1. This appeal by the assessee is against the order of the AAC in his appeal No. 19, Cir. I (1) of 1982-83, dated 23-4-1983, holding that the sum of Rs. 12,500, being professional fees paid in respect of professional services rendered by the assessee to the company during the previous year, was assessable in the assessment for the year 1980-81.
2. The appeal filed by the assessee is belated by a fortnight. From the condonation letter dated 21-7-1983, submitted by the counsel of the assessee, it would appear that there was no delay on the part of the assessee who appears to have handed over the necessary papers in this regard to the counsel in time and the delay that ensued thereafter, was due to a mistaken impression on the part of the counsel. We, therefore, condone the delay and admit the appeal. The facts in this regard are briefly as under: 3. The assessee was the managing director of Commercial Explosives (India) Ltd. By a resolution dated 23-7-1979, the Board of Directors requisitioned his services in a professional capacity for designing and making improvements in the machinery for manufacture of safety fuses and gun powder blending and packing. For these technical services, he was to be paid a fee of Rs. 12,500. Shri Sanyal rendered the necessary services according to this resolution. The above resolution was submitted for ratification in the annual general meeting of the company held on 17-5-1980. It was duly ratified. Unfortunately, however, before the general meeting took place, Shri Sanyal died on 15-10-1979, after having rendered the services as per the resolution dated 23-7-1979. The remuneration of Rs. 12,500 was disbursed by the company after the resolution was ratified in general meeting held on 17-5-1980. The return of income for the assessment year 1980-81 for the period 1-1-1979 to 15-10-1979 (date of death) was filed by Shri Ranjit Sanyal as the legal heir of late Shri S. Sanyal. In the return filed, the professional fees of Rs. 12,500, payable to Shri Sanyal for the services rendered by him to the company during the previous year, was not included as it was claimed, that the same accrued and also received only after the resolution was ratified at the annual general meeting held on 17-5-1980 after the death of Shri Sanyal. The ITO, however, included the same and completed the assessment on a total income of Rs. 26,390.
Shri Sanyal was the managing director of the Commercial Explosives (India) Ltd. He had rendered certain technical services for remuneration receivable in that behalf in pursuance of a special resolution passed by the Board of Directors on 23-7-1979. Under Section 314(1)(a) of the Companies Act, 1956, no director of a company shall hold any office or place of profit except with the consent of the company accorded by a special resolution. In the present case, though there was a resolution of the Board of Directors, dated 23-7-1979, the same was ratified, approving the payment of professional fees amounting to Rs. 12,500 to Shri Sanyal only at the annual general meeting held on 17-5-1980, after the death of Shri Sanyal on 15-10-1979. Since a director could not hold an office or place of profit except under a special resolution of the company and the special resolution in this behalf was ratified only on 17-5-1980 by the annual general meeting, after the death of Shri Sanyal, it was contended, that the amount payable thereunder accrued and arose only on the date when the resolution was ratified.
Since Shri Sanyal had pre-deceased on 15-10-1979 before the ratification of the resolution approving the payment of the fees, it was submitted that the income in this behalf was not assessable for the assessment year under consideration. In other words, the contention was, that the income accrued and arose only after the death of Shri Sanyal and since the assessment for 1980-81 was in respect of the income during the previous year up to the date of his death, namely, 15-10-1979, the sum of Rs. 12,500 was not includible in the assessment of Shri Sanyal through legal heir, Shri Ranjit Sanyal, for the assessment year 1980-81.
5. The AAC did not agree with this view of the matter. He held that consent under Section 314 was not obligatory prior to appointment. The consent could be post facto as the word 'previous' preceding the word 'consent' in Section 314(1) was omitted by the Companies (Amendment) Act, 1965. Accordingly, he held, that the company was competent to engage the director and remunerate him in anticipation of the ratification of the special resolution in the annual general meeting.
He further held, that the ratification of the resolution at the annual general meeting was only a post facto sanction of the expenditure already incurred for services rendered by the deceased director. He also noticed, that the company had accounted for the expenditure and claimed the same in its accounts for the year ended December 1979 itself. He also held that as far as the assessee was concerned, the stipulated amount was payable to him for services already rendered by him during his lifetime and, therefore, the accrual of the income in respect thereof could not be held in abeyance beyond the period of the performance of the services under the resolution. He, accordingly, upheld the inclusion of the professional fees in the assessment for the year 1980-81, on the ground that it had accrued during the previous year.
6. Aggrieved with the same, the assessee is in appeal before us. The submissions made in this behalf by the learned representative for the assessee may be summarised as under: Under Section 314(1)(a), a director cannot hold an office or place of profit except with the consent of the company accorded by a special resolution. The assessee, while rendering professional services to the company by virtue of the Board's resolution, dated 23-7-1979, was only rendering his services not in his capacity as managing director but otherwise. Therefore, this section is applicable to him since Section 314 requires consent of the company accorded by a special resolution and the same was accorded only, or the resolution of the Board was ratified in the general meeting held on 17-5-1980, after the death of Shri Sanyal on 15-10-1979 ; the professional fees payable to Shri Sanyal for the services rendered by him could not be considered to have accrued till the general body ratified the special resolution. Since the general meeting was held on 17-5-1980 after the death of Shri Sanyal on 15-10-1979, the fees payable in this behalf arose to him only by virtue of the special resolution on or after 17-5-1980. Accordingly, he submitted, that the income in this behalf was not includi-ble in the previous year for the assessment year 1980-81. He also brought to our notice, that the adjustment in this behalf was made by the company on 31-10-1979 and the expenditure in this behalf was capitalised. To sum up, his arguments were that the consent of the company under Section 314 for payment of fees to Shri Sanyal was accorded only on 17-5-1980 after his death and, therefore, income in this behalf could not be considered to have accrued prior to that date.
Since the income held accrued after the death of Shri Sanyal, it was inclu-dible only in the subsequent proceedings.
7. The submission made by the learned departmental representative may be summarised hereunder.
The services, for which the remuneration was payable by virtue of the Board's resolution dated 23-7-1979, were rendered by Shri Sanyal to the company before his death. The remuneration, even though ratified by the general meeting held on 17-5-1980, was for the services rendered by Shri Sanyal during his lifetime. Section 314 does not apply to managing directors as the managing director or manager has been excluded from its operation. Section 314(1)(a) has application only to director.
Since the word 'previous' appearing before 'consent' in 314(1) has been omitted by the Companies (Amendment) Act, J 965, no previous consent is contemplated and, therefore, a post facto ratification by the annual general meeting would be sufficient in this regard. Since the payment in the present case was to the managing director in respect of his services rendered in a professional capacity, no special resolution is called for under Section 314. He invited our attention to the Commentary on the Companies Act by Shri Ramaiya, Eighth edn., 1977. He particularly invited our attention to the following passage: The persons who are not hit by the prohibition should be noted--they are those who hold the office of managing director, manager, banker and trustee for debenture-holders. Neither whole-time directors nor directors-in-charge nor any committee of directors, if they hold an office or place of profit are exempted.
Since in the present case, services have been rendered in a professional capacity before the death of the managing director, the fees payable in respect thereof accrued or arose on the completion of the services by virtue of the resolution dated 23-7-1979. He submitted, that the ratification by the annual general body does not have the effect of postponing the accrual of the income which, in any case, had accrued on the completion of the services.
8. We have carefully considered the submissions made on either side. We are of the opinion, that the technical fees payable for the services rendered by Shri Sanyal accrued to him immediately after the completion of the services that is, during the year ended 15-10-1979, being the previous year for the assessment year under consideration. As argued on behalf of the revenue, Section 314 has no application to a managing director. The commentary at page 687 extracted from Ramaiya's book makes it clear, that the prohibition under this section does not hit the managing director. There is no authority for the proposition that the professional services rendered by Shri Sanyal were rendered by him in his capacity other than that of the managing director. The Board's resolution, dated 23-7-1979, authorised Shri Sanyal to render the services in respect of which a fee of Rs. 12,500 was stipulated. By virtue of the fact, that the word 'previous' before the word 'consent' in Section 314(1) has been dropped by the Companies (Amendment) Act, 1965, no previous consent of the company is contemplated. It is enough if a post facto sanction of the annual general meeting is obtained. In view of this, it cannot be said that the fee payable to Shri Sanyal accrued only after the resolution was ratified at the general meeting held on 17-5-1980. The position would have been different, if the Companies (Amendment) Act, 1965, had not dropped the word 'previous' appearing before 'consent'in Section 314(1)(a). In fact, the first proviso in this behalf is as under: Provided that it shall be sufficient if the special resolution according the consent of the company is passed at the general meeting of the company held for the first time after the holding of such office or place of profit: From the wording of the first proviso, it is clear, that it shall be sufficient if the special resolution is passed at the general meeting of the company held for the first time after the holding of such office or place of profit. From this, it would appear, that the post facto sanction is a mere formality and it does not have the effect of postponing the accrual of the income. Absolutely, there is no basis to hold that the income accrued only on the day when the special resolution was ratified at the general meeting held on 17-5-1980.
Moreover, under Sub-section (3) of Section 314, any office or place of profit will obviously include only selling and buying agents, receiving commission and/or salary. In the present case, the services, for which the payment was sanctioned, were rendered by Shri Sanyal during his life time, namely, during the previous year. The accrual of the income will be simultaneous with the completion of the services. It cannot be made dependant on the ratification of the special resolution at a much later date. Even otherwise, the ratification will only relate back to the date of the resolution by the board of directors on 23-7-1979, by virtue of which the services were rendered. We, accordingly, uphold the decision of the AAC that the income has been rightly included in the assessment for this year.