1988 PLP 563 (PTD)

NAIMUDDIN, C.J.-- This is an application under section 66 of the Income-tax Act, 1922 filed by the Commissioner of Income-tax, Central Zone, Karachi, against S. Mazhar Hussain, the respondent.

2. The respondent is an assessee and Managing Director of Messrs Atlas Rubber and Plastic Industries Limited, Karachi. He is also a director of Atlas Trading Agencies and of Simplex Rubber Manufacturing Company Limited. During, the assessment year 1972-73 he received a salary of Rs.2,000 per month from Atlas Rubber and Plastic Industries Limited, Karachi. He has also received remuneration of Rs.6,000 during this year from Atlas Trading Agencies. No remuneration was received by him from Simplex Rubber Manufacturing Company Limited.

3. Besides, he was paid conveyance and entertainment allowances by the three companies as detailed below: Conveyance Allowance Entertainment Allowance (1) Messrs Atlas Rubber and Plastic Company Ltd Rs.3,000 Rs.3,000 (2)? Atlas Trading Agencies Rs.1,350 Rs.1,350 (3) Simplex Rubber Manufacturing Co. Ltd Rs.1,500 Rs.1,500 ???????????

4. The responder t claimed exemption under Rule 39 of the Income-tax Rules (hereinafter called the Rules) only in respect of payment of entertainment allowance made to him by Atlas Rubber and Plastic Industries Ltd., Karachi. The Income-tax Assessment Officer was of the view that since the assessee was working for two companies, he was, therefore, not working on whole time basis for either of them and as such he was not an employee within the meaning of sub-rule 3(b) of Rule 39 of the Rules. The remuneration received by him, therefore, was taxed under section 12 of the Income-tax Act, 1922 by the Income-tax Officer.

5. Aggrieved by the order of the Income-tax officer, the respondent filed a direct appeal under the then existing provisions of the Income-tax Act before the Appellate Tribunal, which was registered as I. T. A. No.24-K. B. of 1973-74. Before the Tribunal the stand of the respondent was that in fact he was working whole time for one company i.e. Messrs Atlas Rubber and Plastic Industries Limited, Karachi by virtue of a resolution adopted at the General Meeting of the said company held on 20-2-1969.

6. The Tribunal relying on Article 29 of the Articles of Association of Atlas Rubber and Plastic Industries Limited and on the aforesaid resolution passed at the General Meeting of the said company held on 20-2-1969, came to the conclusion that the respondent was actually employee of the said company under section 7 of the Act, and, as such, was liable to be taxed in respect of the salary received by him from the said company.

7. The reasons which weighed with the Tribunal in holding that the respondent was an employee of the company within the meaning of Rule 39(3)(b) of the Rules were: 'The mere fact that he happened to be a director of some other companies as well could not deprive him of the benefit which was available to him by virtue of the provisions of Rule 39 of the Rules and that an employee 'within the meaning of Rule 39 includes a director as well and if he is a director of more than one company he will be entitled to avail of the benefit of receipt of commission etc. only in respect of one company.' The Tribunal further reasoned that reading the second proviso in any other manner would result in defeating the very purpose and object of the Rules.

8. Therefore, the applicant applied to the Income-tax Tribunal to refer the following questions,, of law said to arise out of the order of the Tribunal. "(1)????? Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in holding that the remunerations received by the assessee as a director of three companies, are taxable under section 7 of the Income-tax Act? (2)??????? Whether, on the facts and in the circumstances of the case, the learned Tribunal was justified in directing the Income-tax Officer to give exemption in respect of entertainment and conveyance allowance under Rule 39 of Income-tax Rules? (3)??????? Whether, the remunerations received by a director from three companies are assessable under section 7 of the Income-tax Act? (4)??????? Whether, an assessee being a director of three companies is an employee within the meaning of clause 3(b) of Rule 39 of the Income-tax Rules." The Tribunal has however, referred the following question of law by their order, dated 18-3-1977. "Whether in the facts and circumstances of the case, the Tribunal was justified in holding that notwithstanding his being a director in three companies, the assessee was a whole-time employee of one of them within the meaning and for the purpose of clause 3(b) of the Rule 39 of the Income-tax Rules?"

9. We have heard Mr. Shaikh Haider, learned counsel for the applicant and Mr. Iqbal Naeem Pasha, learned counsel for the respondent.

10. Mr. Shaikh Haider at the very outset submitted that if the respondent was an employee within the meaning of Rule 39 of the Rules he would be governed by the provisions of section 7 of the Income-tax Act, 1922 and the entertainment allowance will not be liable to be assessed under section 12 of the Income-tax Act, 1922 as was taxed by the income-tax Officer. Therefore, it would be convenient if Rule 39(3) of the Rules is quoted here which reads as follows:- "39.(3)For the purposes of this rule-- . (a)??????? 'basic salary' means the pay and allowance payable monthly or otherwise, but does not include- (i)???????? dearness allowance or dearness pay unless it enters into the computations of superannuation or retirement benefits of the employee concerned; (ii)??????? employer's contribution, to a recognised fund or a fund to which the Provident Funds Act, 1925 (XIX of 1925) applies and the interest credited on the? accumulated balance of an employee in such fund; (iii) ????? allowances which are exempt from the payment of tax; and (iv)?????? allowances, perquisites, annuities and benefits referred to in sub-rule (1). (aa)????? 'Salary', as used in S.No.2 of the Schedule to sub-rule (1) means remuneration or compensation for services rendered, paid or to be paid at regular intervals and includes overseas, dearness grain compensation or cost of living allowance and bonus and commission which are payable to a director or employee in accordance with the terms of his employment as remuneration or compensation for services but does not include the employer's contribution to a recognised Provident or Superannuation Fund or any other sum which does not enter into the computation for pension or retirement benefits; and (b)??????? 'employee' includes a director of a company working whole-time for one company. (4)??????? This rule shall apply to the allowance annuities, benefits and perquisites which become due to an assessee on or after first day of July, 1961."

11. In our opinion the answer to the question referred to this Court depends on the interpretation of Rule 39(3)(b) of the Rules.

12. It is clear from the language of the rule that the definition of 'employee' given in sub-rule (3) of Rule 39 of the Rules includes a director of a company. But to get the benefit as an employee a director must fulfil two more conditions, (1) that he should work fork one company and (2) whole time. It was contended by Mr. Shaikh Haider that the respondent worked at least for two companies, and therefore, he was not an employee within the meaning of sub-rule (3) of Rule 39 of the Rules. On the other hand Mr. Iqbal Naeem Pasha submitted that the respondent was working whole time for Atlas Rubber and Plastic Company Limited in respect of which he claimed exemption for entertainment allowance. In our opinion the stand of Mr. Shaikh Haider is right. A person may be a director of several companies. He may also work whole time in one company or part-time in several companies of which he is a director. If a person does work part-time in several companies then he cannot be said that he works whole time for one company, which is the prima facie the requirement of Rule 39.

13. Therefore, the question is whether there is any evidence or any material on record that the respondent worked whole time for Atlas Rubber and Plastic Company Limited. Mr. Shaikh Haider submitted that the Tribunal has not found in the order, dated 7-4-1977, nor has it stated in the Statement of Facts submitted to this Court that the assessee was working whole time for one company only. He submitted that there is no doubt that the Tribunal has relied on the resolution mentioned herein below and Article 29 but neither the resolution nor the Article shows that the respondent was working whole time for one company. It may be pertinent if we may here quote the resolution passed at the General Meeting of the company held on 20-2-1969, and Article 29 of the Articles of Association of Atlas Rubber and Plastic Company Limited. The resolution reads as follows: - "After careful consideration it was unanimously resolved that the salary, conveyance allowance and entertainment allowance of each of the four Directors viz. Mian S. Nazir Hussain, Mr. S. Zafar Hussain, Mr. S. Mazhar Hussain and Mr. S. Arshad Javed for their services and active engagement in the business of the company be fixed with effect from 1st March, 1969, as under:- Salary Rs.2,000 per month Conveyance allowance 250????? " ????????? " Entertainment allowance 250????? " ????????? " The Article 29 of the Articles of Association of Atlas Rubber and Platice Company Limited reads as follows:- "(29).?? - Mr. S. Arshad Javed shall be the Operative Director of Production and he shall hold that office for life or until he voluntarily resigns and shall not be liable to retirement by rotation. He shall get, by way of remuneration, a sum of Rs.1,500 per month. His remuneration shall be subject to increase or reduction in a General Meeting, with the increase or reduction in: the business of the Company." Mr. Iqbal Naeem Pasha also relied on them.

14. The said resolution and Article 29 do not show that the respondent worked whole time for Atlas Rubber and Plastic Company Limited. Mr. Iqbal Naeem Pasha particularly laid much emphasis on the words 'for their services and active engagement in the business of the Company' used in the resolution. If the respondent had worked for one company only then there would not have been any difficulty in presuming on the basis of the resolution that he was whole time working for that company. The Tribunal has itself stated that the assessee also received remuneration amounting to Rs.6,000 during the year from Atlas Trading Agency, besides conveyance allowance of Rs.1,350 and entertainment allowance of Rs.1,

350. The word 'remuneration' means 'reward, recompensation, repayment, payment and pay', (See the Oxford English Dictionary Volume VIII). This word was also judicially considered by Blackburn, J., in R.V. Postmaster-General (1 Q.B.D. 663, 664) and according to him ' Remuneration' means a quid pro quo. Whatever consideration a person gets for giving his services, seems to me a 'remuneration' for them". This word was also considered in Russel v. Ely & Walker Dry Goods Co. 332 Mo 645, 60 SW2d 44, 87, ALR 953, wherein it was held to mean 'compensation, salary; wages'. Since admittedly the respondent received the remuneration of Rs.6,000 from Atlas Trading Agencies in the year, therefore, it could be only for work or services rendered. There is no other explanation. Now, if the respondent was also working or rendering services to Atlas Trading Agency then it could not be said that he was working whole time for one company. It would be proper to infer that he was working part-time for Atlas Rubber and Plastic Company Limited and part-time for Atlas Trading Agencies there is no evidence that he was exclusively working whole time for the former from which he was getting the pay of Rs.2,000 per month. In order to have the benefit of rule 39(3)(b) the respondent as already stated, should have explained on what account he received the remuneration if it was not for services rendered. It was alternatively argued by Mr. Iqbal Naeem Pasha that a person could work whole time for one company and part-time for another company but whole time means whole time and if you take away a part from the whole the whole does not remain the whole. Even reference to the resolution or articles by the Income-tax Tribunal or by Mr. Iqbal Naeem Pasha is of no help because neither the resolution says that respondent will whole time work for the company or he will actively and whole time engage in the business of that company nor does the articles provide so.

15. Mr. Iqbal Naeem Pasha-referred to the following observations of Murshid, J., in Mukhlesur Rahman v. The Sub-Divisional Officer, Narayanganj PLD 1962 Dacca 497 wherein it was held as follows:- "The expression 'whole time' denotes daily engagement or employment during the ' routine or normal office hours for the entire day. A temporary or periodical cessation of work or pay in a continuing service is of no consequence in this behalf. The expression 'salaried' and 'whole time' are well-understood terms. If the nature of his office is, that it is a 'whole time' job in the aforesaid sense, then he satisfied the qualification of a whole time holder of an office and it would make no difference if he, in fact, during a particular interval was doing no work, being either on leave or for some other reason, although he continues in a service which involves a whole time appointment." But, the observations, firstly should be understood in the context of the facts of that case. Nonetheless, if the respondent had shown what were the routine or normal office hours and if evidence was not available that he was paid a remuneration of Rs.6,000 for one year or on an average Rs.500 per month by one company and Rs.2,000 per month by another company then it was possible to argue that the respondent was working whole time for one company. The word 'whole' indicates that the employee should actively engage all or any time, whether the unit of time is taken as office hours or day, or night, or month or year. It would be reasonable to infer that he was proportionately working i.e. 4/5th time for Atlas Rubber and Plastic E Company Limited from whom he was drawing a salary of Rs.2,000 pert month and 1/5th time for Atlas Trading Agencies from whom he got remuneration of Rs.6,000 for the year. Significantly, he was drawing from Atlas Rubber and Plastic Company Limited Rs.3,000 per month as entertainment allowance and from the Atlas Trading Agencies Rs.1,350 per month which is roughly 1/2. From it also an inference can be drawn that he was working for second company also.

16. In our opinion the benefit of the rules has to be given to a person who works whole time for one company and not part-time. If a person works as a director for one hour only and does not work for another company he can still be considered to be working whole time for that company and if a person works whole day for one company and whole night for another company or for some days in a month for one company and for some other days in a month for other he cannot be said to be working for one company only, for, word 'whole time' used in the Rule 39(3)(b) in our opinion means 'entire time as the word 'whole' has been used in the sense of 'entire'.

17. Mr. Shaikh Haider and Mr. Iqbal Naeem Pasha both referred to the case of The Commissioner of Income-tax Bombay v. L. Armstrong Smith 1946 (14) I T R 606, wherein the facts were that a business carried on by the assessee was taken over by a private limited company in which the assessee held most of the shares while two of his nominees held the rest. The Articles of Association of the company provided that the assessee was to be the Chairman and Managing Director of the company until he resigned office or 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 directions in regard to the company's business, and that his remuneration was to voted by the company at its annual general meeting. The assessee devoted his whole time to the management of the company's affairs. He received a sum of Rs.48,000 as his remuneration in the year of account. On these facts it was held that the remuneration of Rs.48,000 received by the assessee was for managing the company's business and arose from his contractual relation with the company provided by the Articles for performing the services of managing the company's business and, therefore, his remuneration fell to be taxed under section 7 and not under section 12 of the Income-tax Act. This case firstly, has not considered the provisions of. Rule 39(3)(b) of the Rules nor has it discussed the meaning of expression 'whole time'. Therefore, it is not directly on the point. Secondly, in this case the assessee devoted his whole time to the management of the affairs of the company. This case seems to be an authority for the propositions 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 and that a director or managing director may enter into a contractual relationship with the company which could be provided by Articles of Association for performing a service of managing the company's business.

18. Mr. Shaikh Haider also referred to the following cases: Commissioner of Income-tax v. Lakshmipati Singhania 1973 (92) I T R 598 and Commissioner of Income-tax Bombay City v. Lady Navajbai R.J. Tata (1947) 15 I T R 8.

19. However, in none of them Rule 39(3)(b) of the Rules or the meaning of the phrase 'whole time' has been considered. In case of Commissioner of Income-tax v. Lakshmipati Singhania (supra) the facts as stated in the head note of the report were that the assessee was the financial advisor of the company. He was not appointed as financial advisor under any contract but by means of resolution of the board of directors. The resolution did not contain any terms and conditions under which the assessee had to work. The assessee was allowed rent-fee accommodation but did not receive any other remuneration from the company. On the question whether the value of rent-free accommodation was assessable as salary or a perquisite. On these facts it was held that there was no finding that the assessee was under the control of the company while discharging his functions as financial advisor. The resolution of the board of directors did not give rise to any inference that the assessee was a servant of the company. Hence, the value of the rent-free accommodation was not assessable under section

7. This case is, therefore, not directly on the point.

20. In the case of The Commissioner of Income-tax, Bombay City v. Lady Navajbai R.J. Tata (supra) the facts as narrated in head note of the report were that 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 she 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 had to 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 assessee as her remuneration in the relevant account year was salary chargeable under section ' of the Income-tax Act, On these facts it was 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 a 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.

21. Lastly, we may mention that Mr. Iqbal Naeem Pasha argued that the finding of fact made by the Tribunal that the assessee was an employee must be accepted and he relied on India Cement Ltd. v. Commissioner of Income-tax Madras 1966 (40) I T R 52 but in the present case the Tribunal has not found as a fact that the respondent was a whole time employee working for one company. However, Mr. Iqbal Naeem Pasha pointed out a passage in the order, dated 7-4-1975, whereby they decided the appeal which reads as follows:- "Mr. I.N. Pasha, Advocate, the learned counsel for the appellant submitted that the assessee was in fact working whole time for one company i.e. Messrs Atlas Rubber and Plastic Industries by virtue of a resolution adopted at a General Meeting of the said company on 20th February, 1969 for his service and active engagement in the business of the said company. He also placed before us the Articles of Association of the said company and drew our attention to the Article 28 which inter alia, lays down that Mr. S. Mazhar Hussain (i.e. the assessee) shall be the Operative Director of Sales and he shall hold that office for life or until he voluntarily resigns and that he shall get, by wav of remuneration a sum of Rs.1,500 per month subject to increase or reduction in a General Meeting, with the increase or reduction in the business of the company. He also drew our attention to the fact in the earlier assessments upto assessment year 1971-72 the assessee was treated as an employee of the said company. He also pointed out that although the Income-tax Officer has in his impugned order observed that the salary received by him was to be taxed under section 12 of the Income-tax Act yet in I.T. 30 he has shown the salary received by the employee and has allowed him the allowance of Earned Income Relief. The counsel maintained that the assessee had claimed exemption only in respect of perquisites received by him from Messrs Atlas Rubber & Plastic Industries whereas the conveyance and entertainment allowance received by him from the other two companies had been offered for tax purposes. The counsel also drew our attention to the provisions of sub-rule 3(b) of Rule 39 of the Income-Tax Rules to contend that the definition 0f "Employee" given therein clearly includes as Director of a Company." To term the above observation particularly the opening sentence of the above paragraph as finding is not correct. These were only submissions of Mr. Iqbal Naeem Pasha before the Tribunal.

22. For the reasons given above we answer the question referred to this Court in the negative.

23. Parties in the circumstances of the case are left to bear their own costs. H. B. T. / C-44/ K?????????????????????????????????????????????????????? Reference answered in the negative