DWIJENDRA CHANDRA CHOWDHURY Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) JOINT managing directors of company appointed for lifetime, exercising the powers and performing functions of chief executive officers were agents of company and remuneration paid to them partook the character of business income. Reassessment under s. 34(1)(a) - -Validity - -Assessee receiving monthly remuneration and commission on sale, as joint managing -director of tea company - -Assessees adopting cash basis while tea company adopting mercantile basis - -Both monthly remuneration and commission received and offered by assessees as income for asst. yr. 1954 -55 - - Commission not received and not offered for asst. yrs. 1955 -56 and 1956 -57 - -But assessees debited tea company's books for amount of commission - -Same ITO for assessee as well as tea company - -Original assessments for asst. yr. 1955 -56 and 1956 - 57 completed along with assessment for asst. yr. 1954 - 55 - -ITO aware of all facts necessary for assessment and had applied his mind to these facts - -No non -disclosore of material facts by assessees - -Proceedings for reassessment under s. 34(1)(a), not valid Facts The assessees as joint managing directors of E Ltd. a tea company were entitled to a monthly remuneration of Rs. 1000/ - and a 5 per cent commission on the sales of the paid company. The assessees who were maintaining their individual accounts on cash basis had submitted IT return for asst. yr. 1954 -55 offering for tax both the monthly remuneration as well as the commission on sales. However, for the asst. yrs. 1955 -56 and 1956 -57, on account of non -receipt of commission, the assessees had offered only their monthly remuneration for income -tax. But the tea company had deleted the assessee's accounts in its book, for the amount of commission, as it was following. Mercantile system of accounting. The assessments of assessee's income for all the three years were completed together by March, 1957, on the basis of assessee's return where is the said receipts were claimed as business income. Subsequent to a scrutiny of the books of the tea company, finding that the company had already passed entries for commission, the ITO holding that material facts were not disclosed, reopened the assessment under s. 34(1)(a) and reassessed all income, incloding the unreceived commission, as salary income under s. 7 of the the IT Act, 1922. Appeals to AAC and Tribunal failed. Held Having found that the ITO knew when he completed the original assessment that the commission on sales had accrued due to the assessees and that nothing was actually drawn by them during the calendar years 1954 and 1955 and in view of the fact that the ITO had been assessing the commission in the hands of the assessees only on receipt basis in the past right up to the asst. yr. 1954 -55, and he having adopted the same basis in the original assessment for the years 1955 -56 and 1956 -57, the conclusion is irresistible that the ITO not only knew all the primary facts relevant and necessary for the purpose of making an assessment in the case, but also he had in fact applied his mind to those facts and made the assessment on a full consideration of these primary facts and the inferences to be drawn from them. In the circumstances, the Tribunal was not justified in assuming that there was a statutory obligation on the part of the assessees to include in the returns the amount of commission, whether the same had been paid or not. The ITO was fully aware of all the facts, and as all the primary facts were before him and within his knowledge, the mere fact that the return did not contain a reference to a particular income earned, although not received, would not make any difference. There was no failure on the part of the assessees in each of these cases either to make a return of their income under s. 22 for the years in question, or any failure on their part to disclose fully and trully all the material facts necessary for the assessment being made for the years in question, namely, the asst. yrs. 1955 -56 and 1956 -57. Conclusion Having adopted the same receipt basis in the original assessment for the asst. yr. 1955 -56 and 1956 -57, as in the asst. yrs. 1954 -55, the ITO knew all the facts relevant and necessary for making an assessment and he had further applied his kind to those facts in making the assessments. There was to omission or wilful default on the part of the assessee in disclosing facts and materials, and hence there existed no ground for an action under s. 34(1)(a). Reassessment under s. 34(1)(a) - -Disclosure of material facts - -Need not be in return of income itself - -Could be in accounts or documents produced before ITO Held The one condition that must be justified before ITO could take action under s. 34(1)(a) was that he must have had reason to believe that by reason of the omission or the failure on the part of the assessee to disclose fully and truly all the material facts necessary for assessment for the year, the income profits or gains chargeable to income -tax had escaped assessment. The disclosure by the assessee need not be only by or in the return of the income, but it could be done, as was done in the instant case, by other means such as accounts and other documents produced before the ITO at the time of the original assessment. - -Calcutta Discount Co. Ltd. vs. ITO (1961) 41 ITR 191 (SC) : TC51R.779, CIT vs. Lakhiram Ramdas (1962) 44 ITR 726 (SC) : TC51R.970 and S.C. Prashar vs. Vasantsen Dwarkadas (1963) 49 ITR 1 (SC) : TC51R.1727 followed. Conclusion Disclosure of material facts relevant and necessary for assessment of income need not be in the return of income itself. It could be done by other means such as accounts and other documents produced before the ITO. Salary - -Employment vs. agency - -Remuneration as joint managing directors - -Assessees appointed first managing directors of company - -They were to hold office till their death with option to resign and nominate any person as successor - -Object of appointing them was to secure better management and direct control and supervision of affairs of company - -All the executive functions and powers and duties of board vest in joint managing directors except those which have to be performed by the board of directors themselves - -They could delegate any or all the powers vested in them - -Thus, the joint managing directors were agents of company and they filled the capacity of 'managing agents' - -Remuneration paid to them, therefore, is business income and not salary Held The assessees are not employees or servants of the company, but are managing agents inasmuch as their duties and powers correspond to those of an agent as distinct from a mere servant of the company. In this connection, the following features, as gathered from the articles of association of the company, may be noticed: (1) The object of appointing the joint managing directors is to secure better management and direct control and supervision of the affairs of the company. (2) The joint managing directors hold office till their death, although they are given the option to resign by giving a notice in writing. (3) The joint managing directors have the right to nominate any other person as managing director in case of early retirement or permanent disability or incapacity of any one of them. (4) All the executive functions and all powers and duties of the board of directors under the articles of association vest in the joint managing directors, excepting those which have to be performed by the board of directors themselves. (5) The joint managing directors have the power of appointing and dismissing the managers, engineers, assistants, clerks and labourers, and to do all acts, matters and things deemed necessary, proper or expedient for carrying on the business and concerns of the company. (6) The joint managing directors have the power to make such investments of the company's funds, as they shall think fit. (7) The joint managing directors have the power to make and sign all contracts and to draw, sign, accept, endorse and negotiate bills of exchange, promissory notes, hundies, cheques, drafts, government promissory notes and other Government securities and other instruments, on behalf of the company. (8) The joint managing directors may delegate any or all of the powers vesting in them to such other directors, managers, agents or other persons as they may think fit and may grant such persons such power -of -attorney as they may deem expedient and may revoke those powers at their pleasure. (9) The joint managing directors may, with the approval of the directors, from time to time raise or borrow any sums of money for and on behalf of the company or themselves advance money to the company and secure the payment of such money in such manner and upon such terms and conditions in all respects as they think fit, particularly by the issue of debentures or bonds of the company or by mortgaging or charging all or any part of the properties of the company. (10) The joint managing director could only be removed it he is declared insolvent by a competent Court or is found guilty of misappropriation of the funds of the company by a competent Court. The above features, clearly and beyond and doubt make the joint managing directors, the agents of the company and they filled the capacity of the 'managing agents' within the meaning of the Companies Act. This being the position, there is no difficulty in coming to the conclusion that the income derived by the assessees from the company is remuneration paid to them in their capacity as managing agents, and, therefore, partakes of the character of business income assessable under s. 10 of the 1922 Act. Such income, therefore, does not partake of the nature of the salary paid to a servant or employee which is to be assessed under s. 7. The functions of the joint managing directors involve the performance of executive functions on behalf of the company and it is only right and proper that by virtue of part of their duties, they should be treated as exercising the powers of chief executive officers of a company. The duties of agents and managing agents of a company essentially partake of the character of management of the affairs of the company which necessarily involves the exercise and performance of executive functions, and this being the case, nothing, turns on the employ of the expression 'chief executive officers' in connection with the joint managing directors' duties. - -Lakshminarayan Ram Gopal & Son Ltd. vs. Government of Hyderabad (1954) 25 ITR 449 (SC) : TC58R.196 and Qamar Shaffi Tyabji vs. CEPT (1960) 39 ITR 611 (SC) : (1960) TAX 13(3) 368 : TC 13R.735 applied. Conclusion Joint managing directors of company appointed for lifetime, exercising the powers and performing functions of chief executive officers were agents of company and remuneration paid to them partook the character of business income and not salary. Counsel appeared S.S. Ray, P.C. Choudury & S.K. Sen, for the Assessee : M.C. Pathak, for the Revenue C.S. NAYUDU, J.: The following questions have been referred to us in each of these cases, for our opinion, by the Tribunal, 'A' Bench, Calcutta : (I) Whether, on the facts and in the circumstances of the case, the remunerations received by the assessee from M/s Eastern Tea Estates (P) Ltd., in the relevant years of account, are assessable under s. 10 of the Indian IT Act, 1922 ? (2) Whether, on the facts and in the circumstances of the case, the initiation of the proceedings in reassessment under s. 34(I)(a) for the asst. yrs. 1955 -56 and 1956 -57 was legally valid ?

(2.) AS the questions referred to us are common to both cases and as the facts and circumstances to be considered are, more or less, similar, we have heard the references together and propose to dispose them of together by a common order.

(3.) BEFORE we consider the questions referred to us, it would be necessary to set out the relevant facts of the cases which are beyond controversy. The assessee concerned in these two references are joint managing directors of M/s Eastern Tea Estates (P) Ltd., a private limited company, incorporated under the Companies Act, hereinafter referred to as the company. Their powers and duties are set out in Arts. 46 to 54, 56, 59, 60, 61 and 68 of the articles of association of the company. It may be seen from Art. 46 of the above articles that the joint managing directors of the company are to hold office on a monthly remuneration of Rs. 1,000 each and 5 per cent commission on sales besides actual travelling expenses, etc., incurred in connection with the business. It is also provided in this article that they would hold office till their death but would have the option to resign by giving notice in writing. The two assessees who are the joint managing directors of the company submitted their income -tax returns for the asst. yrs. 1955 -56, 1956 -57 and 1957 -58 covering respectively the calendar years 1954, 1955 and 1956, respectively. During the calendar year 1953 and asst. yr. 1954 -55, the assessees in addition to their remuneration of Rs. 1,000 per month in each case had also received some amount towards commission and in the return for that year they showed the receipt of both these items. The assessees were assessed on the basis of their return, that is on the basis of what was actually received by way of commission in addition to the monthly remuneration of Rs. 1,000 in each case. Hence, this assessment, it is claimed, was done on the basis of business income. Similarly, the assessments for the asst. yrs. 1955 -56 and 1956 -57 were also completed, on the basis of the returns filed by the assessees, on 28th March, 1957. But in the returns for these two assessment years only the remuneration of Rs. 1,000 per month was included and no amount was shown as commission receipts, in view of the fact that the assessees did not actually receive any amount towards the commission. It is also the case of the assessees, in this connection, that while the company followed 'the mercantile system of accounting', the assessees followed 'the cash system', reckoning as income only amounts that had been actually received into their hands, and since no amount towards commission had been received during the assessment years in question, namely, 1955 -56 and 1956 -57, that is the calendar years 1954 and 1955, respectively, the returns did not show any commission, the same having not been actually received. The assessment for all the three assessment years, as indicated above, was completed on 28th March, 1957, and the assessees were assessed on the basis of their returns for all these years.