TMI Blog1982 (2) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... pril, 1957, two managing directors were appointed by resolution dated 28th March, 1957. These two managing directors were Mr. S. N. Dey and Mr. Kasambhai Abdul Raoof Maniar. Their remuneration was Rs. 3,000 each per month. The resolution of appointment of managing directors read as follows : " RESOLVED that M/s. S. N. Dey and Shri Kasambhai Abdul Raoof Maniar be and are hereby appointed managing directors of the company on a remuneration of Rs. 3,000 each per month to manage the affairs of the company on behalf of the board of directors, subject to control and directions that may be given from time to time by the board of directors of the company in whom the management of the company shall vest from the midnight of March 31, 1957, consequent upon. " Kasambhai died on 18th September, 1966, and in the vacancy so caused, Umerbhai Abdul Raoof Maniar was appointed as the other managing director. The assessee-company has a recognised staff provident fund which was recognised by the Commissioner of Income-tax by his order dated 23rd June, 1951. The provident fund scheme came into effect from 1st August, 1950, and there were rules and regulations governing the said employees' prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of absence from the board of directors, the office of the director is to be taken as vacated. The Tribunal further took the view that the control and supervision of the directors over the joint managing directors was not the control and supervision of the directors in regard to the manner or method of their work and that the control and supervision of the directors was a general control and supervision and within the limits of their authority and further that the day to day management of the business of the company was within the discretion of the joint managing directors subject to the limitations detailed in art. 131. Article 131 provides that the managing director or managing directors shall not exercise power to: (1) make calls on shareholders in respect of moneys unpaid on the shares in the company ; (2) except within the limits previously fixed by the directors at board meeting (a) invest the funds of the company, (b) make loans and borrow moneys. The Tribunal found that the circumstances in the case established that the joint managing directors were the agents of the assessee and not the servants of the assessee remunerated by wages or salaries. The Tribunal fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. The Tribunal having declined to make a reference of the fourth question proposed by the assessee, the assessee has taken out a motion for relief that the statement of the case be amended by incorporating the fourth question or, alternatively, the statement of the case be referred back to the Appellate Tribunal with a direction to refer the said question of law. Mr. Dastur, appearing on behalf of the assessee has advanced an elaborate argument before us in support of his contention that the two managing directors must be considered as employees of the assessee-company and that the ground on which the Tribunal has held against the assessee-company that there was no contract of employment between the managing directors and the assessee is based on an erroneous assumption that it is always necessary that there has to be a separate contract for employment between the managing directors and the assessee before they could become employees of the company. The view taken by the Tribunal, according to the learned counsel, is contrary to an earlier decision of this court in CIT v. L. Armstrong Smith [1946] 14 ITR 606, and the decision of the Supreme Court in Ram Prashad v. CIT [197 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessable as salary under section 7. In other words, whether or not a managing director is a servant of the company apart from his being a director can only be determined by the articles of association and the terms of his employment." The Supreme Court cited with approval (p. 127) a passage from the judgment of the Scottish Court of Session in Anderson v. James Sutherland (Peterhead) Ltd. [1941] SC 203 at 218, where Lord Normand stated: ".. . ...... the managing director has two functions and two capacities. Qua managing director he is a party to a contract with the company, and this contract is a contract of employment; more specifically I am of opinion that it is a contract of service and not a contract for service. ' " The Supreme Court also referred to the decision of this court in Armstrong Smith's case [1946] 14 ITR 606 (Bom). Mr. Dastur has also cited before us a passage from Palmer's Company Law, 22nd Edn., Vol. 1, p. 668, which reads as follows : " It follows from this case ( [1941] SC 203-Anderson v. James Sutherland (Peterhead) Ltd.) that in modern company practice a managing director, in the great majority of cases, combines the position of director and of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r membership of the provident fund. It is necessary to refer in some detail to the relevant provisions in the rules which regulate the management of the employees' provident fund because it is contended by Mr. Dastur that the two managing directors were not only employees of the company, but they were also permanent in the service of the company. This argument has been advanced obviously with a view to show that the requirements of the provident fund rules are satisfied in the instant case. Clause 3(b) of the Rules defines a member as meaning " any person permanently in the service of the company or likely to be made permanent in the service of the company and who contributes to the fund". The object of the fund as stated in cl. 4 of the Rules is " to provide under these rules every member on the termination of his service with accumulated amount payable to him or his heir or nominee in case of death ". The procedure for becoming a member of the fund is laid down in cl. 7 of the Rules, which reads as follows : " 7. Membership.-Every member who was in the service of the company on 1st August, 1950, or who shall have entered the services of the company after that day excludi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insane or otherwise incapacitated for work and whose work during such service shall have been satisfactory in the opinion of the managing director shall be entitled to receive the full amount found on making up his account standing to his credit as on the date of termination of his service in respect of his own contribution and interest thereon and of the company's contribution and interest thereon. Under cl. 21(a), the member who is dismissed from the service of the company for reasons of misconduct is entitled only to the amount found on making up his account to be standing to his credit as at the date of termination of his service in respect of his own contribution thereon. Under sub-cl. (b) of cl. 21 if a member is dismissed for misconduct or voluntarily leaves the service of the company otherwise than on account of ill-health or other unavoidable cause before completing five years' continuous service, then the company has a first charge upon such part of the amounts standing to his credit at the termination of his service in respect of the company's contribution and interest thereon including any balance then outstanding and subsequently repaid as the member shall not beco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyees' Provident Funds Act was essentially made in order to provide certain benefits to employees after their retirement from employment. The Statement of Objects and Reasons of the Employees' Provident Funds Act, 1952, states as follows: " The question of making some provision for the future of the industrial worker after he retires or for his dependants in case of his early death, has been under consideration for some years. The ideal way would have been provision through old age and survivors' pensions as has been done in the industrially advanced countries. But in the prevailing conditions in India, the institution of a pension scheme cannot be visualised in the near future ....... Taking into account the various difficulties, financial and administrative, the most appropriate course appears to be the institution compulsorily of contributory provident funds in which both the worker and the employer would contribute. Apart from other advantages, there is the obvious one of cultivating among the workers a spirit of saving something regularly. The institution of a provident fund of this type would also encourage the stabilisation of a steady labour force in industrial centres." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elf. For example, in so far as the admission to the provident fund scheme is concerned, discretion is vested in the managing director to admit a person to the membership or not. Now, what is contended by Mr. Dastur is that the rules do not expressly prohibit a managing director from becoming a member of the provident fund and it could as well be that where an application is made by the managing director, it would be considered by the board of directors. It will not be permissible for us to read such a power in the board of directors in so far as the provident fund rules are concerned. The power to admit a member is vested in the managing director himself. That would be a clear indication, in our view, of the fact that it was never contemplated by the rules that the managing director himself would become a member of the provident fund. Similarly where a question, as to whether the full benefit of the provident fund should be given to a person, who completes five years of continuous service but whose services are terminated, by way of retrenchment or by reason of the member becoming insane or otherwise being incapacitated for work, arises, it is the managing director who has to sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the resolution dated March 28, 1957, the assessee-company has incurred a liability and the company has discharged that liability and the moment it was found that the company had discharged that liability, the assessee-company will be entitled to the deduction. It is not possible for us to accept this argument. It is no doubt true that under s. 36(1)(iv) of the I.T. Act " any sum paid by the assessee as an employer by way of contribution towards a recognised provident fund " subject to the conditions laid down therein is made a permissible deduction. In the present case, we have the recognised provident fund which is regulated by certain rules. Only such payment as is permissible under those rules will qualify for deduction under s. 36(1)(iv). The mere fact that a payment has been made in pursuance of the resolution dated 7th August, 1963, will not entitle the assessee-company for deduction. The payment must be also in accordance with the rules of the recognised provident fund. If the rules of the provident fund do not permit a managing director to become a member, and indeed there is no finding nor any material anywhere on the record to show that the managing directors had beco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Tribunal. It would not be possible for us to go behind the statement of the Tribunal that such a question was never argued before it. Indeed, so far as the fourth question, in respect of which this motion has been taken out, will itself indicate that the question which was sought to be agitated by the assessee was not whether the assessee was entitled to the deduction in question under s. 37 of the I.T. Act, but the thrust of the question was that the Tribunal had failed to consider the argument under s. 37 which is entirely different from contending that the Tribunal should have granted the, relief to the assessee under the provisions of s. 37 of the I.T. Act. We do not see any warrant in view of the facts of the present case to take the view that the Tribunal should be called upon to deal with the question again for the first time as to whether the assessee was entitled to a claim under s. 37 in the absence of any findings recorded necessary for the purposes of adjudication of a claim for deduction under s. 37. It would also not be possible for us to accept the argument of Mr. Dastur that in any case, alternatively, the claim for deduction was permissible under s. 37 of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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