This judgment will dispose of three References Nos. 20 to 22 of 1958 under sub-section (1) of section 66 of the Indian Income-tax Act. The facts of the case are that R.B. Devi Singh, Ishwar Lal and Rai Bahadur Suraj Narain, as directors of Messrs. J.N. Singh and Co. Ltd., were each paid Rs. 10,000 by way of directors remuneration by the resolution of the board of directors passed on January 6, 1949 - 'resolved that remuneration of the three directors - R.B. Suraj Narain, R.B. Devi Singh and Mr. Ishwar Lal be fixed at Rs. 10,000 each for the year 1948-49 and these amounts shall be payable out of the profits of the company.' A shareholders meeting confirmed the resolution on February 8, 1949. The payment of the amount was made to R.B. Devi Singh on April 5, to Mr. Ishwar Lal on March 19 and to R.B. Suraj Narain on April 7, 1949. The companys accounting year ended on June 30, 1949, for the assessment year 1950-51. In this assessment year the company did not claim the total amount paid to the three directors as a deduction in its return. The amount thus remained part of its income and was subject to income-tax. In the case of each assessee a claim was made that the amount of Rs. 10,000 paid to him as remuneration by the company was not chargeable to income-tax in his hands as tax had been paid or was payable by the company on the amount, otherwise it was said it would be a case of double taxation.
Earlier a similar situation having arisen in regard to this very company for the assessment year 1941-42, and the company having claimed the amount as revenue expense on account of its having paid the amount to its directors as remuneration, the claim was disallowed up to the Appellate Assistant Commissioner but the Income-tax Commissioner on April 2, 1945, allowed the claim holding the otherwise it would turn out to be a case of double assessment of the amount, once in the hands of the company and again in the hands of the assessee director. It is on this instance, so it has been said at the hearing, that the company relied in not claiming the amount as a deduction in its return for the assessment year 1950-51.
In all the three cases the claim made by the assessees has been negatived by all the income-tax authorities, the Income-tax Officer, the Income-tax Appellate Assistant Commissioner and the Income-tax Appellate Tribunal. The main ground on which the claim of the assessees has been disallowed is that the amount paid to the directors as remuneration by the company was never claimed by the company as a deduction and, therefore, the question of allowance or disallowance of such a claim never arose, with the result that the exemption according to Notification No. 878-F, dated March 21, 1922, as amended by Notification No. 8 dated March 24, 1928, could not be available to the assessees. The orders of the Income-tax Appellate Tribunal in the three cases respectively are of May 17, 1952, and May 11, 1953, in the last two of the three cases. In its order in the case of Mr. Ishwar Lal the Tribunal remarked that 'the intention of the notification was (reference is to the notification already mentioned above) obviously not to tax the sum of money in the hands of both the owner of the business and the employee, provided the conditions laid in the notification were satisfied.' In the case of R.B. Suraj Narai the Income-tax Officer said that 'the payment does not appear to fall within the terms of the notification in that it is not a sum paid out of, or determined with reference to, the profits of the companys business and is not a sum which by reason of such mode of payment or determination has not been allowed as a deduction but has been included in the profits of the business of the company.'
It was then that on an application under sub-section (1) of section 66 of the Indian Income-tax Act, 1922, the assessees obtained an order from this court requiring the Income-tax Appellate Tribunal to make reference of these questions of law in each case to this court :
'(1) Whether the directors remuneration of Rs. 10,000 received by the assessee from Messrs. J.N. Singh and Co. Ltd. under the terms of the shareholders resolution dated the 8th February, 1949, is exempt from tax under Notification No. 878-F, dated March 21, 1922, as amended and issued by the Finance Department of the Government of India under section 60 of the Indian Income-tax Act or otherwise under the Act ?
(2) Whether it was a necessary condition for the application of the terms of the notification referred to in question No. (1) to the facts of the present case that the amount of remuneration should have been claimed as a deduction by the company in its assessment and whether it was necessary for the company to make the claim year after year.'
The Income-tax Appellate Tribunal has, while making reference of these questions of law to this court, given its opinion that the questions that arise are really somewhat in a different form. In giving its own opinion it drafts the questions as below :
'(1) Whether in view of there being no claim for deduction of the sum of Rs. 10,000 paid as directors remuneration to the assessee, the provisions of Notification No. 878-F, dated March 21, 1922, as amended and issued by the Finance Department of the Government of India, under section 60 of the Indian Income-tax Act do not apply and the assessee is not entitled to claim exemption under that notification ?
(2) If the answer to the first question is in the negative, whether even otherwise the inclusion of this amount in the assessment of the assessee in view of this amount having been brought to tax in the hands of the company, will amount to double assessment and the assessee is not liable to be assessed on this amount.'
It will be seen that the first question as propounded by the Income-tax Appellate Tribunal is broadly the same as the second question on which reference has been called by this court. The second question as propounded by the Tribunal does not seem to arise because at the hearing the case of each assessee has been confined only to claiming the benefit of the provisions of Notification No. 878-F of March 21, 1922, as amended, and no claim to exemption has been urged from any other aspect of the matter. So the questions that were stated in the order of this court are the questions that are being considered.
In order to appreciate the exemption claimed by the assessees reference to Notification No. 878-F, dated March 21, 1922, as amended by notification No. 8 of March 24, 1928, is apparently necessary. The notification says :
'Incomes included in total income but exempt from income-tax and not from super-tax.
The following classes of income shall be exempt from the tax payable under the said Act but shall be taken into account in determining the total income of an assessee for the purposes of the said Act :
(1) Sums received by an assessee on account of salary, bonus, commission or other remuneration for services rendered, or in lieu of interest on money advanced, to a person for the purposes of his business,
Where such sums have been paid out of, or determined with reference to, the profits of such business,
and by reason of such mode of payment or determination have not been allowed as a deduction but have been included in the profits of the business on which income-tax has been assessed and charged under the head business :
Provided that such sums shall not be exempt from the payment of super-tax unless they are paid to the assessee by a person, other than a company, and have already been assessed to super-tax.......'
The company has paid tax on the amount, it not having made a claim for deduction of this amount in its assessment return for the relevant assessment year 1950-51. The question then turns upon these words in the said notification 'and by reason of such mode of payment or determination have not been allowed as a deduction but have been assessed and charged under the head business. Apparently the words 'have not been allowed as a deduction' imply that deduction of the amount is claimed and is then not allowed. It cannot possibly cover a case in which no deduction has been claimed and there is no occasion for an order disallowing any such claim. Such a deduction in so far as the present cases are concerned might well have been claimed by the company under section 10(2)(xv) of the Income-tax Act, 1922, it being entirely a different matter whether such a claim would or would not have been accepted. The company in omitting to make a claim for deduction in regard to the amount of remuneration to the directors from its assessment relied, so it has been stated on its behalf, on the previous decision of the Commissioner of Income-tax made in regard to the assessment year 1941-42 when the company claimed such a payment as revenue expense and its claim was in the end allowed. It has been urged on its behalf that it was not necessary for it to continue making claim in this manner. This, however, cannot be the correct position because in regard to each assessment year when facts are placed before the Income-tax Officer it is for him to decide as a question of fact whether any payment by the company to its directors is by way of remuneration for services rendered or of a different nature, and accordingly as he decides the nature of payment, the question of liability or non-liability to income-tax is decided. The company in the present cases never claimed the amount paid to its directors as deduction on account of the payment being for remuneration for services rendered; the income-tax authorities never had an opportunity to decide whether or not this was correct as a fact. So taking the plain meaning of the words' have not been allowed as a deduction' in the notification, it is evident that the notification applies to a case in which claim to a deduction has been made and such claim has not been allowed. The result of that would be that on the disallowance of the claim for deduction, the company will have to pay income-tax, and the person to whom payment has been made as referred to in the notification would be exempt from tax according to the notification. There is no direct case which has reference to similar circumstances, though the learned counsel for the assessees has made reference to Hasan Sasamusa v. Commissioner of Income-tax, but in that case all that the learned judges pointed out is that three conditions must be satisfied before an assessee is entitled to the benefit of the notification. In the first place, it must be proved that the sum was received by the assessee as salary, bonus, commission or other remuneration for services rendered. Secondly, it must also be established that the sum was paid to the assessee 'out of, or determined with reference to, the profits of such business'. Thirdly, it must be shown that the amount has not been deducted from the companys assessment. But this merely reiterates what is stated in the notification itself. This statement does not deal with the question that arises in the present references. So on the words of the notification itself the answer to the first question is in the negative and to the first part of the second question in the affirmative, as the second part of the second question whether it was necessary for the company to make the claim year after year does not arise, the matter being only confined to one assessment year. The answers to the questions are against the assessees and as the cases have been argued together, so the three assessees will pay costs of the Commissioner of Income-tax only once, the counsels fee being Rs. 240.
Reference answered accordingly.