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Judgment
K.S. Paripoornan, J.—At the instance of an assessee to agricultural Income Tax, the Agricultural Income Tax Appellate Tribunal, Thiruvananthapuram, has referred the following question of law for the decision of this court : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the payment of remuneration to directors was not allowable u/s 5(j) of the Agricultural Income Tax Act, 1950 ?" The respondent is the Revenue. The matter arises under the Agricultural Income Tax Act. We are concerned with the assessment year 1984-85. The assessee which is a company claimed that it is entitled to deduction of Rs. 1,20,000 paid towards the remuneration of its directors. The assessing authority, by order dated July 30, 1985, held that the amount claimed is fabulous and is not in any way connected with deriving of agricultural income. It was a clear act of diversion of income from the company and so cannot be allowed. The assessee filed an appeal from the aforesaid order of assessment before the Deputy Commissioner (Appeals) and took a specific objection that the assessing authority (Inspecting Assistant Commissioner) was wrong in disallowing the claim for deduction of Rs. 1,20,000 paid to the directors of the company as remuneration. In the appeal memorandum, it was specifically stated thus: "The remuneration paid to the directors by the company has been authorised by a resolution passed at the extraordinary general meeting of the company held on March 28, 1980, and a copy of the resolution has also been duly filed with the Registrar of Companies as required u/s 192 of the Companies Act." The first appellate authority--Deputy Commissioner (Appeals), Kollam-held thus :
"But I find that this fact was not represented before the assessing authority at the time of assessment. The company had filed an explanatory letter under the date 25th March, 1985, and a detailed reply to the pre-assessment notice under the date 10th July, 1985. In none of these letters, had the assessee-company mentioned this fact. The director of the company who appeared and argued the case before me has not produced any evidence such as the minutes book of the extraordinary general meeting or the copy of the resolution and application to the Registrar of Companies. Therefore, I am not in a position to assess the validity of the contention."
However, the first appellate authority felt that there is truth in the plea that, if the services of the directors were not utilised, there would have arisen a necessity for appointing a general manager, etc., and their remuneration would have been higher. So, on an ad hoc basis, he allowed 50 per cent of the amount claimed, i.e., Rs. 60,000, and allowed the same as deduction by way of salaries and allowances.
The Revenue as well as the assessee filed appeals before the Agricultural Income Tax Appellate Tribunal. Both the appeals were heard and disposed of by the Tribunal by a common order dated June 1, 1988. The Tribunal observed, in paragraph 5 of its order, thus :
".... Five of the nine directors of the company during the relevant year were ladies. Auditors'' report appended to the annual accounts does not show the details of payment made to each director. A copy of the resolution said to have been adopted authorising payment of salary to directors was not produced at any stage. There is a permissive clause in the articles of the company enabling payment of remuneration to its directors. Payment of specific amounts is not, however, provided for."
However, in addition thereto, the Appellate Tribunal held thus :
"It was not shown to our satisfaction that the directors held the office or place of profit as authorised by a special resolution as contemplated u/s 314 of the Companies Act. ..."
The Appellate Tribunal concluded thus :
". . . . We conclude that the amount of Rs. 1,20,000 incurred towards salary to directors was not spent wholly and exclusively for earning the agricultural income. Having found that the payments were influenced by personal considerations, the Deputy Commissioner (Appeals) was not right in holding that a portion of the claim was allowable still. This finding of the first appellate authority is reversed and the allowance granted by him cancelled."
It is thereafter at the instance of the assessee that the above question of law has been referred for the decision of this court. For the assessment year 1984-85, two reference applications happened to be filed because there were two appeals before the Tribunal, one at the instance of the Revenue and the other at the instance of the assessee.
We heard counsel for the Revenue, Senior Government Pleader, Mr. V. C. James, and counsel for the assessee, Mr. Vellappally.
Mr. Vellappally, counsel for the assessee, argued that the Tribunal was in error in holding that Section 314 of the Companies Act ever applied to this case at all. On this basis, the Tribunal was in error in holding that since there was no special resolution, the payment of salary could not be allowed as a deduction. It was further argued that, at no time, was the assessee required to produce the resolution of the company authorising payment of salary to the directors. The disallowance was made on an ad hoc basis and without applying the mind. So, the order of the Appellate Tribunal is erroneous in law. It should have been held that the payment made to the directors is an allowable deduction u/s 5(j) of the Agricultural Income Tax Act, 1950.
On the other hand, learned Government Pleader contended that the specific plea of the assessee was that remuneration was paid to the directors as authorised by a resolution at the extraordinary general meeting of the company. The plea so put forth was never proved. Existence of such a resolution was never proved before any of the authorities. The allowance was claimed only on the basis of a resolution. Since such a resolution was never proved, the Appellate Tribunal was justified in disallowing the claim. Learned Government Pleader also submitted that neither in the explanatory letter dated March 25, 1985, nor in the pre-assessment notice dated July 10, 1985, the company mentioned about the special resolution dated March 28, 1980. It was stated in the appeal memorandum filed before the first appellate authority, but it was not produced. What is more, the director of the company who appeared and argued the case before the appellate authority did not produce any evidence like the minutes book of the extraordinary general meeting or a copy of the resolution or application to the Registrar of Companies. It was because the specific factual plea put forth was not proved that the authorities disallowed the claim. The Appellate Tribunal adverted to these facts and further observed that five of the nine directors of the company were ladies. Even the audit report appended to the annual accounts did not show the details of payments made to each director. The resolution said to have been adopted authorising payment of salary to the directors was not produced. Based on the above factual basis, the deduction claimed was disallowed. The Appellate Tribunal did not disallow the deduction solely on the basis of Section 314 of the Companies Act. Since the Appellate Tribunal was satisfied that the plea put forward was not proved and the payments were influenced by personal considerations, the disallowance was proper.
Having considered the rival pleas put forward before us, we are of the view that the decision of the Tribunal is justified in law. The Appellate Tribunal noticed the plea taken before the first appellate authority and also before it. The Appellate Tribunal entered the following findings of fact in paragraph 5 of its order :
".... Five of the nine directors of the company during the relevant year were ladies. Auditors'' report appended to the annual accounts does not show the details of payments made to each director. A copy of the resolution said to have been adopted authorising payment of salary to the directors was not produced at any stage. There is a permissive clause in the articles of the company enabling payment of remuneration to its directors. Payment of specific amounts is not, however, provided for."
The above finding of fact by the Appellate Tribunal was not challenged by framing appropriate questions. Indeed, the assessee framed such questions for being referred to this court. But the Appellate Tribunal declined to refer such questions. The assessee should have pursued the matter and filed an appropriate application in this court to direct the Tribunal to refer those questions also. It did not do so. Now, on the basis of the findings entered by the Appellate Tribunal, the conclusion is inevitable that the factual foundation for the claim for deduction is totally non est. The assessee specifically pleaded before the first appellate authority that the remuneration paid to the directors has been authorised by the resolution passed at the extraordinary general meeting of the company held on March 28, 1980, and the copy of the resolution was filed with the Registrar of Companies. But no such resolution was brought to the notice of either the first appellate authority or the Appellate Tribunal. The application filed before the Registrar of Companies was also not brought to the notice of the authorities. This fact was not put forward before the assessing authority in any of the communications addressed by the assessee to the assessing authority. What is more, the director of the company who appeared and argued the matter before the first appellate authority did not produce any relevant material, even the minutes book of the extraordinary general meeting or a copy of the resolution or application to the Registrar of Companies. It is because the assessee specifically put forward the plea that the remuneration was paid to the directors as authorised by the company in a special resolution and it was not proved, the authorities declined to grant the relief prayed for by the assessee.
In the light of the findings entered by the Appellate Tribunal that the payment was not authorised, even the audit report did not show the details of the payment and the amount so incurred was not spent wholly and exclusively for earning the agricultural income and the payments made were influenced by personal considerations, the conclusion is inevitable that the payment was not an allowable deduction u/s 5(j) of the Agricultural Income Tax Act. We answer the question referred to this court in the affirmative, against the assessee and in favour of the Revenue. The references are answered as above.
A copy of this judgment, under the seal of this court and the signature of the Registrar, shall be forwarded to the Agricultural Income Tax Appellate Tribunal, Thiruvananthapuram, forthwith.