Dipak Kumar Sen, J. - (1.) Construction Machinery Private Ltd., the assessee, was incorporated under the Companies Act, 1956, on May 19, 1971, with three shareholders, namely, Atma Singh, Prem Chand Bhalla and Joginder Singh (the son of Atma Singh) who were allotted, respectively, 1010, 110 and 410 shares in the assessee-company. The assessee-company was incorporated with the principal object of taking over the business of Atma Singh carried on by him as a sole proprietor under the name and style of M/s. Construction Equipments and Parts Distributors.
(2.) On May 19, 1971, the date on which the assessee-company was incorporated, a separate agreement was entered into by and amongst the said Atma Singh, Prem Chand Bhalla and Joginder Singh, which provided that Atma Singh would be the first managing director of the assessee-company for life and that the entire management and control of the assessee would be retained in his hands. It was agreed further that the other two shareholders, namely, Prem Chand Bhalla and Joginder Singh, would also become the directors of the assessee-company.
(3.) On March 30, 1972, at a meeting of the directors of the assessee, a resolution was passed sanctioning payment of remuneration and house rent allowance to the directors for the accounting period ending on March 31, 1972. It was resolved that Atma Singh be paid a remuneration of Rs. 3,000 per month with house rent allowance of Rs. 500 per month ; Prem Chand Bhalla be paid a remuneration of Rs. 2,000 per month with house rent allowance of Rs. 200 per month and Joginder was allowed a remuneration of only Rs. 500 per month.;