cent of the fixed managing agency remuneration was to be paid to the assessee for doing his duties as joint supervisor, along with M. Ramnarain (P) Ltd. for whom its two directors, Shri Madanmohan R. Ruia and Smt. Kanta Madanmohan R. Ruia, were to render services to the managing agency company. This company was to receive the balance of 60 per cent of such fixed remuneration. As a corollary to the above agreement dt. 20th Dec., 1961, an agreement was made at Bombay on 15th Jan., 1962, between the assessee and his son, Shri Kirit Babubhai Chinai, which was also to become operative from 10th Feb., 1961, on which date Ruia Chinai & Co. (P) Ltd. became entitled to a fixed remuneration under the managing agency agreement and the period was to end with that of the agreement dt. 20th Dec., 1961, i.e., the one in which, inter alia, the two supervisors were appointed. Under the agreement between the assessee and his son, Kirit, Kirit agreed to render assistance to the assessee in the management and affairs of the Bombay Oxygen Corporation Ltd. and Ruia Chinai & Co. (P) Ltd. for which he was to be paid remuneration of Rs. 1,000 per month w.e.f 1st March, 1961. He further agreed not to render assistance to any other company in its management or affairs during the operation of the agreement except with the consent of Ruia Chinai & Co. (P) Ltd., given in writing. A copy of the managing agency agreement has been annexed as annex. "A" to the statement of the case. A copy of the agreement dt. 20th Dec., 1961, between the managing agency company and Kamalnayan Bajaj and the supervisors is annexed as annex. "B" to the statement of the case. A copy of the agreement between the assessee and his son, Kirit, is annxed as Annex. "C" to the statement of the case.

(3.) IT may be mentioned that the assessee had in the alternative contended that the remuneration paid to his son, Kirit, amounted to diversion of income at its very source in view of the terms of the agreement dt. 20th Dec., 1961. This was also negatived by the ITO. The assessee's case that he was entitled to deduction under S. 16(v) if the remuneration paid to him was regarded as "salary" was also rejected. According to the ITO, the amount to be claimed as deduction under S. 16(v) was one which was spent by the assessee in the performance of his duties which was equivalent to doing the work of the office. In the view of the ITO, the work of the assessee as a supervisor began when the assessee arrived at the office and ceased when he left the office and, therefore, the payment of Rs. 1,000 p.m. to his son could not be considered as expended wholly, necessarily and exclusively in the performance of his duties. The assessee proceeded in appeal to the AAC. The AAC held that the amount paid to the assessee under the supervision agreement was income by way of salary and no deduction therefrom was allowable under S. 16(v) of the Act. The assessee carried the matter in further appeal to the Tribunal. Before the Tribunal submissions were made by the assessee on a four fold footing, each footing being by way of an alternative to the previous one. In the first place, it was submitted that the income earned by the assessee under the agreement dt. 20th Dec., 1961, was income from business to which S. 28 applied and the deduction claimed was either permissible under that very section or in any case under S. 37(1) of the Act. In the alternative, it was submitted that if the income was not income from business, it had to be properly regarded as income from "other sources" and to such income the provisions of Assessment year Supervision charges received Remuneration paid . Rs. Rs. 1962 63 12,005 10,000 1963 64 14,000 12,000 1964 65 14,000 12,000 s. 56 were applicable. It was contended, then, that the deduction was required to be allowed under s. 57(iii) of the IT Act, 1961. In the further alternative it was submitted that the remuneration payable to Shri Kirit Babubhai Chinai was diversion of income under an overriding title and, therefore, could not constitute part of the taxable income of the assessee. Lastly, it was submitted that even if the amount received by the assessee under the agreement dt. 20th Dec., 1961, was to be treated as salary income as contended by the Department and, therefore, fell under S. 15 of the IT Act, 1961, the deduction claimed was permissible under S. 16(v) of the said Act. The Tribunal considered the agreement between the assessee and the company and held that the remuneration paid to the assessee was required to be considered as salary paid to him. The tribunal, however, disagreed with the view of the ITO which was subsequently confirmed by the AAC that the remuneration paid to Kirit under the agreement between the assessee and Kirit was not allowable as a deduction under S. 16(v). According to the Tribunal the amount paid to Kirit had been actually expended by the assessee which by the conditions of his service he was required to spend out of the remuneration received by him (the assessee). According to the Tribunal, further, this was an amount wholly, necessarily and exclusively expended by the assessee for the performance of his duties and thus fully satisfied the requirements of S. 16(v) of the Act. The Tribunal went on to consider the other claims of the assessee. It rejected the contention that this was a diversion of income at the initial stage itself under an overriding title. Thus, this contention of the assessee was not accepted, but on both the other footings, viz., that if the remuneration may be regarded as income from business or as income from other sources, the Tribunal was of the opinion that the amount paid to Kirit was allowable as deduction under S. 37(1) or S. 57(iii), respectively, as the case may be.