1. The following question has been referred under s. 256(1) of the I.T. Act, 1961 at the instance of the assessee :
'Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the tax authorities were justified in disallowing the assessee's contribution to the assessee during the accounting periods relevant to the assessment years 1964-65, 1965-66, 1966-67 and 167-68 ?'
2. The assessee-company is a private limited company and in the relevant assessment years 1964-65 to 1967-68, the assessee was engaged in the manufacture and sale of mill boards out of waste paper. On 31st March, 1957, the Bombay Industries Pvt. Ltd. were the agents and secretaries of the assessee-company. With effect from 1st April, 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 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.'
3. Kasambhai died on 18th September, 1966, and in the vacancy so caused, Umerbhai Abdul Raoof Maniar was appointed as the other managing director.
4. The assessee-company has a recognised staff provident 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' provident fund. These rules are annex. 'E'. By resolution dated 7th August, 1963, the benefits of the provident fund scheme were extended to the managing directors of the assessee-company to be effective from their remuneration for the month of March, 1963, drown in April 1963. In view of the said resolution during the accounting period relevant to the assessment period 1964-65, the assessee debited a sum of Rs. 6,083, being the assessee's contribution to the provident fund for the benefit of the managing directors. For the subsequent years the contribution of the assessee-company was Rs. 6,929, Rs. 7,695 and Rs. 7,244, the last contribution being for the accounting period relevant to the assessment year 1967-68. These amounts were claimed by the assessee-company by way of deduction under s. 36(1)(iv) of the I.T. Act, as being sums paid by the assessee as an employer by way of contribution towards the recognised provident fund.
5. The ITO has disallowed these deductions on the ground that the expenditure in question was unreasonable having regard to the legitimate business needs of the assessee and the benefit derived by the assessee therefrom.
6. In appeal by the assessee against the assessment orders for the assessment years 1964-65, 1965-66 and 1966-67, the AAC upheld the disallowance on the ground that the managing directors were not 'members' as contemplated by the provident fund rules as they were not persons permanently in the service of the company or likely to be made permanent in the service of the assessee-company. So far as assessment year 1967-68 was concerned, the claim of the assessee-company was also disallowed.
7. The matter was taken by the assessee-company to the Income-tax Appellate Tribunal. The Tribunal on a consideration of the articles of association of the company took the view that the managing directors were not life directors because they were to cease to be the managing directors on their ceasing from any cause whatsoever to be directors of the assessee. The Tribunal further referred to art 121 of the articles of association which postulated the contingency in which the office of the director would be taken as vacated because it says that if a director absents himself from three consecutive meetings of the directors or from all meetings of the directors for a continuous period of three months, whichever is longer, without leave 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 of 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 call on shareholders in respect of moneys unpaid on the shares in the company;
(2) except within the limits previously fixed by the directors at a board meeting -
(a) invest the funds of the company,
(b) make loans and borrow moneys.
8. 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 further took the view that there was no separate contract of employment between the managing directors and the assessee, and in the light of the resolution and articles of association, the relationship between the assessee-company and the managing directors was of principal and agent and not of employer and employee.
9. It is necessary to refer to the fact that the assessee in his reference application had asked for a reference of four questions. It is not now in dispute that the controversy raised by the assessee in the first three questions is brought out in the question which is now referred by the Tribunal. The fourth question in respect of which the reference was sought by the assessee-company read as follows :
'Whether, the tribunal erred in law in not even considering the argument that apart from the question whether the managing directors were the company's employees, the amounts contributed towards their provident fund were allowable as legitimate business expenditure of the company ?'
10. In respect of the fourth question, it is required to be pointed out that after the appeals were decided by the Tribunal a miscellaneous application was made on behalf of the assessee-company making a grievance that the Tribunal had failed to consider the alternative argument made by the assessee that, in any event, the expenditure was allowable as an expenditure laid out wholly and exclusively for the purpose of the applicant's business irrespective of whether they were employees of the applicant or could not be admitted to the benefits of the provident fund scheme. The assessee, therefore, prayed that the failure to consider the argument gave rise to a mistake apparent from the record, which should be corrected and the Tribunal should consider the argument which has inadvertently escaped the attention of the Tribunal. A separate order was passed by the tribunal on this miscellaneous application The Tribunal took the view that the log book did not show that when the appeals were argued, the argument that the expenditure was allowable as an expenditure laid out wholly and exclusively for the purpose of the applicant or could not be admitted to the benefits of the applicants provident fund scheme, was canvassed. The Tribunal therefore, negatived the grievance made on behalf of the assessee-company.
11. The Tribunal having declined to make a reference of the fourth question proposed by the assessee, the assessee has taken out emotion for a 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.
12. Mr. Dastur, appearing on behalf to 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 that there was no contract of employment between the managing directors and the assessed 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 : 14ITR606(Bom) and the decision of the Supreme Court in Ram Prashad v. CIT : 86ITR122(SC) . The learned counsel for the assessee has place heavy reliance on these two decisions.
13. In the case of Armstrong Smith a proposition of law on several English cases cited before this court but not expressly referred was laid down in the following paragraph at p. 609 :
'We have been referred to quite a number of English cases the effect of which can, I think, be summarised by saying that a director of a company as such is not a servant of the company and that 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 from his office of director, he becomes entitled to remuneration as an employee of the company. Further, that relationship may be created either by a service agreement or by the articles them selves.'
14. The learned counsel for the assessee contend that on the authority of the decision in Armstrong Smith's case : 14ITR606(Bom) , the view taken by the Tribunal that there is no separate contract for employment becomes erroneous because it is now well recognised that a contractual relationship between the managing directors and the company can be created by the articles themselves.
15. In Ram Prashad's case : 86ITR122(SC) , the Supreme Court recognised the fact that a managing director may have a dual capacity and he may both be a director as well as an employee and further that in the capacity of a managing director, he may be regarded as having not only a capacity as persona of a director but also has the persona of an employee, or an agent depending upon the nature of his work and the terms of his employment. It was observed by the Supreme Court in that case as follows(p. 127) :
'Where he (managing director) is so employed, the relationship between him as the managing director and the company may be similar to a person who is employed as a servant or an agent, for them term 'employee' is facile enough to cover any of these relationships. The nature of his employment may be determined by the articles of association of a company and/or the agreement, if any, under which a contractual relation ship between the director and the company has been brought about, whereunder the director is constituted an employee of the company, if such be the case, his remuneration will be assessable as salary under section 7. In other words, whither or not a managing director is a servant of company apart from his being a director can only be determined by the articles of association and the terms of his employment.'
16. 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.  SC 203 , 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 is a contract of service and not a contract for service.''
17. The Supreme Court also referred to the decision of this court in Armstrong Smith's case : 14ITR606(Bom) .
18. Mr. Dastur has also cited before us a passage from Palmer's Company Law, 22nd Edn., Vol. I, p. 668, which reads as follows :
'It follows from this case  SC 203 - Anderson v. James Sutherland (Peterhead) Ltd. that in modern company practice managing director, in the great majority of cases, combines the position of director and of in the great majority of cases, combines the position of director and of employee and that, as has been observed earlier, the validity of his appointment and the scope of his duties have to be gathered from the provisions of the articles and the terms of his contract with the company. The view that a director may be an employee of the company is further supported by cases such as Lee v. Lee's Farming Ltd.  AC 12; 31 Comp Cas 233 and Boulting v. Assn. of Cinematograph, etc., Technicians  2 QB 606; 33 Comp cas 475 .'
19. Reliance was also placed by the learned counsel on the decision of the Calcutta High Court in Satya Paul v. CIT : 116ITR335(Cal) and the decision of the Madras High Court in K R Kothandaraman v. CIT  62 ITR 348.
20. On behalf of the Revenue, the learned counsel, Mr. Joshi, has relied on another decision of the Supreme Court in Lakshminarayan Ram Gopal and Son Ltd. v. Government of Hyderabad : 25ITR449(SC) , and the decision of the Assam High Court in Dwijendra Chandra Chowdhury v. CIT : 61ITR97(AP) . On the basis of these two authorities, the learned counsel for the Revenue has contended that by virtue of the resolution dated 28th March, 1957, the managing directors were to manage the affairs of the company for and on behalf of the board of directors and there was no control of the board of directors in respect of the day to day administration of the company, which was to be done exclusively by the two managing directors and, therefore, according to the learned counsel, the managing directors could not be said to be employees of the company. The learned counsel for the Revenue has contended that the board of directors did not have a direct control and supervision as master over his servant and the managing directors, who were to exercise that authority subject to the control and supervision of the board of directors, were not subject in such exercise to the direct control or supervision of the principals, namely, the board of directors.
21. When we heard this matter fully, we found that we were able to dispose of the reference without going into the question as to whether the two managing directors in the instant case were employees of the company or not because we were employees of the assessee-company, on a construction of the provident fund rules, they could not be held to the employees who qualified for membership of the provident fund.
22. It is necessary to referring some detail to the relevant provisions in the rules which regulated 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 fund rules are satisfied in the instant case.
23. 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 his 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 excluding those whose names stand in the list of temporary hands or who are in the list of monthly salary drawing equal to or less than Rs. 30 are entitled to be the members of the provident fund on presenting an application in writing to the company of Form A annexed herewith and be entitled to the benefit thereof, provided always that it shall be the discretion of the managing director of the company to admit a person to the membership or not. Once, however, he is admitted to the membership, he shall continue to be a member till he is in the service of the company.'
24. Under cl. 7, the membership is open to an employee who was in the service of the company on 1st of August, 1950, or who shall have entered the service of the company after that date. But employees whose names stand in the list of temporary hands or who are in the list of monthly salary drawing equal to or less than Rs. 30 are not entitled to be members of the provident fund. For becoming a members of the provident fund, cl. 7 requires an application in writing to the company in the prescried. Form A. But under this clause discretion is vested in the managing director to admit a person to the membership or not. But once he is admitted to the membership, he continues to be a member till he is in the service of the company. It is important to point out that an employee does not automatically become a member of the provident fund scheme. He is to be admitted to the membership of the provident fund and the authority to admit an employee to the provident fund is vested in the managing director of the company.
25. Clause 18 of the Rules deals with advance to members and the last paragraph of that clause reads as follows :
'Notwithstanding anything herein contained it shall be open to the trustees to permit the withdrawal of ninety per cent. cf the amount standing at the credit of a member if the member is taking leave preparatory to retirement, provided that if he rejoined duty on the expiry of his leave he shall refund the amount drawn together with interest at the rate allowed by the company.'
26. Under cl. 20 of the Rules, it is provided that any member who shall have completed 5 years of continuous service with the company and any member (whatever be the period of service with the company) whose service with the company shall have been determined by reason of retrenchment or by reason of the member becoming 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 service in respect of his own contribution and interest thereon and of the company's contribution and interest thereon.
27. 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 or 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 become entitled to receive or as shall be forfeited on such termination of his service for payment to the company of any sums due to the company against the member in respect of all loss, damages, costs and expenses which the company may at any time have sustained or being put by reason of any negligent act or omission or fraud of or by such member.
28. Under cl. 30, there is a power to repeal vary or alter the Rules an this is required to be done by the trustees at the direction of the board of directors and subject to the approval of the Commissioner.
29. Now, in the relevant assessment years, these Rules continued to be in force by virtue of the exemption granted under s. 17 of the Employees' Provident Funds Act, 1952. Section 17 of the Employees' Provident Funds Act, 1952, provides for a power to the appropriate government to exempt from the operation of all or any provision of a scheme, inter alia, any establishment where a scheme which is already in force is not less favourable to the employees than the benefits provided under the Act.
30. Now, the question which is required to be determined is whether the managing directors of the assessee-company qualify for being a member of the provident fund in question and it is in that context that it is vehemently contended that they are permanently in the service of the company. It is argued that what is contemplated by the Rules is that the employee must not be in temporary employment of the company. It is argued that if a post is of a permanent nature, then the employment in the post does not become temporary. An anomaly is put forward before us that even in the case of an ordinary employee, it is possible that a person whose services may be terminated by one month's notice can get the benefit of the provident fund rules but a managing director cannot. Reference is made before us to a decision of the Patna High Court in which, dealing with what is a substantive and a permanent employment, it was pointed out that the phrase 'substantive and a permanent employment' is more descriptive of the nature and character of the appointment than indicative of the duration of that appointment.
31. It is difficult to find any quarrel with this proposition, but when we consider the definite use of the word 'permanent' in the rules, it has to be noticed that the Employees' Provident Funds Scheme which is contemplated by the Employees' 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 dependents 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 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 cultivation 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 far face in industrial centers.'
32. It is too late in the day to dispute the fact that the provident fund schemes under the Employees' Provident Funds Act were intended to be in the nature of retirement benefit to the employees. Retirement is normally a concept which is closely linked with permanent employment, Permanent employment does not necessarily mean employment for life, but it is now a well-known concept in service jurisprudence that there is a security of tenure and security of employment during a specified period which is normally fixed with reference to age. Once a person is given a employment which is of a permanent character, a right normally accrues to him to continue in employment till he reaches his age of superannuation or retirement subject, of course, to the contingency of services being terminated either on the ground of misconduct or on other grounds permissible under law. But the fact that the services of a permanent employee are liable to be terminated either on the ground of misconduct or on other grounds permissible under law does not detract rom the fact that the employment is necessarily of a permanent character, that is, the employee is entitled to continue in service till he reaches the age of superannuation or retirement.
33. It is in that context that the words 'permanent in the service of the company' are used. If that be the concept of permanent service as contemplated by the Provident Fund Rules, then it is difficult for us to see bow a managing director can be said to be in the permanent employment assuming, as already pointed out, that he is an employee of the company. Retirement, as contemplated in the law of master and servant, that is, retirement from superannuation after putting in a certain stipulated years of service according to the normal rules or tenure of office, is not a necessary concomitant of a managing director's post. He is appointed by the board of directors and, as will be clear from the Regulations, such appointment is to be for a period not exceeding five years.
34. There are other difficulties in holding that the managing director is entitled to the benefits of the provident fund scheme in question. Some of the relevant provisions which we have extracted above will indicated that, in certain matters, discretion is vested under the Scheme with the managing director himself. 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 a s well be that where an application is made by the managing director, it would be considered by the board of director. 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.
35. 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 in capacitated for work, arises, it is the managing director who has to satisfy himself as to whether, during the period that such employee was in service, his service was satisfactory or not. This would again show that the managing director performs an important function. This is done by him in his capacity as the managing director and that again, in our view, would be an indication that the managing director was never contemplated as being capable of becoming a member of the provident fund.
36. Our attention has been invited to art 147(14) of the articles of association. Article 147 deals with certain powers of the board and while enumerating the powers of the board, one of the powers in cl. (14) is :
'To provide for the welfare of employees including the managing directors or ex-employees of the company and the wives, widows and families or the dependents or connection of such persons, by building or contributing to the building of house dwellings or chawls, or by grants of money, pensions, gratuities, allowances bonus or other payments; or by creating and from time to time subscribing or contributing to provident fund and other associations, institutions, funds or trusts.....'
37. Now, it is no doubt true that the provision for the welfare of employees including the managing directors is a part of the powers of the board of the directors. One of the methods by which a provision for welfare can be made is under art. 147(14) by subscribing or contributing to provident fund. It is, however, difficult for us to see how a reference to art 147(14) can have any relevance in so far as the construction of the provident fund rules is concerned. Those rules must be construed in the normal manner and whether a managing director is entitled to become a member of the provident fund or not will have to be decided on the construction of the rules. Whether any other provident fund can be instituted for the benefit of the managing directors or not is not a matter which falls for consideration in the instant case. We are concerned with the limited question as to whether so far as the employees' provident fund in question is concerned, managing director can validly become a member of that fund or not. That question can be answered in favour of the assessee only if on the construction of the relevant rules it would be possible to hold that the the managing director satisfies the requirements of the rules.
38. It is them contended that by virtue 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 there in 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 a 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 become members by making necessary applications as required by cl. 7 of the rules, then such payment would in law be outside not only the provident fund rules but also the provisions of s. 36(1)(iv) of the I.T. Act and the assessee-company will, therefore, not be entitled to claim deduction in respect of such payment.
39. That brings us to the motion which is taken out by the assessee-company. The learned counsel for the assessee has contended that even with in the scope of the question which has been referred it is permissible for the assessee-company to urge that the assessee will be entitled to the deduction of the amount in question under s. 37 of the I.T. Act, on the ground that the amount has been laid out wholly and exclusively for the purposes of the business of the company.
40. Now, it cannot be disputed that there is no finding whatsoever by either the AAC or the Tribunal that the amount has been laid out wholly and exclusively for the purposes of the business of the company. As a matter of fact the finding recorded by the ITO was that the necessity for making such contribution in relation to the legitimate business of the company has not been explained and he has noticed the fact that no such contributions were made during the prior years. The question as to whether an amount has been laid out wholly and exclusively for the purposes of the business is not a pure question of law but is a mixed question of law and fact. If any authority for this proposition is needed, it could be found in the decision of the Supreme Court in CIT v. Greaves Cotton and Co. Ltd. : 68ITR200(SC) . What is argued by Mr. Dastur is that the amount involved is so small, and is about Rs. 2,300 per year, and the contribution to be made by the company is at the rate 8 12 % that hardly any argument is necessary that this amount would be laid out wholly and exclusively for the purposes of the business of the company and in any case, according to Mr. Dastur, the Tribunal could be asked to consider on the facts as they stand as to whether the contribution made by the company to the provident fund is in any way excessive.
41. It is difficult to entertain this argument. The assessee had in fact filed a miscellaneous application before the Tribunal drawing its attention to the fact that the argument advanced before the Tribunal on the basis of s. 37 of the I.T. Act had not been considered by the Teibunal. 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 initiated 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 ranted 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 in 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 the I.T. Act.
42. In the view which we have taken, the question referred to us must be answered in the affirmative and against the assessee. The assessee will pay the costs of this reference. Motion stands rejected with no order as to costs.