TMI Blog1977 (9) TMI 11X X X X Extracts X X X X X X X X Extracts X X X X ..... at the learned counsel appearing for both the parties ultimately agreed that our answer to question No. 2 should abide by our answer to question No. 1 and accordingly we have dealt with their arguments only on question No. 1 and have allowed the articles of association of both the companies to be kept on the record at their request. There is no separate contract between the assessee and the companies regarding his appointment as the managing director. Their agreements in this behalf are enshrined in the articles of association of the respective companies. The articles of association of these companies do not provide for dismissal of the assessee from the office of the managing director. Dr. Debi Pal, learned counsel for the assessee, therefore, argues that the assessee is an agent and not a servant of the companies. Whereas Mr. Suhas Sen, learned counsel for the revenue, argues that as the assessee has been appointed under the articles of association as the managing director and the companies have inherent right to alter the articles, the companies can always dismiss him from that office by altering their articles and, accordingly, it should be held that he is an employee of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pacity of a manager. And as a director he gave direction to himself to do his duties as the manager of the companies and, therefore, it should be held that he is a servant of the companies. But we are not impressed by this contention, for it cannot be said that all managing directors are the servants of the companies and as already stated the true nature of the contracts between the assessee and the companies should determine their relationship. We will now take up the articles of association of Surrendra (Overseas) Pvt. Ltd. which was incorporated as a private limited company under the provisions of the Indian Companies Act, 1913. Retirement by rotation under art. 68 does not apply to the assessee. Art. 69, inter alia, provides that the directors, may meet together to despatch the businesses and the questions arising at any such meeting shall be decided by a majority vote. Art. 76 deals with the disqualification of the directors and it provides that the office of the director shall be vacated in case of happening of any of the events specified therein. Art. 79 provides that the business of the company shall be managed by the directors. Other powers of the directors are specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee is the managing director of this company for life. He is also the first and the permanent director and chairman of this company. His powers under art. 62 are of pivotal importance. He can from time to time and at any time appoint any person as an additional director and can also remove him. No servant of any company can appoint a director, not to speak of dismissing him. These two powers, in our opinion, lead to an irresistible conclusion that the assessee is not a servant of Surrendra (Overseas) Pvt. Ltd., although this company and its directors exercise some amount of supervisory control over him and his appointment can lawfully be terminated by this company without amending its articles if he is found to be guilty of fraud, misfeasance, dishonesty, wilful default, gross negligence and the like causes. In the premises, it must be held that the assessee's remuneration as the managing director of Surrendra (Overseas) Pvt. Ltd. is not assessable under s. 7 of the Act. In this behalf, we may also say here that the provision for payment of remuneration by itself is not a decisive factor as held by Chagla J. (as he then was) in CIT v. Lady Navajbai R. J. Tata [1947] 15 ITR 8 (B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholder of the company. His two nominees were the other shareholders and directors. Under the articles, the management of the company vested in the directors who were to act under the supervisory control and direction of the assessee whose remuneration for acting as the managing director was to be voted in the annual general meeting of the company. His remuneration as the managing director was held to be assessable under s. 7 of the Indian I. T. Act, 1922, in the following terms at pages 610, 611 of the report: "It is to be observed that Mr. Smith is under article 58 appointed for life and that there is vested in him the power to control and manage the whole of the company's business and that so long as he retains the said office no one else has any right to intervene in the management. In my opinion these articles fall under the head of creating a contractual relationship between the company and Mr. Smith by which Mr. Smith is to be in the service of the company ...... In these circumstances his remuneration falls to be taxed under section 7 and not section 12 ........" The case of L. N. Gadodia Co. v. CIT [1951] 20 ITR 460 (All) was decided on different facts and it doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommodation and the question was whether the value of the rent-free accommodation was assessable as salary or perquisite. The Allahabad High Court answered the question in the negative by holding that he was not a servant of the company. Reliance was also placed before us on Halsbury's Laws of England and the recognised text books on company law. As the Supreme Court has already considered them in Ram Prashad's case [1972] 86 ITR 122, it is unnecessary for us to discuss them or to enumerate the principles discussed in the aforesaid cases. We will, however, refer to Ram Prashad's case [1972] 86 ITR 122 (SC) while dealing with the arguments of Dr. Pal. Dr. Pal argues that the directors of Aminchand Pyarelal (Cal) Ltd. have no supervisory control over the assessee and, therefore, the assessee is not a servant of this company. But we are not impressed by it. This company was incorporated as a public limited company under the Indian Companies Act, 1913. The control of this company is vested in the directors under art. 133. The management of the business of the company is also vested in the directors under the provisions of the Indian Companies Act, 1913. The assessee is to manage t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der art. 135 of Aminchand Pyarelal (Calcutta) Ltd., Dr. Pal argued that the assessee cannot be removed before 20 years from the office of the director under art. 116, the relevant portion whereof reads as follows: "Subject to the provisions of any agreement for the time being in force the company may by extraordinary resolution remove any director before the expiration of his period of office ........" Dr. Pal made the aforesaid contention in support of his earlier submission, namely, that this company has no power to dismiss the assessee from the office of the managing director and, therefore, he is not a servant of this company. But art. 135 is solely confined to the assessee's appointment as the first managing director of this company and apart from it there is no agreement on the record relating to his directorship. Therefore, the words "subject to the provisions of any agreement for the time being in force" in art. 116 do not apply to him in his capacity of a director. He can accordingly be removed from the office of the director under art. 116 which is an overriding article giving a specific right to the company to remove any director "before the expiration of his perio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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