JAGDISH SAHAI J. - This reference under section 66 (2) of the Indian Income-tax Act of 1922 (hereinafter referred to as the Act) has been made by the Income-tax Appellate Tribunal, Allahabad Bench (hereinafter referred to as the Tribunal), along with a statement of the case inviting the opinion of this court on the following question of law :
'Whether, on the facts and in the circumstances of the case, the remuneration paid to the directors for the period April 7, 1951, to July 13, 1951, is a permissible deduction under the provisions of the Income-tax Act ?'
The facts stated by the Tribunal in brief are as follows :
Shri Thakurji Engineering Works Limited, Mirzapur (hereinafter referred to as the assessee) is a private limited company incorporated on 13th of July, 1951. This company took over as going concerns two businesses, that is the iron foundry business under the name and style of Shri Thakurji Engineering Works and the tobacco business under the name and style of Bandhulal Sukhdeo Ram, which were being carried on by the Hindu undivided family, styled as Shri Thakurji Engineering Works. On 6th of April, 1951, there was a partial partition amongst the members of the Hindu undivided family, Shri Thakurji Engineering Works. The two business left the fold of the family and the shares of the branches constituting the Hindu undivided family, Shri Thakurji Engineering Works, were also defined. The following six members of the Hindu undivided family became the six shareholders in the private limited company :
1. Shri Bhikam Prasad Gupta.
2. Shri Mangroo Ram Gupta.
3. Shri Thakur Prasad Gupta.
4. Shri Bindbasni Prasad.
5. Shri Asthbhuja Prasad.
6. Shri Chaturbhuj Prasad.
By means of a resolution dated 18th of September, 1951, the shareholders allowed salary of Rs. 600 per month to the four directors of the company, that is, (1) Shri Bhikam Prasad Gupta, (2) Shri Mangroo Ram, (3) Shri Thakur Prasad and (4) Shri Bindbasni Prasad. By means of another resolution of the same date, the company decided that the total business done up to 16th of September, 1951, by the Thakurji Engineering Works and Messrs. Bandhu Lal Sukhdeo Ram in whatever shape be treated as the business done by the applicant-company and that the remuneration at the rate of Rs. 600 per month be paid to the aforesaid directors right from the 7th of April, 19651. These four directors were paid a sum of Rs. 600 each from 7th of April, 1951, to 25th of March, 1952, on which date (the latter date) the company closed its accounts for the first year.
In the assessment proceedings the Income-tax Officer, action on another resolution dated April 6, 1952, of the board of directors voluntarily reducing their salary from Rs. 600 to Rs. 225 per month each, allowed the directors remuneration at the rate of Rs. 225 per month and disallowed the balance on the ground that it was unreasonable and excessive. In appeal, the Appellate Assistant Commissioner affirmed the decision of the Income-tax Officer. The assessee then preferred a second appeal before the Tribunal, which allowed the remuneration to the directors at the rate claimed by the assessee from the date of incorporation, namely, 13th of July, 1951, to the end of accounting year, holding it to be admissible deduction under section 10 (2) (xv) of the Act, but refused to consider the payments made for the period from 7th of April, 1951, to 12th of July, 1951.
The ground on which the Tribunal refused to consider the payments made for the period 7th of April, 1951, is that, previous to the incorporation of the company, the business belonged to the Hindu undivided family, of which Sarvashri Bhikam Prasad Gupta, Mangroo Ram, Thakur Prasad and Bindbasni Prasad could not be treated to be directors, but were only members or coparceners of the Hindu undivided family.
The Tribunal having refused to make a reference as desired by the assessee, the latter approached this court and the reference was ultimately made under section 66 (2) of the Act under the direction of this court.
Mr. Brij Lal Gupta, who has appeared for the assessee, has strenuously contended that, having proceeded to make the assessment on the footing that it was a company for the entire period beginning from 7th of April, 1951, to the 25th of March, 1952, it was not open to the Tribunal to have held that for purposes of business deduction, for the period 7th of April, 1951, to 12th of July, 1951, it was the Hindu undivided family and not the company. Learned counsel contends that the assessing authorities including the Tribunal could not blow hot and cold in the same breath, accept the resolution of the company that the total business done up to 16th of September, 1951, would be deemed to be the business done by the applicant-company and yet refuse to recognise it as such for business deductions.
The assessee voluntarily submitted a return claiming assessment as company. This move on the part the assessee was not prompted by any action taken by the Income-tax Officer, but was an unilateral act of assessee. The income-tax Officer or the Appellate Assistant Commissioner or the Tribunal could give the benefit of the payment made to the aforesaid four directors as their salary only if the amounts paid to these directors for the period commencing with the 7th of April, 1951, to 12th of July 1951, could be held to be an expenditure not being in the nature of capital expenditure or personal expenses of the assessee, but one incurred wholly and exclusively for the purpose of such business, profession or vocation, it is clear from the statement of the case that, during the period 7th of April, 1951 to 12th July, 1951, in fact it was the Hindu undivided family and not the company, which was existence. Any expenses incurred over the members of the Hindu undivided family could not be added to the expenditure made wholly and exclusively for the purpose of the business of the company. It is therefore, clear that no deductions could under section 10 (2) (xv) of the Act be made to the company in respect of the amounts paid to the aforesaid four directors for the period mention above.
The question of blowing hot and cold in the same breath does not arise at all; firstly, because the assessing authorities including the Tribunal has to give effect to the legal provisions contained in section 10 (2) (xv) of the Act, and secondly, because the act of the assessee in treating the income in the hands of the Hindu undivided family as the income of the company was the unilateral act of the assessee, which did not bind the income-tax authorities.
That being the position, our answer to the question referred to us is in the negative and against the assessee. The assessee shall pay to the income-tax department a sum of Rs. 200 by way of costs of these proceedings.
Question answered in the negative.