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TMI Blog1968 (12) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... profits, either a sum which is sufficient to allow a further remuneration of Rs. 5,000 to each director or a sum equal to 5 per cent. of the net profits as defined under section 105 of the Bhopal State Companies Act, 1945, whichever is higher, and, in the latter case, the directors may distribute among themselves the sum as appropriated in such proportion as they may mutually agree upon, or, in the absence of any agreement, equally. In either case, the sum appropriated shall be considered to be a part of the working expenses of the company." The dispute in this case relates to the place of accrual of the further remuneration earned by the assessee as a director in terms of article 105B. It may be noted that article 105B is silent about the place where such remuneration is payable but there is no dispute that the remuneration was credited to the accounts of the directors in the books of the company maintained at Bhopal and it was not received at or brought into British India during any of the relevant years of account. In the assessments for the accounting years 1942-43 to 1948-49 the assessee claimed that the director's remuneration received by the assessee during the relevant pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s registered office at Bhopal and the directors' meetings were rarely held in Bhopal. It was contended before the Tribunal that, as the further remuneration payable to the directors in terms of article 105B comprised of a share of the profits of the company and inasmuch as such profits arose in Bhopal, the director's remuneration also arose in Bhopal. The Tribunal negatived this contention. The Tribunal's view was that article 105B of the articles of association merely laid down that the remuneration of the director would depend upon the net profits of the company, and it did not indicate where such remuneration accrued or arose. In the end the Tribunal concluded as follows: " In the present case we find that there is ample material to infer that the control and management of the company was in the hands of the directors who resided in British India and virtually the control and management of the company was done from British India. The assessee's remuneration cannot therefore be said to have accrued or arisen in the State of Bhopal as the services mainly of supervision and control were exercised in British India. In view of this fact we are of opinion that the remunerations were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmed is a question of fact not questionable in this court. Mr. C. S. P. Singh, appearing for the assessee, contended that the directors are not servants of the company and they are not paid remuneration for the services they render. He argued, therefore, that it would not be correct to hold that the situs of accrual of the remuneration is the place from where the assessee as a director performed the functions and duties assigned to him. He contended that remuneration paid to the directors is to be regarded as gratuity not for services rendered by them. In this connection he relied upon the judgment of Sir Leonard Stone C.J. of the Bombay High Court in the case of Commissioner of Income-tax v. Lady Navajbai R. T. Tata . The decision, however, does not support the proposition contended for by Mr. Singh, as we shall see presently. But before we advert to that decision we would like to refer to the relevant provisions of the Indian Companies Act, 1913, as it prevailed at the material time, relating to directors, their position, powers, duties, etc. These provisions are contained in section 83A, sections 86A to 86L, sections 91A to 91D, sections 100, 130, 131, 132, 235, 237, 238A and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and control over such managerial personnel and they continue to remain responsible for the discharge of the statutory functions. Mr. Singh is not, therefore, correct when he contends that as the affairs of the assessee-company were managed by managing agents, the six directors had nothing to do and they were paid the remuneration prescribed in the article 105B of the articles of association for rendering no service whatever. Further, his argument that there is no nexus between the services rendered by the directors and the remuneration paid to them is equally incorrect. In this connection the material portion of section 132(3) of the Indian Companies Act, 1913, as amended in 1936, may be quoted, " The profit and loss account shall include particulars showing the total of the amount paid whether as fees, percentages or otherwise to the managing agent, if any, and the directors respectively as remuneration for their services ......." Section 132(3) clearly contemplates that remuneration is paid to directors for services rendered by them. The same is the position under the English company law. In this context, we may quote from Halsbury's Laws of England (third edition by Lord Si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom Cawnpore which was in British India, notwithstanding the fact that the company itself was registered in Bhopal where the manufacturing operations were carried on. The decision of the Tribunal must be upheld in view of the law laid down by the Supreme Court in the case of Shoorji Vallabhdas & Co. v. Commissioner of Income-tax . That case relates to the place of accural of remuneration paid to managing agents of a company for their services. Mr. C.S.P. Singh, for the assessee, contended that cases relating to the place of accrual of managing agency commission cannot be regarded as authority for cases in which the question relates to the place of accrual of director's remuneration. We fail to see, however, any substance in this contention. It is no doubt true that directors are not, strictly speaking, agents of the company, in the sense managing agents are, but, as found above, remuneration is paid to them for services rendered in the management and direction of the affairs of the company. There is, therefore, no reason why the principle laid down in regard to the place of accrual of managing agency commission payable to managing agents for services rendered by them should not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down by the Supreme Court in the above cases is also determinative of the place where directors' remuneration accrues. It may be stated here that, in laying down the principle aforesaid, the Supreme Court had considered the decision of the Privy Council in Commissioner of Income-tax v. Chunilal B. Mehta, on which reliance was placed by Mr. Singh in support of his contention that the place from where a business is directed cannot be regarded as the place of accrual of business profits. In that case the Privy Council observed that the mere fact that the profits made depended on the exercise in British India of knowledge, skill and judgment by the assessee did not necessarily mean that such profits arose or accrued in British India. The Privy Council was considering the assessability under section 10 of the Act, of profits of a business earned by a trader by exercise of his special knowledge and skill, and the decision has no relevance to the place of accrual of remuneration for services assessable under section 12 of the Act. The Privy Council did not purport to lay down any general rule or principle regarding the situs of accrual of profits of a business which depends upon the skill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n arising to the assessee from the Gwalior Mills was not taxed in view of section 14(2)(c) of the Act. The assessee had claimed deduction in respect of the entire remuneration which was payable to its directors for each of the three years. The income-tax authorities, however, disallowed a part of such remuneration which, in their opinion, could be properly attributable to the earning of the commission from the Gwalior Mills which had been exempted from tax. It was held that the apportionment of the directors' fees made by the income-tax authorities was unwarranted and that the entire amount paid to its directors by M/s. Birla Bros. was debitable as legitimate expenses of the managing agency business. Chief Justice Harries, who delivered the leading judgment in the case, observed : " In my judgment as the directors' fees are fees earned and payable in Calcutta by directors who must be deemed to carry on the business of the company in Calcutta, these fees must be regarded as expenses of the company incurred in earning the income upon which it is taxed." It should be noted that in this case the directors worked for their company, namely, M/s. Birla Bros. Ltd., at its head office in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevance of the place where duties are performed... (1) If a person holding an office or employment is ordinarily resident in the United Kingdom in the year of assessment and performs the duties of the office or employment wholly outside the United Kingdom, his emoluments in the year of assessment are not within the charge under Case I; and (2) if he does not so perform the duties his emoluments are within the charge of Case I whether they are or not received in the United Kingdom. Moreover, if the person holding the office or employment is not ordinarily resident in the United Kingdom his emoluments for the year of assessment will be chargeable in so far as they are in respect of duties performed in the United Kingdom." The charges which fall under Case II or Case III are not relevant to our purpose. It would be seen that under the old law, tax was payable if the situs of the " public offices " and " employment of profits " was the United Kingdom. The old law made no reference to the residence of the assessee during the relevant year. Under the new law, as it prevails in the United Kingdom, it is not only the situs of the office or employment but also the residence of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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