Citation Codes

Equivalent Citations

citation codes

Case Number

Misc. Case No. 199 of 1948

Judges

Hon'ble Mr. Vashistha Bhargava

Acts

Section 21 of the Excess Profits Tax Act read with Section 66(1) of the Income-tax Act.
7(1), Excess Profits Tax Act read with clause 2(a)
7(1), Excess Profits Tax Act read with cl. (2)(a)
Section 2(10) of the Excess Profits Tax Act
7(2), Excess Profits Tax Act.5. Profits
Indian Companies Act
Sub-rule (2) of R. 7

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Smart Summary

Analytical Summary of the Opinion (Malik, C.J.)

Factual and Procedural Background

This matter is a reference under Section 21 of the Excess Profits Tax Act read with Section 66(1) of the Income-tax Act. The specific question referred to the Court was whether, in the circumstances of the case, the remuneration granted to B.B. (also referred to as R.B.) Seth G.M. Modi was "directors' remuneration" within the meaning of that term as used in Schedule 1, Rule 7(1) read with clause (2)(a) of the same rule of the Excess Profits Tax Act.

Factual background as stated in the opinion: - A Hindu undivided family firm called R.B. Multanimul and Sons acted as Managing Agents of Modi Sugar Works Ltd. until March 1940; after a family disruption the business continued under a successor firm until September 1940. - In September 1940 a private limited company was formed which took over the business of R.B. Multanimul and Sons and became the managing agents of Modi Sugar Works Ltd. - The Articles of Association limited the Board of Directors to not more than seven and not fewer than two. The first five directors named included B.B. (R.B.) Seth Multanimul and Raizada Seth G.M. Modi. - Under Article 61 Raizada Seth G.M. Modi was appointed Governing Director for life, with the power to nominate or appoint a successor or have his administrator/executor act in his place. Article 62 defined specific functions for the Governing Director; Article 68 protected his tenure from removal by co-directors. - As Governing Director, he was paid remuneration. The Appellate Tribunal held that the amount paid to him was paid to him as a director and thus was not a deductible expenditure for purposes of computing profits for Excess Profits Tax.

Legal Issues Presented

Whether, in the circumstances of the case, the remuneration granted to B.B. (R.B.) Seth G.M. Modi was "directors' remuneration" within the meaning of that term as used in Schedule 1, Rule 7(1) read with clause (2)(a) of the Excess Profits Tax Act.

Arguments of the Parties

Appellant's (Assessee's) Arguments

It was urged that Seth G.M. Modi performed dual functions — both as a director and as a manager — and that the remuneration attributable to his managerial functions should not be treated as directors' remuneration.
Reliance was placed on Article 61 of the Articles of Association (which provided that Modi would carry out functions subject to the control and supervision of the Board) and on the definition of "manager" in the Indian Companies Act (Section 2(9)), which defines a manager as a person who, subject to the control and direction of the directors, has the management of the whole affairs of a company. The contention was that because he worked subject to control and supervision of other directors, he must be deemed to perform the functions of a manager and thus the payment should be treated as managerial remuneration rather than directors' remuneration.
It was also argued by reference to the English case Henry Richardson, Ltd. v. Inland Revenue Commissioners that where a person holds two distinct offices (e.g., secretary and director) their remuneration may be attributable to the separate office (i.e., secretary's remuneration) rather than all being director's remuneration.

Respondent's (Revenue/Department's) Arguments

The Department denied that their case was that Seth G.M. Modi was a manager for purposes of treating his payments as managerial remuneration; rather they contended that the whole amount paid to him was paid as director's remuneration and the case therefore came under Schedule 1, Rule 7(2) of the Excess Profits Tax Act.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Henry Richardson, Ltd. v. Inland Revenue Commissioners, (1947) 1 All E.R. 275	Illustration of the need to consider whether a person holds two distinct offices (and whether duties/remuneration are separate) — distinction between directors who merely attend meetings and working directors (e.g., managing directors) who give substantially all their time.	The Court considered the principle that one must determine whether separate offices existed. It used the case to examine whether Seth G.M. Modi held two distinct and separate offices (director and manager). The Court concluded that Modi did not hold two separate offices and therefore the remuneration was not separable as managerial pay distinct from directors' remuneration.
Hutton v. West Cork Railway Co., (1883) 23 Ch. D. 654	Statement by Bowen L.J. that a director is not a servant of the company and that amounts paid to him are, in effect, gratuities — supporting the notion that director's remuneration is of a different character than a servant/manager's pay.	The Court relied on the principle that a director (in contrast to a servant under a contract of service) receives remuneration by virtue of his office as director. This supported the conclusion that remuneration paid under the Articles to the Governing Director was director's remuneration and not pay to a manager employed under a contract of service.

Court's Reasoning and Analysis

The Court proceeded by reference to the statutory definitions and the terms of the Articles of Association, applying the following analytical steps (as reflected in the opinion):

Statutory definitions and relevant provisions:
- The Court noted the definition of "director" in Section 2(10) of the Excess Profits Tax Act, which includes "any person occupying the position of a director by whatever name called" and also includes any person who is a manager of the company or concerned in the management of the business and is remunerated out of the business funds and is the beneficial owner of not less than 20% of the ordinary share capital. It was pointed out that Seth G.M. Modi owned only 10% of the ordinary shares, not 20%.
- Schedule 1, Rule 7(1) provides that no deduction may be made for director's remuneration in computing profits; sub-rule (2) of R.7 excludes from the expression "director's remuneration" certain categories, including (a) remuneration of any director required to devote substantially the whole of his time to the company in a managerial or technical capacity and who does not beneficially own or control more than 5% of ordinary share capital, and (b) remuneration of any managing agent where such remuneration is included in the managing agent's profits for excess profits tax purposes.
Framing the key factual-legal question: The Court identified the central issue as whether the remuneration payable to Modi was paid to him as a director required to devote substantially the whole of his time (and thus potentially excluded by R.7(2)(a) if he owned not more than 5%), or whether it was payable to him as a manager (i.e., under a contract of service) and therefore not directors' remuneration.
Assessment of the parties' contentions:
- The assessee argued that Modi carried out managerial functions subject to the control and supervision of the Board as set out in Article 61, invoking the Companies Act definition of "manager" (Section 2(9)) to claim that Modi must be regarded as a manager and that the remuneration attributable to managerial work should not be treated as directors' remuneration.
- The Department countered that the whole amount was paid to him as director and should be treated as director's remuneration under Schedule 1, Rule 7.
Legal distinction between offices and capacities:
- The Court emphasized the difference between being a manager in the sense of holding a separate office under a contract of service and performing managerial functions by virtue of another office (for example, as a director or managing agent). The Court explained that where a person is a manager under a contract of service the remuneration can be regarded as manager's pay; but where someone performs managerial work by virtue of their capacity as director (i.e., not under a separate contract of service), the remuneration need not be characterized as managerial pay.
- The Court illustrated this distinction with the example of a managing agent (whose remuneration is managing agent's remuneration even if performing managerial work) and a director entrusted with management under the terms of his directorial office (whose remuneration remains director's remuneration unless he holds a separate managerial office under contract).
Application to the Articles of Association and the facts:
- The Court examined Articles 61 and 62 and other Articles (notably Article 68) to determine the nature of Modi's appointment: he was appointed Governing Director for life, with the right to nominate/appoint a successor, to chair the Board, and with certain enumerated powers including power to appoint a manager. He could not be removed by co-directors in the manner other directors could be. These attributes indicated an office of a Governing Director rather than employment as a manager under a contract of service.
- The Court concluded that it was never intended by the Articles that he should be appointed as a manager under a contract of service; rather his functions and rights were those of a Governing Director. He did not occupy two distinct and separate offices (director and manager) simultaneously.
- Consequently, the remuneration fixed under Article 61 was payable in his capacity as Governing Director irrespective of whether he personally discharged managerial functions or appointed someone else to discharge them.
Use of authorities:
- The Court applied the reasoning in Henry Richardson to the question of whether separate offices were held and relied on Hutton v. West Cork Railway Co. for the principle that a director is not a servant of the company, supporting the proposition that sums paid under the directorial office are director's remuneration rather than wages of a servant/manager.

Holding and Implications

Holding: The Court held that, on the facts and circumstances of this case, the remuneration granted to R.B. (Raizada) Seth G.M. Modi was directors' remuneration within the meaning of the term as used in Schedule I, Rule 7(1) read with clause 2(a) of the same rule.

Implications and direct effects:

The Court affirmed the view that the sums paid to Seth G.M. Modi were payable in his capacity as Governing Director and therefore constituted director's remuneration for purposes of the Excess Profits Tax computation rules referenced.
As stated in the opinion, the practical consequence aligns with the Appellate Tribunal's earlier conclusion that the amount paid to him was not a deductible expenditure from the total profits calculated for purposes of payment of the Excess Profits Tax.
The assessee was ordered to pay the costs of the other side, assessed at Rs. 500.
The opinion does not purport to lay down any broader rule beyond its application to the facts; the decision is driven by the construction of the Articles and the statutory definitions as applied to the particular appointment and rights of the Governing Director in this case.

Answer: In the affirmative.

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R.B. Seth Multanimal And Sons v. Commissioner Of Income-Tax

Malik, C.J:— This is a reference under Section 21 of the Excess Profits Tax Act read with Section 66(1) of the Income-tax Act. The question referred to this Court is as follows:

“Whether in the circumstances of the case, the remuneration granted to B.B Seth G.M Modi is directors' remuneration within the meaning of the term as used in Sch. 1, R. 7(1), Excess Profits Tax Act read with cl. (2)(a) of the same rule?”

2. There was a Hindu undivided family firm known as R.B Multanimul and Sons which till March 1940 worked as Managing Agents of the Modi Sugar Works Ltd. There was a disruption in the family and the Hindu undivided family firm was succeeded by another firm of the same name which carried on business up to September 1940. In September 1940, a private limited company was formed which took over as a going concern the business of E.B Multanimul and Sons and thus became the Managing Agents of the Modi Sugar Works Ltd. Prom the Articles of Association of the Company it appears that the Board of Directors could not exceed 7 including the Governing Director and could not be less than 2. The names of the first set of 5 Directors were given in the Articles of Association and they were B.B Seth Multanimul, Raizada Seth G.M Modi, Seth Harmukhrai, Seth Harnam Singh and Seth Benarsidas. Raizada Seth G.M Modi was under Article 61 appointed Governing Director subject to the control and supervision of the Board of Directors. His functions were defined in Article 62, Article 61 provides that he was to be the Governing Director for his lifetime and he was also given the right to nominate, assign or appoint a successor or appoint his administrator or executor to be the Governing Director of the Company in his place. As Governing Director of the company he was paid certain remuneration and the Appellate Tribunal held that the amount paid to Raizada G.M Modi was paid to him as Director of the company and the amount was, therefore, not a deductable expenditure from the total profits calculated for purposes of payment of the Excess Profits Tax.

3. ‘Director’ is defined under Section 2(10) of the Excess Profits Tax Act as including any person occupying the position of a director by whatever name called and also includes any person who is a manager of the company or is concerned in the management of the business, is remunerated out of the funds of the business and is the beneficial owner of not less than 20 per cent, of the ordinary share capital of the company. Seth G.M Modi owns only 10 per cent, shares in the company and not 20 per cent. It was, therefore, urged thatt Seth G.M Modi was performing two separate functions, one of a director and the other of a manager, and as manager, by reason of the fact that he was not the beneficial owner of 20 per cent, of ordinary share capital of the company, he could not be called a director.

4. On behalf of the Department it was urged that it was not their case that Seth G.M Modi was manager of the company and as he held beneficial ownership in not less than 20 per cent, ordinary share capital of the company he was deemed to be a director, but that the whole amount paid to him was paid to him as a director and that the case came under sch. 1, R. 7(2), Excess Profits Tax Act.

5. ‘Profits’ are defined in S. 2, sub-s. (19) as meaning profits as determined in accordance with Sch. 1; and R. 7(1) Sch. 1, provides that in computing the profits or standard profits no deduction can be made in respect of director's remuneration. Sub-rule (2) of R. 7 of the same Schedule provides that:

“The expression “director's remuneration” does not include:

(a) the remuneration of any director who is required to devote substantially the whole of his time to the service of the company in a managerial or technical capacity and is not the beneficial owner of, or able, either directly or through the medium of other companies or by any other indirect means, to control, more than five per cent, of the ordinary share capital of the company, or

(b) the remuneration of any managing agent where such remuneration is included in the profits of the managing agent's business for the purposes of excess profits tax.”

6. The question, therefore, is whether the remuneration, which the company wanted to deduct and the Appellate Tribunal has held that it was not entitled to deduct, was paid to Seth G.M Modi as director, who was required to devote substantially the whole of his time to the service of the company, it being admitted that he owned more than 5 per cent, ordinary shares, or it was paid to him as manager.

7. Learned counsel for the assessee has urged that Seth G.M Modi was performing dual functions of a director and a manager and the remuneration paid to him as manager cannot be said to be paid to him as director for performing any managerial work entrusted to the director. The whole basis of the argument is that under Article 61 of the Articles of association Seth G.M Modi had to carry on the work assigned to him subject to the control and supervision of the Board of Directors and it is urged that Seth G.M Modi, therefore, became a manager of the company. Reliance is placed on the definition of the word ‘manager’, in the Indian Companies Act. The word ‘manager’ has been defined in Section 2(9) of the of that Act “as a person who, subject to the control and direction of the directors, has the management of the whole affairs of a company”. The argument is that, if he was to carry on the work assigned to him as a director and not as a manager, then he should not be subject to the control and supervision of the other directors and since he was to work subject to the control and supervision of other directors he must be deemed to be performing the functions of a manager in addition to his duties as director and ceased to be a director simpliciter.

8. Learned counsel has urged that the word ‘manager’ is not defined in the English Statute and, therefore, English cases are not likely to be of much assistance. Reference, however, was made to the case Henry Richardson, Ltd. v. Inland Revenue Commissioners, (1947) 1 All E.R 275. In that case G was the secretary of the company and later became a director. As secretary she was drawing a salary and as director she became entitled to receive the fees payable to other directors together with certain bonuses. The question for decision was whether the whole amount paid to her as salary as secretary as well as the fees and bonuses paid to her as director became remuneration paid to her as a director. On behalf of the Inland Revenue Commissioners, it was urged that having become a director of the company whatever amount she received must be deemed to be director's remuneration. It was pointed out, on the other hand, that having continued to be the secretary it might well be urged that all that she received was secretary's remuneration.

9. The learned Judge (Atkinson J.), however, pointed out that the question had to be decided on a consideration of the fact whether she continued to hold two offices, her duties as secretary being separate from her duties as Director and Chairman of the Board, and that whether if she ceased to be a Director, the post of Secretary would remain and her salary as Secretary would remain payable to her. The learned Judge further pointed out that Directors are of two kinds: Directors who merely attend Directors' meetings and get Directors' fees; and working Directors who give all their time to carrying on the business of the company, such as a Managing Director, and in the latter case the amount paid to the Managing Director would be remuneration paid to a Director.

10. In the case before us it cannot be seriously urged, that Seth G.M Modi held two distinct and separate offices, one of director and the other of manager. The definition of a manager in the Companies Act is very wide and

“includes a director or any other person occupying the position of a manager by whatever name called and whether under a contract of service or not”.

11. The Indian Companies Act thus contemplates managers who might be servants of the company under contract of service as also managers who might not be servants but might be carrying on the work of a manager in some other capacity such as the capacity of a director. If is only if a person is a manager under a contract of service that the remuneration paid to him can be said to be the remuneration paid to a manager simpliciter. In case where the person happens to be in charge of some managerial work because of some other capacity occupied by him the remuneration paid to him need not necessarily be held to be remuneration paid to him in his capacity as manager.

12. We may take the example of a managing agent. The managing agent is also under the control and direction of the directors “except to the extent if any, otherwise provided for in the agreement” and is entitled to the management of the whole affairs of the company by virtue of an agreement with the company. If by virtue of this right a managing agent actually has the management of the whole affairs of the company, he may he doing the same work as a manager is expected to do under the Indian Companies Act, still the remuneration paid to him must be held to be managing agent's remuneration. Similarly, if a director has the management of the affairs of a company entrusted to him in his capacity as a director, the remuneration paid to him will be director's remuneration even though the work entrusted to him might be the same as is usually done by a manager. It will cease to be directors remuneration only if he happens to be doing the work not in his capacity as a director to whom some additional work has been entrusted but as a manager in the capacity of a servant under a contract of service so that he is really holding two distinct and separate offices.

13. In Hutton v. West Cork Railway Co., (1883) 23 Ch. D. 654, it was pointed out by Bowen L.J that a director is not a servant of the company and whatever amount is paid to him is paid as gratuity. In the case before us there can be no doubt that Seth G.M Modi was entrusted, under Article 62 of the Articles of Association, with certain functions by virtue of his having been appointed Governing Director and it was never the intention under that Article to appoint him as a manager under a contract of service with the company. He did not occupy two distinct and separate offices, one of manager and the other of director. He, as Governing Director, was entitled to continue in that office for the rest of his life and his rights were to go to his successor, administrator or executor after his death. He was further given the right to assign his rights or nominate his successor. He was to be the Chairman of the Board and was to preside at all meetings of the Board. Under Article 68 of the Articles of Association, though all other directors had to vacate office on being requested in writing to do so by the co-directors, the Governing Director could not be so removed. In Article 62 of the Articles of Association the various functions to be performed by the Governing Director, without prejudice to the general powers conferred on him by Article 61, are enumerated which include the power to appoint a manager. If he chose to appoint a manager in exercise of his power as the Governing Directors, he would cease to be the manager of the company as defined under the Indian Companies Act and yet he would be entitled to the remuneration fixed for him under Article 61 of the Articles of Association.

14. It cannot be seriously contended that Seth G.M Modi could have continued to exercise the functions entrusted to him under Article 62 as Governing Director, if he had ceased to be director of the company. It is clear that the remuneration payable to him under Article 61 was payable in his capacity as a Governing Director irrespective of the fact whether he also discharged the functions of the manager under the Indian Companies Act or entrusted such functions to any other person appointed by him.

15. We are, consequently, satisfied that, on the facts and circumstances of this case, the remuneration granted to R.B Seth G.M Modi was director's remuneration within the meaning of the term as used in sch. I, R. 7(1), Excess Profits Tax Act read with clause 2(a) of the same rule. The assessee must pay the costs of the other side which we assess at Rs. 500.

B/D.H

16. Answer in the affirmative.

R.B. Seth Multanimal And Sons v. Commissioner Of Income-Tax

Analytical Summary of the Opinion (Malik, C.J.)

Factual and Procedural Background

Legal Issues Presented

Arguments of the Parties

Appellant's (Assessee's) Arguments

Respondent's (Revenue/Department's) Arguments

Table of Precedents Cited

Court's Reasoning and Analysis

Holding and Implications

R.B. Seth Multanimal And Sons v. Commissioner Of Income-Tax

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