MALIK, J. - (1.) THIS is a reference under Section 21, Excess Profits Tax Act read with Section 66(1), Income -tax Act. The question referred to this Court is as follows : 'Whether in the circumstances of the case, the remuneration granted to R.B. Seth G.M. Modi is directors' remuneration within the meaning of the term as used in Schedule 1, Rule 7 (1), Excess Profits Tax Act road with Clause (2) (a) of the same rule?' There was a Hindu undivided family firm known as R.B. Multanimul and Sons which till March 1940 worked as Managing Agents of the Modi Sugar Works Ltd. There was a disruption in the family and the Hindu undivided family firm was succeeded by another firm of the same name which carried on business up to September 1940. In September 1940, a private limited company was formed which took over as a going concern the business of R.B. Multanimul and Sons and thus became the Managing Agents of the Modi Sugar Works Ltd. From the Articles of Association of the Company it appears that the Board of Directors could not exceed 7 including the Governing Director and could not be less than 2. The names of the first set of 5 Directors were given in the Articles of Association and they were R.B. Seth Multanimul, Raizada Seth G. M. Modi, Seth Harmukhrai, Seth Harnam Singh and Seth Benarsidas. Raizada Seth G. M. Modi was under Article 61 appointed Governing Director subject to the control and supervision of the Board of Directors. His functions were defined in Article 62, Article 61 provides that he was to be the Governing Director for his lifetime and he was also given the right to nominate, assign or appoint a successor or appoint his administrator or executor to be the Governing Director of the Company in his place. As Governing Director of the company he was paid certain remuneration and the Appellate Tribunal held that the amount paid to Raizada G. M. Modi was paid to him as Director of the company and the amount was, therefore, not a deductable expenditure from the total profits calculated for purposes of payment of the Excess Profits Tax.
(2.) 'Director' is defined under Section 2 (10), Excess Profits Tax Act as including any person occupying the position of a director by whatever name called and also includes any person who is a manager of the company or is concerned in the management of the business, is remunerated out of the funds of the business and is the beneficial owner of not less than 20 per cent, of the ordinary share capital of the company. Seth G. M. Modi owns only 10 per cent, shares in the company and not 20 per cent. It was, therefore, urged that Seth G. M. Modi was performing two separate functions, one of a director and the other of a manager, and as manager, by reason of the fact that he was not the beneficial owner of 20 per cent, of ordinary share capital of the company, he could not be called a director. On behalf of the Department it was urged that it was not their case that Seth G. M. Modi was manager of the company and as he held beneficial ownership in not less than 20 per cent, ordinary share capital of the company he was deemed to be a director, but that the whole amount paid to him was paid to him as a director and that the case came under Schedule 1, Rule 7 (2), Excess Profits Tax Act.
(3.) 'Profits' are defined in Section 2, Sub -section (19) as meaning profits as determined in accordance with Schedule 1 ; and Rule 7 (1) Schedule 1, provides that in computing the profits or standard profits no deduction can be made in respect of director's remuneration. Sub -rule (2) of Rule 7 of the same Schedule provides that : 'The expression 'director's remuneration' does not include : (a) the remuneration of any director who is required to devote substantially the whole of his time to the service of the company in a managerial or technical capacity and is not the beneficial owner of, or able, either directly or through the medium of other companies or by any other indirect means, to control, more than five per cent. of the ordinary share capital of the company, or (b) the remuneration of any managing agent where such remuneration is included in the profits of the managing agent's business for the purposes of excess profits tax.' The question, therefore, is whether the remuneration, which the company wanted to deduct and the Appellate Tribunal has held that it was not entitled to deduct, was paid to Seth G. M. Modi as director, who was required to devote substantially the whole of his time to the service of the company, it being admitted that he owned more than 5 per cent. ordinary shares, or it was paid to him as manager. ;