1. The question that has been referred to us for our determination in this reference at the instance of the Commissioner of Income-tax, Bombay City-II, Bombay, runs as follow :
'Whether, on the facts and in the circumstances of the case, the additional remuneration received by the respective assessees in terms of the resolution of S. B. Joshi & Co. Ltd., dated June 20, 1959, was income liable to be assessed as income under the head 'Salary' or income under the head 'Business or profession' ?'
2. The question relates to the assessment years 1961-62 and 1962-63. During the relevant accounting years for the said assessment years, four assessees, Shri V. R. Chaphekar, M. P. Apte, D. B. Joshi and R. B. Joshi, received certain sums as additional remuneration in consideration of the additional responsibilities that were remuneration in consideration of the additional responsibilities that were required to the undertaken by them from a company called M/s. S. B. Joshi & Co. Ltd., of which these persons were directors and from whom each one of them also received a regular remuneration of Rs. 1,000 per month. The four assessees mentioned above received sums of Rs. 24,594, Rs. 24,594, Rs. 24,594 and Rs. 24,594, respectively, during the accounting year relevant for the assessment year 1961-62, while Mr. Chaphekar and Mr. D B. Joshi received sums of Rs. 25,000 and Rs. 25,000, respectively, as additional remuneration during the accounting year relevant for the assessment year 1962-63. In the individual assessment of these four persons who were directors of M/s. S. B. Joshi & Co. Ltd., a common question arose as to whether the amount or amounts of such additional remuneration that was received by each one of them in addition to the regular remuneration of Rs. 1,000 per month were to be treated as income under the head 'salary' or were to be treated as income under the head 'business or profession'. It appears that two separate resolutions had been passed by the said limited company sanctioning the regular remuneration of Rs. 1,000 per month and the said additional remuneration, in terms whereof the amounts mentioned above for the respective years come to be received by the assessees. By a letter dated July 22, 1963, the authorised representative of the assessees contended before the Income-tax Officer that whereas the amount of Rs. 1,000 per month was liable to be treated as income from salary, the other amounts received by them fell properly to be treated as income from business or profession. It was emphasized that the amounts paid as additional remuneration were debited in the accounts of the limited company separately and shown under the head 'director's remuneration' as required by the Indian Companies Act, 1956. By a further letter written on October 28, 1963, the nature of the work done by the assessees as technical advisers for which additional remuneration was sanctioned by the second resolution was further explained to the Income-tax Officer. The Income-tax Officer, however, did not accept the contention of the assessees. He took the view that since it was admitted that these four assessees, who were directors of M/. S. B. Joshi & Co. Ltd., were also working in the capacity as employees and were receiving a specific salary of Rs. 1,000 per month, it was not possible to differentiate between the work done by them which was of administrative nature as an employee and the work done as technical advisers; that the additional amounts had been paid as additional remuneration and since the relationship of employers and employees was admitted by the assessees between them on one hand the limited company on the other, the additional amounts received by them were clearly taxable as salary under section 7 of the Indian Income-tax Act, 1922 (section 15 of Income-tax Act, 1961).
3. The assessees preferred appeal to the Appellate Assistant Commissioner and the Appellate Assistant Commissioner passed a common order, whereby he ultimately confirmed the view of the Income-tax Officer. On the question as to whether this additional amount should be regarded as business income, he principally relied upon the fact that all fresh contracts that were taken by the limited company since the passing of the said resolutions were taken by the limited company, executed by the limited company, executed by the limited company itself and the profit and loss thereof belonged to the limited company and that the assessees had no interest in this business nor were they concerned with the profit and loss except for their fixed remuneration. He pointed out that in the earlier year when the execution of the contract under taken by the company were given by the company to other firms with which one or other assessees was associated as a partner dealing with others, the assessees could undoubtedly be said to be carrying on a business. But the position in the relevant assessment years was entirely itself which alone could be said to be carrying on this business, the amounts received by the assessees could not possibly as treated as business income. He also considered the question from another angle, viz., as to whether these receipts could be regarded as income received by the assessees in exercise of their profession as an engineer or technical adviser, and examining the question from that angle, he took the view that one of the basic ingredients of a profession was that professional services should be available to any person in need of the technical skill and that, in the case of these assessees, there was not a single instance of any one of them having ever acted as a technical consultant for any outside party. He pointed out that no such income had ever been shown nor was it the contention of the assessees that any one of them had ever acted in such capacity for anybody else and that merely because the assessees were partners, that fact need not necessarily convert their receipts into professional income if the facts showed otherwise. In this view of the matter, he held that the income could not be possibly taxed as provisional income. The matter was carried further in second appeals that were preferred by the assessees to the Appellate Tribunal and the Tribunal also consolidated all the appeals and passed a common order. On a consideration of several fresh facts that were placed before the Tribunal along with those that had been already placed before the lower taking authority, the Tribunal relying upon three decision, (1) Commissioner if Income-tax v. L. Armstrong Smith  14 ITR 606, (2) Commissioner of Income-tax v. Lady Navajbai R J Tata : 15ITR8(Bom) (3) Commissioner of Income-tax v. Mrs. Durga Khote : 21ITR22(Bom) took the view that the assessees, merely because they were directors were not servants of limited company and further that it was difficult to hod that these engineers who were professional men and carried on business become employees of the limited company when they agreed to give technical advice merely because they had earlier agreed to do some administrative work on a salary of Rs. 1,000 per month. The Tribunal did not agree with the Appellate Assistant Commissioner's observation that there was not a single instance of any of the assessees having acted as a technical consultant for any outside party, for, in its view, the limited company and the various partnerships were all different persons as recognised by the department itself in its assessment and that the assessees at the time they were giving technical advice to the company were also partner sin one or the other of the various partnerships and that those partnerships must be regarded as outside a parties so far as the limited company was concerned. It, therefore, held that the assessees could not be regarded as mere servants of the limited company. The Tribunal finally concluded that on the facts and circumstances of the case and having regard to the various decisions of the Bombay High Court (referred to above), the remuneration which was received by the assessees, under the second resolution should be regarded as income from business or profession and not as income from salaries, notwithstanding their position as directions of the limited company and notwithstanding the receipt to a regular remuneration under the first resolution (Rs. 1,000). In other words, the Tribunal allowed the appeals of the assessees holding that the additional remuneration was income from business against which it was permissible to set off the loss brought forward from the earlier years under section 24(2) of the Indian Income-tax Act, 1922, which really was what the assessees ultimately wanted by raising such a question before the taxing authorities and before it. As stated earlier, at the instances of the Commissioner of Income-tax, the question set out at the commencement of the judgment has been referred to us for our determination.
4. Since the question for decision must ultimately depend upon appreciation of the facts and circumstances obtaining in the case, it will be necessary to set out certain undisputed facts which have obtained in the case, it will be necessary to set out certain undisputed facts which have obtained in the case. Initially, a partnership firm called M/S. B. Joshi & Co. consisting of two partners, viz., S. B.
5. Joshi and R. M. Joshi, used to secure contracts for construction of bridges. These contracts were not directly executed by the firm, but the work of each contract was got done through as sub-partnership, in which the said partners of the said firm would be associated with certain engineers being one or the other of the assessee. In respect of the share of profit from such sub-partnership, the assessees used to be assessed treating the income as income from business. In this manner, from the assessment year 1951-52 till the assessment year 1959-60, the assessees had income from business by way of share of profit in such sub-partnership. Some time in 1053, a limited company was incorporated in the name of S. B. Joshi and Company Ltd., which was initially a private limited company, but subsequent to the assessment years under consideration, the company was converted into a public limited company. During the relevant assessment years with which we are concerned, it continued to be a private limited company having five directors who were all engineers by profession and had business income by way of share of profits in the sub-partnership as mentioned above. These directors were : (1) R. B. Joshi, (2) R. N. Joshi, (3) D. B. Joshi, (4) M. P. Apte, and (5) V. R. Chaphekar. In other words, the four assessees before us were as such directors of the private limited company. It appears that this limited company did not do any business till the assessment year 1956-57, and it was in that year for the first time that it submitted tenders for construction of projects. Some contracts already on hand with the firm of S. B. Joshi & Co. were transferred to the limited company with the consent of the other contracting partners. Such pending contracts which were so transferred were executed in the same way as the firm had been point, that is to say, by getting the work done through a sub-partnership and in each of such sub-partnership, the company was one of the partners and the partners were the same engineers who were also its directors as mentioned above. The assessees before us thus continued to figure as partners along with the limited company from the assessment year 1956-57 in some of these sub-partnerships. As in the previous years, the share of profit from such sub-partnerships was continued to be assessed in the hands of the assessees as income from business.
6. The point, however, is as to in respect of the fresh or new contracts which were taken by the limited company in the relevant assessment years under consideration, when such contracts were executed by the limited company itself enjoying the profits, if any, and at the same time suffering loss, if any, arising therefrom and which were not entrusted by the limited company to any-partnerships firm, what would be the legal position with regard to the additional remuneration that was received by the assessees from the limited company under the second resolution dated June 20, 1959; and the question is whether such additional remuneration should be treated as income under the head 'Salary' or should be treated as income under the head 'Business or profession'.
7. It would, therefore, be necessary to set out both the resolution dated June 20, 1959, under which remuneration it terms called 'salary' at the rate of Rs. 1,000 per month was payable to each one of these assessees and the resolution under which additional remuneration was payable to these assessees. Under the first resolution that was passed by the board of directors of S. B. Joshi & Co. Ltd., in the meeting held on June 20, 1959, it was resolved thu :
'The chairman informed the board that Shri V. R. Chaphekar was working at the Kymore Works he was getting a salary of Rs. 1,000 p.m. As that work is now completed, he is looking to other works of the company. It was, therefore, RESOLVED that Shri V. R. Chaphekar be and is authorised to draw a salary of Rs. 1,000 p.m. with effect from June 1, 1959.'
8. Similar resolution identically worked were passed in regard to the other three assessees. The second resolution that was also passed by the board of directors of S. B. Joshi & Co. Ltd., held on June 20, 1959, runs thu :
'The board RESOLVED that, as the experienced engineers are already working on works carried out in partnerships and as the other engineers are too junior to be associated with such a responsibility, agreements should not be made with them till they attain the qualities necessary for such an association.
The board further RESOLVED that in respect of the works undertaken by the company, not entrusted to directors of the company, viz.,
(1) Shri R. B. Joshi (2) Shri R. N. Joshi (3) Shri D. B. Joshi (4) Shri M. P. Apte (5) Shri V. R. Chaphekar
be paid 1% of the net work done but not exceeding Rs. 25,000 to each of the above directors in addition to their present remuneration in consideration of the additional responsibilities required to be undertaken by them.'
9. It may be stated that in addition to the salary of Rs. 1,000 per month which was payable to each of these assessees under the first of the aforesaid two resolutions, each one of the assessees had received additional remuneration during the accounting periods relevant to the assessment years in question in pursuance of the second such additional remuneration that was received by each one of the four assessees should be treated as income under the head 'Salary' or income under the head 'Business or profession' On a fair reading of these two resolutions, two or three aspects become at once clear. In the first place, unquestionably under the first resolution, what is paid to each one of theses assessees is termed as salary of Rs. 1,000 per month. Secondly, under the second resolution, it has been stated that the additional remuneration mentioned therein payable to each one of the assessees is 'in addition to their present remuneration'. During there course of arguments it was sought to be urged by Mr. Patil at one stage that the additional remuneration was in consideration of technical advice or services received from each of these assessees by the limited company in carrying out or executing the construction work that had been undertaken by it and, therefore, it should be regarded as income received by each one of them form each one's profession as an engineer and could not be equated as additional salary paid to them in addition to the salary which was payable to them under the first resolution. It was also urged by Mr. Patil that so far as the first resolution was concerned, it was clearly termed as salary which was obviously for the purpose of doing administrative work of the first limited company as a director and, therefore, the nature of the additional remuneration payable under the second resolution was different from the nature of the first remuneration that was to be received by each one of them under the first resolution. It is not possible to accept either of these contentions of Mr. Patil for the reasons which become very place, the first resolution nowhere indicates that the salary of Rs. 1,000 per month is paid to each one of the assessees for doing administrative work of the limited company. On the other hand, the resolution, which, were have quoted above, clearly states that Shri V. R. Chaphekar was working at the Kymore Works where the was getting a salary of Rs. 1,000 per month and as that work is now completed, he is looking after other works of the company. Presumably, Mr. Chaphekar has been looking after the construction works of the company which were being carried on at different places and the sum of Rs. 1,000 that was paid to him was not for discharging administrative work in the officer of the limited company. So far as the second resolution is concerned, there is nothing to indicate that this additional remuneration was being paid to each one of the assessees in consideration of any technical advice that was being received by the limited company from these assessees. Some sort of reliance was placed by Mr. Patil on the first part of the second resolution, in which some reasons have been indicated as to why this additional remuneration was to be paid to each one of these assessees under the second resolution. He invited our attention to the first part of the second resolution, under which it has been stated that apart from the experienced engineers who were already working on works carried out in partnerships, the other engineers were too junior to be associated with such a responsibility and, therefore, agreements should be made with them till they attain the qualities necessary for such association, presumably for the purpose of entrusting the execution of the work to sub-partnerships and it was on account of this reason that additional remuneration was paid to each one of the assessees under the second resolution. In the first place, the real question that one has to consider is as to whether when the contracts which were undertaken by the limited company had not been got exactitude through sub-partnerships - whatever be the reason - and when such work was being executed or carried out by the limited company itself running the risk of incurring loss or enjoying the prospects of making profits, the additional remuneration that was made payable under this second resolution to each one of the assessees should be regarded as income under the heads of business or profession and it is from that angle that the resolution has to be properly interpreted. Looked at from that angle, it is difficult to accept Mr. Patil's contention that the additional remuneration that was made payable to each one of the assessees was in consideration of any technical skill or technical advice, which the limited company was receiving from them in the matter of execution of the contract works. In any event, it cannot be disputed that no such aspect appears clear in the resolution at all. On the other hand, as indicated above, the language of the latter part of the second resolution clearly suggests that this additional remuneration that was made payable to each come one of the assessees was 'in addition to their present remuneration' which admittedly was termed as salary payable to each one of them per month. In our view the first part of the resolution merely sets out the reason for not forming sub-partnerships as was being done earlier and if, for whatever reason, they were not formed there would be no scope to contend that the additional receipts were from business or profession. Moreover, as we have indicated above, while narrating undisputed facts, it is quite clear that so far as fresh or new contracts that were taken by the limited company are concerned, admittedly none of them had been entrusted or got executed through any sub-partnerships that were being formed earlier, but these contracts were executed by the limited company itself. It was the limited company which was interested either in the profits or losses that might arise as a result of execution of those works and the assessees had really no interest in such profits or losses arising from such contracts that were executed by the limited company itself. In other words, irrespective of the question as to whether as a result of the execution of these contracts the company earned profits or sustained loss, the assessees were entitled to their remuneration by reason of the two resolutions, which were to the effect that they would get a salary of Rs. 1,000 and in addition would get 1% of the work done, but not exceeding Rs. 25,000.
10. Having regard to these facts and circumstances which emerge very clearly on record, it is difficult to accept Mr. Patil's contention that the additional remuneration each one of the assessees was receiving under the second resolution should be treated as income under the head of business or profession and the Tribunal's view cannot be accepted.
11. The Tribunal has relied upon two or three decisions of this court for the purpose of arriving at the particular conclusion to which it reached, viz., (1) Commissioner of Income-tax v. Armstrong Smith : 14ITR606(Bom) ; (2) Commissioner of Income-tax v. Lady Navajbai R. J. Tata : 15ITR8(Bom) and (3) Commissioner of Income-tax v. Mrs. Durga Khote : 21ITR22(Bom) .
12. We were taken through each one of these decisions by Mr. Joshi and after having gone through these decision, we are clearly of the view that each one of the decision turns upon the facts which obtained in each of the cases and it is not possible to sustain the view taken by the Tribunal because of any of these three decision. In the first mentioned case, it has been held by this court that a director of a company as such is not a servant of the company and the fees he receives are by way of gratuity. But that does not prevent a director or a managing director from entering into a contractual relationship with the company, so that, quite apart his officer of director, he becomes entitled to remuneration as an employee of the company. In that case, the short facts were these :
13. A business carried on by the assessees was taken over by a private limited company in which the assessees held most of the shares while two of his mines held the rest. The articles of association of the company provided that the assessees was to be the chairmen and managing director of the company until he resigned officer of died or ceased to hold at least one share in the capital of the company, that all the other directors were to be under his control and were bound to conform to his to be voted by the company at its annual general meeting. The assessees devoted his whole time to the management of the company's affairs. This court held that the remuneration of Rs. 48,000 received by the assessees was for managing the company's business and that, therefore, his remuneration fell to be taxed under section 7 and not under section 12 of the Income-tax Act. In fact this decision cannot avail the assessees in support of their contentions before us.
14. In the case of Lady Navajbai R. J. Tata : 15ITR8(Bom) , the assessee was a permanent director in a limited company. The articles of association of the company did not appoint her either as manager or managing director and she had no contract with the company outside the articles. She did not attend office every day like the other directors of the company, but the attended the board meetings. She was also consulted in all important matters by the directors. Under the articles of association of the company the business of the company should be managed by the directors and their remuneration was at the rate of Rs. 100 per mensem and such further sum as might be voted to them by the company in general meeting. The question was whether the sum of Rs. 40,000 received by the assessees as her remuneration in the relevant account year was salary chargeable under section 7 of the Indian Income-tax Act, 1922. The court held that the assessee was not an employee or a servant of the company, that the sum of Rs 40,000 paid to her as director's remuneration was neither salary nor wages but gratuity and that as it was paid to her by virtue of her office as director and not as a servant or employee of the company, it did not fall to be taxed under section 7, but must be brought to tax as income from other sources under section 12. It is clear that the question which arose for determination before this court in that case turned upon the facts which obtained in that case, and the only ratio that could be said to have been laid down by that decision is that the fact that a person may hold and office and that the he should receive a remuneration by virtue of that office does not necessarily bring about a relationship of master and servant between him and the person who pays him the remuneration or the relationship of an employer and an employee.
15. The third case, Commissioner of Income-tax v. Mrs. Durga Khote : 21ITR22(Bom) was a cases of a famous film actress, who entered into various contracts in the year of account for saving with several film companies and the contracts were to the effect that her services were lent for the purposes of acting in different films at a certain remuneration fixed in the contracts. She was completely free, after her contracts with the film companies were carried out, to lend her services to any other company she descried and this court took the view that the assessee's income arose out of the practice of her profession of a film actress and must, therefore, be computed under section 10 and not under section 7 of the Act. Obviously, it was a case where a professional cine artist entered into several contracts with several film companies during the year of account, under which she received remuneration fixed in those contracts, in which case it could be said that she was actually practicing her profession as a film actress and whatever under section 10 and not under section 7 of the Act. However, in this case the court has made a significant observation which has a material bearing on the issue before us. The Court has distinctly observed that the position would be different when a professional person permanently accepts an employments and exchanges his profession for service. In the instant case also, it could be said that though each one of the assessees was an engineer by profession, after becoming directors of the private limited company in question, under the two resolutions relevant for our purposes, they could be said to have accepted employment with the limited company by way of attending to the limited company's construction works for which they received certain remuneration. As discussed earlier, the two resolutions read together leave no room for doubt that the remuneration payable both under the first resolution as well as under the second resolution was in the nature of salary income that was received by them from the limited company.
16. Mr. Patil invited our attention to a decision of the Allahabad High Court in the case of L. Jeewanlal v. Commissioner of Income-tax : 24ITR217(All) . According to Mr. Patil, the actual decision in the case is not helpful to his clients, for that was admittedly a case of an assessee who was a broker, who used to secure orders for a textile mill and advise them as to the type of cloth which was likely to find a ready market and in that behalf was getting as his remuneration certain percentage on the value of the contracts secured. But he particularly relied upon a passage occurring pages 223 and 224 of the report, where according to him, certain tests have been laid down, which would be helpful in determining the question that has arisen that has arisen before us. The material passage on which reliance was placed runs as follow :
'The question whether a particular income is 'salary' or is 'income from business' is not always free from difficulty. At times the line between 'business' and 'employment' becomes rather thin, and the question has to be determined on such material as may be available, whether the relationship between the assessee and the person from whom the money was received is that of a servant and master or that of two independent contracting parties. Several tests have been laid down to help in the decision of the own work or is working for others. The assessee would be working for others if he has to work according to their directions for a remuneration either paid in cash or paid on a percentage basis for the work done, while if it is the assessee's own business then the discretion how it has to be carried on is primarily his and he is entitled to the profits and liable for the losses thereof. Though this may be true as a board proposition, it may be pointed the out that even a servant may be given a wide discretion and having given the discretion to the servant the master may have no right to control it. On the other hand, if it is the business of the assessee even then there might be to some extent a control by those who supply him with the goods with which to carry on his business, e.g., price for which it should be sold, quantity which should be sold to each customer, whether the goods should be sold for cash or on credit, if on credit at what terms, etc., These may all be controlled by agreement. To find out whether it is the assessee's own business or he is merely working as a servant, though the extent of the control exercised on him is a test, it would be necessary to find out whether it is the right of the assessees that is being controlled by contract or a discretion conferred by others on a servant so that all his powers and authority flow from his master. In the case of a servant ITR is not likely that he would be entitled to the profits of the business and liable for its losses, though he may be remunerated not in cash but on a percentage basis so that his income would vary according to the amount of business done by him for his master. The capacity in which he was carrying on the work is another test, e.g., a company may employ a broker to secure orders for it...... The question whether a person works whole time or only part time also gives some indication and if it is found that the assessee undertakes to do similar work for a number of persons, it indicates that the assessee is carrying on a business, though from the fact that he is doing the work only for the one person it does not necessarily follow that the relationship between them is that of a master and servant...... Another test might well be so the capacity in which the work was being done and whether the assessee is dealing with his own goods or the goods belonging to someone else. This too, however, is not a sure test...... In each case the question whether the assessee is assessee is carrying on businesses or is working as a servant has to be decided on the material available bearing in mind the relationship between the assessee and the person from whom he has received the income.'
17. There is no doubt certain working tests have been indicated by the Allahabad High Court in the aforesaid passage, but the aforesaid passage on which strong reliance was placed by Mr. Patil itself clearly states that in each case the question whether the assessee is carrying on business or is working as a servant has to be decided on the material available bearing in mind the relationship between the assessee and the person from whom he has received the income and the court has further gone on to observe in that very case that the question has in most cases to be decided on the facts and circumstances of each case and much assistance can be got from decisions in other cases where the facts and circumstances might have been totally different and the general principles guiding such decisions may, however, at times prove useful. In the instant case, having regard to the manner in which the two resolutions were passed by the limited company and the language of those resolutions as well as the principle undisputed fact which obtains in the case with regard to the execution of the fresh contracts in the accounting period relevant to the assessment years under consideration, namely, that these were executed in a manner which was entirely different from the manner in which they were executed in the earlier years, it seems to us clear that the additional remuneration which was received by each one of the assessees under the second resolution passed by the limited company will have to be regarded as income taxable under the head 'Salary' and not as income taxable under the head 'Business or profession'.
18. In this view of the matter, the question that has been referred to us is answered thu :
'On the facts and circumstances of the case, the additional remuneration received by the respective assessee in terms of the resolution of S. B. Joshi and Company Ltd., dated June 20, 1959, was income liable to be assessed as income under the head 'Salary'.'
19. The assessees will pay the costs of this reference.