Sagar Automotives (P.) Ltd. vs Commissioner of Income Tax

G.L. Oza, C.J.—This is a reference made by the Tribunal at the instance of the assessee for answering the following question: Whether, on the facts and in the circumstances of the case, the Tribunal was justified in confirming the order of the Commissioner passed u/s 263 of the income tax Act, 1961, directing the disallowance of the directors'' remuneration of Rs. 38,188?

The year of assessment is 1976-77 ending on 30-9-1975. The ITO framed the assessment u/s 143(3) of the income tax Act, 1961 (''the Act''), on 16-2-1979. While completing the assessment, he had allowed the claim for directors'' remuneration to the tune of Rs. 38,188 paid to them for the period between 1-2-4975 to 30-9-1975. This amount included the remuneration paid to the directors to the tune of Rs. 14,800, house rent: Rs. 3,300 and travelling expenses of the directors: Rs. 20,088. The Commissioner exercising jurisdiction u/s 263 of the Act issued a notice to show cause to the assessee and after hearing the assessee came to the conclusion that this remuneration to the directors to the tune of Rs. 38,188 could not have been allowed as, according to the Commissioner, the articles of association of the company do not provide for payment of remuneration to the directors, although according to the Commissioner by a resolution dated 31-3-1977 the members of the company sanctioned the payment made to the directors retrospectively but the Commissioner felt that by such a resolution, this payment could not be rectified as the resolution does not contemplate the modification or amendment of articles of association. On this ground the Commissioner by his order dated 13-2-1981 set aside the order of assessment and directed the ITO to carry the proceedings of assessment in accordance with law afresh.

Against this order passed by the Commissioner, the assessee preferred an appeal which was heard by the Tribunal and the Tribunal by its order dated 12-2-1982 maintained the order passed by the Commissioner. Although in this order the Tribunal also observed that the matter has been sent back to the ITO for reassessment but the Tribunal maintained that the Commissioner was right when he exercised jurisdiction u/s 263 of the Act and disallowed the remuneration paid to the directors. Thereafter it appears that at the instance of the assessee, the Tribunal has made this reference for seeking the opinion of this Court on the question referred to above.

The learned counsel appearing for the assessee contended that so far as private companies are concerned, the definition of ''company'' is provided in section 3 and ''private company'' in section 3(1)(iii) and it has been further provided in this definition that the restrictions on private company are only what have been provided in this definition and they are not all those restrictions which apply to a public limited company. Section 28 of the Companies Act provides for adoption and application of Table A in Schedule I in the case of companies limited by shares and it was contended that it is not disputed that this is a company limited by shares and because of section 28, as there is no specific provision excluding the operation of Table A in Schedule I, Table A in Schedule I will be applicable to this company. It is further contended that Table A in Schedule I, Item 65, provides for remuneration to the directors and, therefore, although in the articles of association there is no specific clause providing for remuneration to the directors but by operation of section 28 this clause, as provided in item 65 of Table A in Schedule I, could be read into the articles of association. It was, therefore, contended that there was an authority to make payment of remuneration to the directors. It appears that as there was an audit objection, the company considered the matter and passed a resolution rectifying the payment, retrospectively. It was, therefore, contended that it could not be said that this was an unauthorised payment by the company to the directors which could be disallowed. It was also contended by the learned counsel that so far as the income tax Act is concerned, the scope of remuneration could only be limited to section 40 and nothing further. It is nobody''s case that any part of remuneration paid to the directors has been disallowed for the reasons which may justify disallowance u/s 40. It was, therefore, contended that the answer to the question has to be in favour of the assessee, i.e., in the negative.

The learned counsel appearing for the department, on the other hand, contended that although the Commissioner, while exercising jurisdiction u/s 263, has examined the matter and has come to the conclusion that this payment to the directors as remuneration and other expenses was not justified in accordance with the provisions contained in the Companies Act, but it was contended that it was only a prima facie view to justify the exercise of jurisdiction u/s 263 but there is no direction made by the Commissioner to disallow this as the matter was sent back with a direction to proceed with the assessment in accordance with law. It was also contended that similarly the order passed by the Tribunal on appeal also has not decided the question as the matter was open before the ITO afresh and it was contended, therefore, that the question does not arise from the order of the Tribunal and answer to the question is not necessary. On merits an attempt was made by the learned counsel for the department to suggest that as the ITO had not gone into the question and the matter has been sent back to him, it is open to the ITO on enquiry to find out if there is some error.

The learned counsel for the assessee, on the other hand, contended that if the Tribunal had taken the view that the question that has been raised is not finally decided, the order of the Tribunal would have clearly stated that. Apart from it, when a prayer was made for making a reference to this Court, it was open to the Tribunal to have said so. It is apparent that the Commissioner as well as the Tribunal disposed of the question of law as to whether these payments made to the directors as remuneration and expenses were justified in view of the Companies Act and having taken that view, although there may not be clear direction to disallow this expenditure but after deciding the legal question when the matter is sent back, it is nothing but a direction to disallow the remuneration paid to the directors. Under these circumstances, it was contended that the contention advanced by the learned counsel for the revenue could not be accepted. It was also contended that sanction of payment made to the directors could also be justified in view of section 91 of the Indian Contract Act, 1872.

It was contended on behalf of the Commissioner that when he exercised jurisdiction u/s 263 and passed the order in question, he clearly held that the company could not make payment to the directors without their being any specific clause in the articles of association. The Commissioner also clearly held that the resolution, which was passed by the company in 1977, retrospectively, rectified the payment made to the directors. It could not, therefore, be said that the Commissioner did not decide the question finally. This view taken by the Commissioner has been maintained by the Tribunal, and, therefore, the contention advanced by the learned counsel for the revenue that the matter is yet open does not appear to be justified. It is further clear that when the assessee sought a reference from the Tribunal to this Court, the Tribunal made a reference framing this question as arising out of the order of the Tribunal. If the Tribunal was of the view that the question was still open, it would have been free to say so by saying that as the question is not yet decided, no question of law arises. It is, therefore, clear that the argument advanced by the learned counsel for the revenue was not the view of the Tribunal nor that was the view taken by the Commissioner.

As regards the question, it is clear from section 28 of the Companies Act that if articles of association of a company do not incorporate matters enumerated in Table A to Schedule I, they would be operative unless they have been specifically excluded. Sub-section (2) of section 28 clearly provides that if the articles do not exclude or modify the regulations contained in Table A, those regulations shall be applicable. It is not disputed that the articles of association of this company do not specifically exclude the application of Table A in Schedule I. Table A in Schedule I, item 65, which clearly provides for payment of remuneration to the directors reads:

(1) The remuneration of the directors shall, in so far as it consists of a monthly payment, be deemed to accrue from day to day.

(2) In addition to the remuneration payable to them in pursuance of the Act, the directors may be paid all travelling, hotel and other expenses properly incurred by them-

(a) in attending and returning from meetings of the board of directors or any committee thereof or general meetings of the company; or

(b) in connection with the business of the company. This regulation follows Regulation 76 of the English Act. It is subject to the provisions of sections 198, 309, 310 and 311.

Unless there is express provision in the articles of a company similar to this regulation, the directors will not be entitled to travelling, etc., expenses- Young v. Naval, Military and Civil Service Co-operative Society of South Africa [1905] 1 KB 687: It may be noted that remuneration u/s 309 does not include travelling expenses.

In this view of the matter, it could not be said that without modifying or amending the articles of association, remuneration could not be paid to the directors. Apart from it, the remuneration paid to the directors has been further rectified by the resolution of the company and, therefore, it could not be said that this payment was an unauthorised payment and, therefore, could not be allowed while assessing the company. Thus, the view taken by the Commissioner and the Tribunal does not appear to be justified. In this view of the matter, therefore, in our opinion, the Tribunal was not justified in confirming the order of the Commissioner passed u/s 263 directing the disallowance of the directors'' remuneration to the tune of Rs. 38,188. The reference is answered, accordingly. In the circumstances, parties are directed to bear their own costs.