D.R.KHANNA,J. - (1.) THESE two references pertain to the assessment of Gian Singh Kalsi, an individual, for asst. yrs. 1961 -62 and 1962 -63. They have been moved by the CIT in the following circumstances:
(2.) THE assessee was the managing director of the Kalsi Tyre Retreading Factory (P) Ltd. (hereinafter referred to as "the company"), during the relevant years, having been appointed so by the board of directors on 25th Aug., 1960. This resolution was to the following effect : "It was felt necessary to have a managing director for running the day to day administration of the company. After discussion it was unanimously resolved that Mr. Gian Singh Kalsi be and is hereby appointed as managing director of the company and the question of his remuneration shall be taken up later." The articles of this company also provided that the directors might be allowed any amount either as salary or as commission on net profits or otherwise as was settled by the board of directors. This company was a closely held company in which the assessee and the members of his family were substantially interested. Although there was no formal resolution of the board determining the amount of salary which was to be paid to the assessee, an amount of Rs. 2,000 per month was started to be paid to him from 15th May, 1960. Entries about these payments were duly made in the account books of the company and also credited in the account of the assessee. The assessee too started withdrawing that salary, and there are observations by the IT authorities that he was meeting part of his household expenses from those withdrawals. In the returns for the asst. yrs. 1961 -62 and 1962 -63, which the assessee filed with respect to his incomes, he disclosed the amounts of these salaries and sought assessment thereon. Revised returns were subsequently also filed and there too, the salary incomes were duly owned. On 12th July, 1962, the directors of the company passed a resolution to the following effect : "It was noted that Mr. Gian Singh Kalsi had charged a remuneration @ Rs. 2,000 per month for the whole of the year 1961. There was no resolution of the board of directors and the amount charged in the accounts was without any authority. The matter was discussed. It was also noted that at no time the directors had decided to fix his remuneration. It was the understanding given to the board that he would not charge any remuneration until the company is in a position to make some profits. He was requested to continue as managing director of the company without any remuneration until such time as the company improves. In the interest of the company Mr. Gain Singh Kalsi agreed not to press for his remuneration and it was decided that the entry which was passed in the accounts should be reversed. It was further resolved to pay him Rs. 2,000 p.m. as remuneration w. e. f. 1st Jan., 1962." Accordingly the account of the assessee with the company was debited with amounts which the assessee had withdrawn and which were credited to his account. The assessee then filed further revised returns in which he excluded the salary incomes so drawn.
(3.) THE ITO, however, treated the amounts of those salary incomes as part of the assessee's assessable incomes. Their surrender later to the company, it was held, could not obliterate the accrual and receipt earlier by the assessee of those amounts during the relevant years. These decisions were upheld in the appeals by the AAC. He observed that in the accounts of both the company and the assessee, the payments of the salary amounts had been duly contemporaneously recorded. These circumstances, he observed, showed that it could not be that the other directors of the company were unaware of the salary amounts drawn by the assessee or they were not approving those withdrawals. Furthermore, when the assessee was utilising the salary amounts for meeting his personal and household expenses, it was assumed that the family members must have known that the assessee was enjoying those salary amounts. The assessee's own conduct also abundantly made it clear that he owned the salary incomes as belonging to him and disclosed them in the two returns which were initially filed. Any surrender of those amounts subsequently long after the previous years, it was held, could not eliminate the accrual and enjoyment of the salaries by the assessee. This belated surrender was considered to be more as a sort of an advantage in the matter of the income -tax assessment so far as the company was concerned, inasmuch as it was having taxable income in those years.;