COMMISSIONER OF INCOME TAX Vs. MOTOR AND GENERAL SALES P LIMITED

JUDGEMENT

(1.) THIS reference has been made by the Income-tax Appellate Tribunal, Allahabad Bench (hereinafter referred to as the Tribunal), under section 66(2) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act). The following question of law has been referred to us, as directed by this court by means of its orders dated August 31, 1962, and April 4, 1962 :

(2.) THE assessee is private limited company which was incorporated on March 26, 1955. It commenced business on May 26, 1955, at Lucknow, as distributors of Tata Mercedes Benz trucks and motor chassis a in the eastern districts of Uttar Pradesh. THE shareholders of the company at the time of its start were Sarvsri C. M. Gupta, M. C. Gupta and R. P. Gupta. THE first two are cousin brother while the third one is an outsider. All these three persons are also directors of the company. In the meeting dated May 28, 1965, the directors passed a resolution to the effect that they would be entitled to receive a remuneration of Rs. 2,000 per month each. Another resolution that was passed is to the effect that manager, Iswar Chandra, would receive Rs. 1,000 per month as salary and a certain percentage as commission cover the profits of the company.

(3.) IT is clear that there were only three shareholders of the company, i.e., Sarvsri C. M. Gupta, M. C. Gupta and R. P. Gupta, and they were also the directors. They held shares to the tune of Rs. 34,000 each. Admittedly sarvsri C. M. Gupta and M. C. Gupta were college students residing at Dehra Dun and not at Lucknow where the business of the company was being transacted. They had no background which could justify the remuneration. They did not carry on the management of the company and did no work for the company beyond attending some meetings. The sole ground on which the Tribunal allowed Rs. 500 to each of these two directors for the year 1956-57, and the Appellate Assistant Commissioner for the years 1957-58 and 1958-59 was that they were financiers and had to be compensated for financing the enterprise. Section 10(2) (xv) of the Act reads :