JUDGMENT [ENTITY], J.
1. The Income-tax Appellate Tribunal, Ahmedabad, on directions of this High Court, because of the prayer of the Commissioner of Income-tax, Gujarat, Ahmedabad, referred to this High Court, the following two questions for opinion and these questions call for answer in [CASE NUMBER]:
" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the remuneration to the extent of Rs. 5,14,157 in respect of the previous year ended on March 31, 1967, for the assessment year 1967-68, was allowable as deduction in the assessment year 1968-69?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the directors are the employees of the assessee-company, and, therefore, the contributions to their provident fund and superannuation fund are allowable as deductions ? "
2. These references have arisen under the following circumstances ;
3. Karamchand Premchand Private Limited, Ahmedabad, is the assessee-company and the relevant year for these references is the assessment year 1968-69, previous year being the financial year which ended on March 31, 1968. Mr. [ENTITY], Mrs. [ENTITY] and Mr. [ENTITY] were the directors in the management of the assessee-company. The assessee-company decided to pay an amount of Rs. 5,14,157 by way of remuneration to the said three directors for the year of account ended on March 31, 1967, and an amount of Rs. 6,30,450 for the year of account ended on March 31, 1968. For that purpose, the assessee-company passed two resolutions, one on September 29, 1967, and another on January 22, 1968. Both these amounts were claimed by the assessee-company as deduction in the assessment year in question. The ITO held that the amount of Rs. 5,14,157 could not be allowed as deduction as the liability to pay the said amount did not arise in the year 1967-68. He also came to the conclusion that the said amount was not allowable also in the assessment year 1968-69 under [SECTION] of the [ACT]. So far as the remuneration of Rs. 6,30,640 was concerned, which was for the assessment year 1968-69, the ITO came to the conclusion that except for the contributions made to the provident fund and superannuation fund of the said three directors, the remuneration was reasonable. The ITO also came to the conclusion that the three directors were not employees of the assessee-company. This order was challenged before the AAC, Special Range I, Ahmedabad. He confirmed the order of the ITO on December 23, 1972. Thereafter an appeal was preferred before the Income-tax Appellate Tribunal. The Tribunal came to the conclusion that the provisions of [SECTION] of the [ACT] were not applicable and the remuneration of Rs. 5,14,157 could not be disallowed under the said provision in the assessment year 1968-69. The Tribunal also came to the conclusion that the remuneration paid was required to be held to be reasonable. Relying upon the case of [PRECEDENT], the Tribunal held that the three directors were the employees of the assessee-com-pany and, in these circumstances, the Tribunal, though it reversed the order of the authorities below on the main matter in controversy, rejected the assessee-company's claim for deduction of the remuneration in the assessment year 1967-68. It came to the conclusion that there was no justification in adding the remuneration paid for the two years and applying the provisions of [SECTION] of the Act to the remuneration of Rs. 11 lakhs as if it was paid in the assessment year 1968-69. As a result, the Commissioner desired and submitted that the two points may be referred to the High Court for its opinion. That is how this [CASE NUMBER] has arisen.
4. The assessee-company also moved this court for an opinion that the remuneration of Rs. 5,14,157 ought to have been considered for deduction as remuneration in the assessment year 1967-68. The Tribunal allowed the assessee-company's claim for deduction of Rs. 11,44,607 for the year 1968-69. Under these circumstances, the following question was referred to this court for the opinion at the instance of the assessee-company and that is how [CASE NUMBER] has arisen:
" Whether, on the facts and in the circumstances of the case, the assessee-company was entitled to deduction of remuneration of Rs. 5,14,157 paid to the directors for the accounting year ending March 31, 1967 ? "
5. The learned advocate, Shri [ENTITY], who appeared for the Revenue, referred to certain facts which are necessary for the purpose of deciding these references. It is an admitted position that the three directors were rendering services to the assessee-company from 1943 onwards, and it is also not in dispute that they were rendering extra services. [SECTION] of the articles of association prescribes that any director who performs extra services shall be paid remuneration to be fixed by the company in general meeting. The said [SECTION] reads as under:
"Remuneration for extra services: If a director being willing, shall be called upon to perform extra services or to make any special exertions in going or residing abroad or otherwise for any of the purposes of the company, the company shall remunerate such director, in such manner, as may be determined by the directors and such remuneration may be in addition to the fee payable to him under the preceding clause, provided, however, that if any director shall be required to render services in connection with the conduct, management or supervision of the business of the company or any department of the company's business for a period of exceeding one year, the remuneration of such director for such services shall be fixed by the company in the general meeting. "
6. It is not in dispute that the resolutions as required by the [ACT], passed in the general meeting declared that Mr. [ENTITY], Mrs. [ENTITY] and Mr. [ENTITY], who were directors of the assessee-company, were holding the office or place of profit in the assessee-company. The shareholders of the company were authorised to fix the remuneration to be paid to these directors from year to year, but the directors, however, chose to work without remuneration up to 1966-67. Thereafter, at a general meeting held on September 29, 1967, the shareholders of the assessee-company passed a resolution authorising remuneration to the directors. Three separate resolutions were passed for the remuneration of each director. They are produced in the paper book ofl[CASE NUMBER], at annexures E, El and E2. The resolution authorised each of the directors to receive remuneration for participation in the company's provident fund, use of motor car for company's business, reimbursement of medical expenses, use of telephone, reimbursement of actual expenses incurred for the business of the company and fully paid holiday in India for one month in each year with hotel expenses, subject to a ceiling of Rs. 2,500. Different amounts were fixed for different directors on all these heads. Subsequently, the resolution was amended on January 22, 1968, and it was decided to pay an amount of Rs. 5,14,157 by way of remuneration to the aforesaid three directors for the year of account ended on March 31, 1967, and an amount of Rs. 6,30,450 by way of remuneration for the year of account ended on March 31, 1968. Those resolutions are produced at annexure "F". In pursuance of the resolutions at annexure " F ", letters were addressed to the three directors which were part of the resolutions and they are annexures G1 and G2. In those letters also, apart from fixed salary, other benefits were there such as participation in the company's provident fund, participation in the company's annuity-cum-gratuity scheme, provision for a motor car, medical benefits, personal accident insurance policy, telephone, rent-free furnished residential accommodation, etc. It was also provided that the appointment may be terminated by the company on giving six months' notice and that the directors shall be similarly entitled to resign or retire on giving six months' notice to the company.
7. Now, on the above facts, we have to decide as to whether the two amounts fixed to be paid as remuneration to the three directors were allowable as deduction in the assessment year 1968-69. The ITO discussed the relevant rulings to which we will refer shortly and on a reference to those rulings, he came to the conclusion that there was no relationship of master and servant between the assessee-company and the three directors. This was confirmed by the AAC and the learned advocate, Shri [ENTITY], for the Revenue, also referred to some rulings and his submission to begin with was that as required by [SECTION] of the [ACT], no special resolution was passed and the resolution which was on record was adopted in an ordinary meeting and it was an ordinary resolution and not a special resolution as contemplated by [SECTION] of the [ACT] and his second contention was that the resolution was not passed in the relevant assessment year. Now the first question is a pure question of fact. Admittedly, the resolution was passed as required by the [ACT]. The three directors were working from the year 1943. The shareholders were required to fix the remuneration and as contemplated by the [ACT], it was resolved that they were rendering extra services and the shareholders were required to fix their remuneration. However, for a number of years, the remuneration was not fixed as the directors desired not to accept the remuneration. This question of fact was not raised at all and for the first time it cannot be raised in this court because for aught we know, special resolution might have been passed. The learned Advocate-General tried to produce the special resolutions which were adopted by the assessee-company on September 17, 1956, and August 21, 1957, and they were special resolutions and by the first special resolution as required by [SECTION] of the [ACT], it was decided that the two directors were holding office of profit from April 1, 1956, and the third director was holding the office of profit from April 1, 1957, and both resolutions were adopted in an extraordinary meeting and they were special resolutions. We do not take into consideration those resolutions naturally because this contention could not be raised in this court and if this contention was raised before the officer who was deciding the matter on facts, he would have allowed the contention to be raised and taken on record those resolutions and would have decided the matter one way or the other. At this stage, the learned advocate, Shri [ENTITY], finding it difficult, gave up his contention that the special resolution was not adopted. The only contention, therefore, that remained was whether by passing two resolutions in one assessment year, whether for the assessment year in which the resolution was not adopted, remuneration could or could not be paid. An attempt was made to read [SECTION] of the [ACT], but from that section also nothing which could help the Revenue could be suggested.
8. Therefore, the second question arises which requires more detailed consideration. The learned advocate, Shri [ENTITY], for the Revenue, submitted that there is no material placed by the assessee-company to establish that the master and servant relationship existed. His submission was that if extra work was done by a director, he could be paid remuneration for that particular extra work but that would not make him a salaried person and an employee of the company. According to him, something more was necessary. His submission was that unless the work is of a continuing nature and there was supervisory control only, periodical work done by a particular individual cannot make him a salaried employee of the assessee-company. On that point, he submitted that no contract was produced and in fact it is not the case of the assessee-company that any contract was ever entered into. It was further submitted that the resolutions do not throw any light and though the resolutions fix the remuneration, no duties are prescribed. According to him, at best what could be said in regard to those directors was that they were the agents of the company and in no case they could be considered salaried employees. It may be stated here that if one looks at the submissions made, it would immediately appear that the learned advocate, Shri [ENTITY], for the Revenue, was submitting something in regard to burden of proof and nothing more. So far as the assessee-company is concerned, it is more than clear that these three directors were doing extra work right from the year 1943. They were rendering extra services. That fact was recognised by the assessee-company and the assessee-company by a resolution authorised the shareholders of the company to fix the remuneration as required by [SECTION] of the [ACT]. However, the directors did not want to take remuneration for a number of years. Therefore, the remuneration was not fixed. When they decided to accept the remuneration, the two resolutions were passed. The resolutions speak not only in regard to the remuneration to be paid but also in regard to the use of motor car, telephone, expenses in regard to the work done for the company and provident fund, gratuity, etc. Normally a person who is not a servant is not entitled to any provident fund contribution or gratuity. Therefore, prima facie, the assessee-company by putting those resolutions on record established that the three directors who were rendering extra services were not only to receive the remuneration but they were to receive facilities for doing extra work and they were to be provided with residential accommodation, motor car and telephone and they will be given contributions towards provident fund and gratuity. These resolutions were adopted by the shareholders. Now that, therefore, the shareholders thought that these directors were the salaried employees of the company and the board of directors and the shareholders had supervisory control over them.
9. Further, their services would be terminated by giving them six months' notice meaning thereby that the employer reserved the right to terminate the services of an employee. Therefore, the factual aspect, so far as the assessee-company was concerned was already put on record and if the Revenue wanted to dispute or challenge this factual aspect, the burden was clearly on the Revenue and now when nothing else is on record, it cannot be suggested that it is the fault of the assessee-company that nothing else is put on record. The Tribunal dealt with these aspects in its judgment in paragraphs 18 and 21, which we need not reproduce. Some authorities on which the parties rely upon are required to be considered.
10. The first case on which reliance was placed by the learned advocate, Shri [ENTITY], is the case of [PRECEDENT]. It was a case under [SECTION] of the [ACT]. There the appellants were registered as a private limited company with the objects, inter alia, of acting as agents for Governments or authorities or for any joint stock companies and carrying on all kinds of agency business. They were appointed under an agency agreement as the agents of a company for a period of 30 years. The appellants were entitled to assign the agreement and their rights thereunder in certain circumstances and also to sub-delegate all or any of the powers, authorities and discretions for the time being vested in them. They were entitled to a remuneration by way of commission of a certain percentage on the amount of sale proceeds of the produce of the company. The question was whether the appellants were acting as employees of the company and whether their remuneration was liable to excess profits tax. In that case, it was held that the appellants were the agents and not merely the servants of the company remunerated by wages or salary. It was observed as under (at p. 450):
" It is the nature and scope of these activities and not the extent of the operations which are relevant for this purpose."
11. It was a clear case where there was an agreement evidencing agency. To come to the conclusion that it constituted an agency, the learned judges took into consideration the following aspects :
"(1) [SECTION] provided that the general management of the business of the company subject to the control and supervision of the directors was to be in the hands of the agents of the company, who were to have the power and authority on behalf of the company.
(2) [SECTION] authorised the agents to sub-delegate all or any of the powers, authorities and discretions for the time being vested in them.
(3) The agency agreement which was executed in pursuance of the appointment under [SECTION] provided that the appellants and their assigns were to be the agents of the company for a period of 30 years from the date of registration of the company and they were to continue to act as such agents until they of their own will resigned.
(4) The remuneration of the appellants as such agents was to be a commission of 2 1/2% on the amount of sale proceeds of all yarn, cloth and other produce of the company.
(5) The appellants were to be paid in addition all expenses and charges actually incurred by them in connection with the business of the company and supervision and management thereof, (6) Subject to the control and supervision of the directors, the said Lakshminarayan Ramgopal and Son Limited were to have the general conduct and management of the business and affairs of the company and were to have on behalf of the company the power to acquire by purchase, lease or otherwise lands, tenements and other buildings and to erect, maintain, alter and extend factories, warehouses, engine house and other building in Hyderabad and elsewhere in the territories of His Exalted Highness the Nizam.
(7) The said Lakshminarayan Ramgopal & Son Ltd, were at liberty to deal with the company by way of sale to the company of cotton, all raw materials and articles required for the purpose of the company and the purchase from the company of yarn, cloth and all other articles manufactured by the company and otherwise, and to deal with any firm in which any of the shareholders of the said Lakshminarayan Ramgopal & Son Ltd. may be directly or indirectly concerned, provided always such dealings were sanctioned, passed or ratified by the board of directors either before or after such dealings.
(8) Clause 8 provided that two of the members, for the time being of the appellants, were at the option of the appellants to be the ex-officio directors of the company and clause 9 empowered the appellants to assign the agreement and the rights of the appellants thereunder subject to the approval and sanction of the board to any person, firm or company having authority by its constitution to become bound by the obligations undertaken by the appellants."
12. On the aforesaid materials, the court came to the conclusion that it was an agency agreement and there was no relationship of master and servant. The Supreme Court in that case referred to [ENTITY]'s Law of Agency and extracted a passage from that which reads as under (at p. 456):
" The distinction between a servant and an agent is thus indicated :
(a) Generally a master can tell his servant what to do and how to do it.
(b) Generally a principal cannot tell his agent how to carry out his instructions.
(c) A servant is under more complete control than an agent."
13. Again at page 20 in [ENTITY]'s Law of Agency, what is stated is asunder :
" (a) Generally, a servant is a person who not only receives instructions from his master but is subject to his master's right to control the manner in which he carries out those instructions. An agent receives his principal's instructions but is generally free to carry out those instructions according to his own discretion.
(b) Generally, a servant, qua servant, has no authority to make contracts on behalf of his master. Generally, the purpose of employing an agent is to authorise him to make contracts on behalf of his principal.
(c) Generally, an agent is paid by commission upon effecting the result which he has been instructed by his principal to achieve. Generally, a servant is paid by wages or salary. "
14. In Halsbury's Laws of England, at page 193, the position is further clarified as under (at p. 457):
"An agent is to be distinguished on the one hand from a servant and on the other from an independent contractor. A servant acts under the direct control and supervision of his master, and is bound to conform to all reasonable orders given him in the course of his work; an independent contractor, on the other hand, is entirely independent of any control or interference and merely undertakes to produce a specified result, employing his own means to produce that result. An agent, though bound to exercise his authority in accordance with all lawful instructions which may be given to him from time to time by his principal, is not subject in its exercise to the direct control or supervision of the principal. An agent as such is not a servant, but a servant is generally for some purposes his master's implied agent, the extent of the agency depending upon the duties or position of the servant. "
15. After considering the totality of the circumstances in that particular case and particularly the agency agreement, the Supreme Court came to the conclusion that it was a purchase of agency. Now, this case instead of helping the Revenue helps the assessee-company.
16. The second case to which reference was made was the case of [PRECEDENT]. It was a case of an office of treasurer created by an agreement by the Allahabad Bank. By an agreement dated January 2, 1931, the Allahabad Bank, for its branches, sub-agencies and pay offices appointed a treasurer to perform the duties, liabilities and responsibilities which by custom or contract usually devolved upon a treasurer as well as those specified in the agreement. The treasurer had to provide the staff for the cash section of the bank. He had power to suspend, transfer or dismiss any member of the staff and to appoint another person in his place. He was responsible for the protection of the property of the bank and for the receipt of any bad money or base money, coin or bullion or any forged or fraudulently altered currency notes. Now this in terms clearly shows that it was a contract of agency, because the treasurer, though he was assigned duties, was free to perform his duties in the manner he chose, though in the interest of the Allahabad Bank. It was held that the treasurer in that case was not a servant of the Allahabad Bank.
17. The third case to which reference was made is the case of [PRECEDENT]. 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 should 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 [ACT]. It was held as under (headnote):
" 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 director and not as a servant or employee of the company, it did not fall to be taxed under [SECTION], but must be brought to tax as income from other sources under [SECTION]."
18. The word "gratuity" used above is to be understood as "gratuitous " payment as opposed to the word " gratuity " understood to be the retiring benefit in service matters. The facts clearly show that it was a gratuitous payment for the work done by virtue of her office as director and that she was not a servant.
19. The fourth case which was cited was the case of [PRECEDENT]. In that case, it was held as under (headnote);
" A director of a company as such is not a servant of the company and the fees he receives are by way of gratuity. But that does not prevent a director or a managing director from entering into a contractual relationship with the company, so that, quite apart from his office of director, he becomes entitled to remuneration as an employee of the company.
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 be 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."
20. It was held as under (headnote) :
" 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 that, therefore, his remuneration fell to be taxed under [SECTION] and not under [SECTION] of the [ACT]."
21. This case also would not help the Revenue. On the contrary, this case would help the assessee-company.
22. The last case which was cited by Shri [ENTITY] is the case of [PRECEDENT]. In that case, the assessee was the managing director of Surrendra (Overseas) Pvt. Ltd. for life and [ENTITY] (Calcutta) Ltd. for 20 years. The question arose whether his remuneration from the two companies would be taxed under the head " Salary ". The control of [ENTITY] was vested in the directors under [SECTION]. It was held as under (headnote):
"The assessee's powers under [SECTION] of Surrendra (Overseas) Pvt. Ltd. were of pivotal importance. He could from time to time and at any time appoint any person as an additional director and could also remove him. No servant of any company can appoint a director or dismiss him. These two powers lead to an irresistible conclusion that the assessee was not a servant of Surrendra (Overseas) Pvt. Ltd. although the company and its directors exercised some amount of supervisory control over him and his appointment could lawfully be terminated by the company without amending its articles, if he were found to be guilty of fraud, misfeasance, dishonesty, wilful default, gross negligence and like causes. The provision for the payment of remuneration is by itself not a decisive factor and, on the facts, the assessee's remuneration as the managing director of Surrendra (Overseas) Pvt. Ltd. was not assessable under [SECTION] of the 1922 Act, under the head ' Salaries'.
However, the articles of association of [ENTITY] showed that the company and its directors exercised a supervisory control over the assessee. [SECTION], which was an overriding article, gave a specific right to the company to remove any director ' before the expiration of his period of office by an extraordinary resolution '. And if he were so removed, he would automatically be dismissed from the office of the managing director The assessee was, therefore, an employee of [ENTITY] (Calcutta) Ltd. and his remuneration was taxable under [SECTION]. "
23. None of the above decisions on which reliance was placed by Mr. [ENTITY] are of any assistance in this case because no principle which will be of assistance in construing the relationship in this case as one other than that of master and servant could be deduced from those cases.
24. Before we refer to the rulings cited by the learned Advocate-General who appeared on behalf of the assessee-company, we may refer to the case of [PRECEDENT]. This case is referred to by the Revenue authorities while deciding this question. In that case, the Supreme Court considered the articles of association of the company and it was found that the assessee was the managing director for a period of 20 years. The general management of the business of the company was in his hands. One of the clauses of the agreement provided that the assessee was at liberty to resign his office upon giving three months' notice and that the company in general meeting could terminate his services before the expiry of the period of 20 years, if the assessee was found to be acting otherwise than in the interests of the company or was found to be not diligent in his duties. In addition to his monthly remuneration and a fixed monthly car allowance, the assessee was entitled to receive a commission of 10 per cent, of the gross profits of the company. The question was whether a sum of Rs. 53,913 which he received by way of a commission was taxable under [SECTION] of the [ACT]. It was held that a sum of Rs. 53,913 was payable to the assessee as salary and was chargeable under [SECTION]. It was held that under the articles and the agreement, the assessee was not an agent of the company but a servant. It was observed as under (headnote):
" A managing director may have a dual capacity. He may both be a director as well as an employee. In the capacity of a managing director he may be regarded as having not only the capacity as persona of a director but also has the persona of an employee, or an agent depending upon the nature of his work and the terms of his employment. Where he is so employed, the relationship between him as the managing -director and the company may be similar to a person who is employed as a servant or an agent, for the term ' employed ' is facile enough to cover any of these relationships. The nature of his employment may be determined by the articles of association of a company and/or the agreement, if any, under which a contractual relationship between the director and the company has been brought about whereunder the director is constituted an employee of the company, if such be the case, his remuneration will be assessable as salary under [SECTION]. In other words, whether or not a managing director is a servant of the company apart from his being a director can only be determined by the articles of association and the terms of his employment. "
25. Now, in this particular case, though all the articles of association are not produced, we have [SECTION] which we have already reproduced and two resolutions passed by the company which lay down the terms of employment.
26. The material available here would support only a case of master and servant relationship.
27. The learned Advocate-General cited the decision in [PRECEDENT]. The test laid down therein for the purpose of determining whether a person is a servant or an agent is as under (headnote) :
" For ascertaining whether a person is a servant or an agent of another, a rough and ready test is whether under the terms and conditions governing their mutual relationship a supervisory control is exercised by the latter in respect of the work entrusted to the former. A servant acts under the direct control and supervision of his master. An agent, on the other hand, in the exercise of his work, is not subject to the direct control or supervision of the principal, though he is bound to exercise his authority in accordance with all lawful orders and instructions which may be given to him from time to time by his principal. But this test is not universal in its application. In determining whether a relationship of employer and employee exists, due regard must also be had to the nature of the particular business, the terms of the engagement and the nature of the duties to be performed by the person in respect of whom the question has arisen as to whether he is an employee. "
28. Thereafter, the court considered the articles of association and after considering the articles of association, the court held as under (headnote) :
" The provisions contained in the articles made it clear that the management of the company was vested in the board of directors, the managing director or managing directors appointed by the board was/were to hold office for such period as the board of directors may fix, that a managing director might be removed from directorship by the company by an extraordinary resolution whereupon he had to automatically cease to be a managing director and that in the discharge of their duties and functions the managing directors were subject to the supervision, control and directions of the board of directors who had power to impose restrictions and conditions subject to which alone the management of the affairs of the company was to be carried on by the managing directors. There was also a further provision that the managing directors shall receive such remuneration (whether by way of salary, commission or participating in profits or partly in one way and partly in another) as the company in general meeting might from time to time determine. The two managing directors were, therefore, 'employees' and the assessee-company was entitled to claim deduction in respect of the remuneration paid to them, subject only to the provisions of [SECTION] ".
29. The principle emerging from the cases which have been dealt with is that ultimately what a court is called on to consider is whether on assessment of the facts available in the case, it could be found that the relationship is one of master and servant. We have already dealt with the special features of this case which indicate to us that the general body desired to remunerate the three directors for extra work rendered by them and such remuneration was intended as salary to be paid to them as employees. The provision for termination of notice which reflects the working of the mind of the general body gives credence to this finding. Hence, question No. 2 in [CASE NUMBER], has to be answered in favour of the assessee and against the Revenue, that is, in the affirmative.
30. Now we have to deal with question No. 1 in [CASE NUMBER], and the sole question in [CASE NUMBER]. Reliance was placed by the learned Advocate-General on the decision in [PRECEDENT]. It was a case interpreting [SECTION] of the [ACT]. What was held therein is as under (headnote) ;
" When an Income-tax Officer proceeds to include a particular income in the assessment, he should ask himself, inter alia, two questions, namely: (i) what is the system of accountancy adopted by the assessee, and (ii) if it is the mercantile system, subject to the deeming provisions, when has the right to receive accrued ? If he comes to the conclusion that such a right accrued or arose to the assessee in a particular accounting year, he should include the said income in the assessment of the succeeding assessment year. No power is conferred on the Income-tax Officer under the Act to relate back an income that accrued or arose in a subsequent year to another earlier year, on the ground that that income arose out of an earlier transaction. Nor is the question of reopening of accounts relevant in the matter of ascertaining when a particular income accrued or arose."
31. We have also to consider the case of [PRECEDENT], where the assessee paid a sum of Rs. 1,08,325-9-3 by way of profit bonus to its employees for the calendar year 1947 in terms of an award made on January 13, 1949, under the [ACT]. It debited the amount in its profit and loss account for the year 1948, but in fact paid it to the employees in the calendar year 1949. It was held as under (headnote):
" It was only in 1949 that the claim to profit bonus was settled by an award of the Industrial Tribunal and the only year to which the liability under the award could be properly attributed was 1949 and that, therefore, the sum of Rs. 1,08,325-9-3 had to be deducted in the calendar year 1949 relevant to the assessment year 1950-51.
An employer who follows the mercantile system of accounting incurs a liability towards profit bonus only when the claim, if made, is settled amicably or by industrial adjudication.
The system of reopening of accounts does not fit in with the scheme of the [ACT]. As far as receipts are concerned, there can be no reopening of accounts, and the position is the same in respect of expenses."
32. We are in agreement with this view. The tax is on the accrual of the income and if the income, though related to services rendered in an earlier year did not accrue in that year, there would be no scope for recording that income as of the earlier year. There is no question of reopening the accounts merely because the income arose out of an earlier transaction if the income did actually accrue only later. In the case before us, the income accrued in the accounting year corresponding to the assessment year 1968-69, because the income so accrued to the assessee not by reason of the services rendered by him during the earlier year, but only when the general body chose to remunerate him for such services by passing the resolutions. Even during many of the earlier years, the directors had been rendering the same services and they were not remunerated for such extra services. It is only when, by passing resolutions, the general body decided to remunerate those directors for a particular year, that income in respect of such remuneration accrued. Therefore, even if it related to services rendered in an earlier year, it must be treated as income arising in the accounting year in which the resolution was passed. If so, it is relevant for the purpose of assessment for the year 1968-69 and not 1967-68.
33. The case in [PRECEDENT], a case decided by this court, has to be distinguished on facts. That was a case where a sum of Rs. 1,75,000 paid to the chairman of the assessee company was claimed as a deduction in the assessment proceedings for 1967-68. The remuneration was fixed at an extraordinary general meeting of the shareholders in January, 1968. In that case, the chairman was also the managing director of the company and, therefore, [SECTION] of the [ACT] which requires consent of the shareholders of the company by special resolution was not necessary. In such circumstances, since even without a special resolution the chairman who worked as managing director could have sued for remuneration as his services were never understood to be gratuitous, it was held that the income arose during the year in which he worked. A case where [SECTION] of the [ACT] would apply, as in this case, and, hence, special resolution would be necessary to authorise remuneration payable to the directors would be different and in such a case it is only on passing such a resolution that income would accrue.
34. In the above view, we have to answer question No. 1 in [CASE NUMBER], in favour of the assessee and against the Revenue, i.e., in the affirmative. In this view, it is agreed by the counsel for the assessee in [CASE NUMBER] that the question may be answered against the assessee, for it is only by way of seeking protection that that question had been raised by him. We, accordingly, answer that question against the assessee and in favour of the Revenue.
35. As the questions are answered as above, now both the matters will go back to the Income-tax Appellate Tribunal so that the Tribunal may be able to dispose of the matter in accordance with law.
36. A copy of this judgment shall be sent under the seal of this court and the signature of the Registrar to the Income-tax Appellate Tribunal, Ahmedabad Bench "C".
37. In both the references, there will be no orders as to costs.