P L D 1973 Lahore 367 (PLP)

MUSHTAQ HUSSAIN, J.‑

Messrs Owen Roberts & Co. Ltd., Lahore are the Managing Agents of Messrs Walter Locke & Co. For the assessment year 1961‑62 the company declared a net loss of Rs. 9,

650. Begun Sardar Shaukat Hayat Khan is the Managing Director of the company. Besides her emoluments, she was allowed by the company a sum of Rs. 6,000 as bonus. The Income‑tax Officer refused to allow it as a deduction under section 10(2)(x) of the Income‑tax Act and the Appellate Assistant 'Commissioner agreed with him on appeal. The assessee success fully appealed to the Income‑tax Appellate Tribunal which found that‑ "In this view of the matter we cannot endorse the Appellate Assistant Commissioner's finding that the bonus of Rs. 6,000 being equivalent to the Managing Director's three months' salary is unreasonable in the context of the loss incurred in the business. We, therefore, delete this addition of Rs. 6,000."

2. The Income‑tax Department felt dissatisfied and as a result of a petition made by it, the Income‑tax Appellate Tribunal has, by its order dated 19‑3‑65, referred the following .question for opinion to us :‑ "Whether on the facts and in the circumstances of the case, the Tribunal was right to holding that a sum of Rs. 6,000 paid as bonus to the Managing Director and the assessee company was allowable as a deduction under the provisions of section 10(2)(x) of the Income‑tax Act."

3. We have heard learned counsel for the parties and answer the question posed to us in the negative, i.e., in favour of the Department; our reasons therefore are following :‑

4. Section 10(2)(x) of the Income‑tax Act provides that subject to the provisions of the Act the Profits and Gains upon which an assessee has to pay tax are to be arrived at after allowing for‑ "Any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission Provided that the amount of the bonus or commission is of a reasonable amount with reference to‑ (a) the pay of the employee and the conditions of his service : (b) the profits of the business, profession or vocation for the year in question ; and (c) the general practice in similar business, professions or vocations ;" The amount allowable under this sub section must, therefore, have been paid to (i) an employee, (ii) as bonus or commission, and (iii) for services rendered. If such sum would have been otherwise admissible to him as profits or dividend it would not be covered by the language of this subsection. This subsection requires that the amount so paid should be reasonable and for determining the reasonableness of the amount it also specifies the criteria. The criteria is contained in clauses (a), (b) and (c) of the proviso reproduced above.

5. The language in which the proviso is couched leave no doubt that each one of these conditions has to be fulfilled before the amount can be termed "reasonable." The first clause ends in a semi‑colon while the second has the conjunctive article 'and' after the semi‑colon and before the last clause. These three clauses have, therefore, to be read collectively and not in the alternative. The mere fact that one or two of these conditions exist in a particular case would not be enough for granting the allowance under this subsection. The reason ableness shall have to be determined by testing on the touchstone of tee criteria collectively provided by the aforesaid three clauses.

6. In the present case, we find that the conditions of service of Begum Hayat have not been produced before the Department to support the contention that the amount paid as bonus was reasonable. In the absence of such evidence being produced, the allowance claimed by the assessee cannot be permitted. There could hardly be two opinions on the postulate that it is for the assessee who wants an allowance to prove the conditions precedent for the grant of it. Since the assesses has failed in doing this, it cannot claim‑ the concession.

7. Clause (b) of the proviso makes the bonus relatable to the profits for the year in question. The amount to be paid as bonus, therefore, has also to be reasonable in relation to the quantum of profits. This requirement pre‑supposes the declaration of profits for the year to question by the assessee. If loss has been declared instead of profits the further question of determining the reasonableness of the amount of bonus in relation to the profits would just not arise. It has already been seen that the reasonableness is to be determined qua the three criteria laid down in the proviso. If one of them, i.e., "the profit's non‑existent, the pre‑condition for the allowance of bonus is just not there. That being so, any bonus paid by an assessee who is running in a loss in the relevant year would not be a sum paid to an employee as bonus within the meaning of section 10(2)(x)".

8. The very opening line of this subsection provides that the amount has to be paid to an "employee." Is a Managing Director an employee of a company ?

9. Salmond in his book on Jurisprudence (11th Edition) states at page 363 that‑ "A corporation having neither soul nor body cannot act save through the agency of some representative in the world of real men . . . . . When the directors are appointed they are themselves regarded for many purposes as the alter ego of the company, and their wills are, within the limits of the rules of law, regarded as the will of the company." (P. 365). The Directors of a company, and of course this term includes the Managing Director would, therefore, not simply on account of having been appointed as such be treated as the employees of the company. This question arose for consideration in Sardar Gulab Singh v. Punjab Zamindara Bank Ltd. Lyallpur (A I R 1942 Lah. 47). It was hold that‑ "The learned Judge held that the position of the company and that of Sardar Gulab Singh as Managing Director was that of master and servant. With great respect we do not think that this is correct. A Director or a Managing Director is in no way a servant of the company; he is the agent of the company for carrying on its business." Subject to what follows, a Director of a company is, therefore, not its servant.

10. We have been referred to the following observation by Pennington in his book on Company Law (2nd Edition), page 468‑ No decision of the Court has yet clearly defined the nature of the office of a director, and it is only rarely that the Court has seemed to recognise that directors occupy two positions regulated by entirely different rules of law, namely, that of officers of the company appointed under the provisions of its constitution, and that of employees or agents of the company serving under contracts of employment. Perhaps it will assist clarity in examining the decided cases if the position of a director under the articles is referred to as his status, and his rights and obligations under his contract of employ ment are referred to as his contractual rights sad obligations. It is the Court's frequent failure to make this distinction and its readiness to treat all questions between the director and hit company as soluble by reference to his contract of employment which has led to the present unsatisfactory state of the law. We are not faced here with a case where a contract of employment between the Managing Director and the company has been produced or proved. We need not, therefore, go into the further question as to whether a Managing Director who has entered into a special contract of service under the articles of association with a company would or would not be an "employee" of the company and any observation made on that question would be gratuitous and in the nature of obiter dictum. We, therefore, advisedly confined ourselves to expressing our opinion on a case where no such special contract has been pleaded or proved.

10. The word "employee" is too well understood in the English language and usage to require any elucidation and we would restrict ourselves to observing that the expression "employee" clearly envisages the relationship of master and servant and can hardly be applied to a person who is an alter ego of a juristic person.

11. Begum Hayat, therefore, was not even an employee so as to entitle the company to an allowance under section 10(2)(x) to respect of the bonus paid to her. We pass no order as to costs. K.B.A. Reference answered.