I.T.A. NO.436/LB OF 1998, DECIDED ON 16TH MAY, 1998. VS I.T.A. NO.436/LB OF 1998, DECIDED ON 16TH MAY, 1998., 1998 PTD-INCOME-TAX-APPELLATE-TRIBUNAL-PAKISTAN 3195 (1998)

(a) Income Tax Rules, 1982---

----R. 3(2)(c)---Benefit allowable under Rr.4 to 18 of Income Tax Rules, 1982---"Director of a company working whole time for one company"-- Meaning---Director working whole time for one company and actively contributing in the management and affairs of that company and also attending the Board meetings of another company in order to watch interest of employer or personal interest of the working Director, will not, in any manner, reduce him from his status of being a whole-time Director in the first company---Allowances claimed and received from only one company were allowable.

(b) Income Tax Rules, 1982---

----S. 3(2)(c)---Object of R.3(2)(c), Income Tax Rules. 1982 ---Intention of the Rules is to discourage and forestall taking of undue benefit by the Directors of Companies who are receiving similar allowance from more than one company.

A. Malik, F.C.A. for Appellant.

Anwar-ul-Haq, D.R. for Respondent.

Date of hearing: 11th March, 1998.

ORDER

NASIM SIKANDAR (JUDICIAL MEMBER).---The appellant in this further appeal for the year 1994-95 is an individual and a Director in three private limited companies namely Nida Investment & Printing Corporation (Pvt.) Ltd, M/s Nida-i-Millat (Pvt.) Ltd., and M/s Nation Publications (Pvt.) Ltd. As against returned loss of Rs.273,253 an assessment was framed at taxable income of Rs.156,417. In the process, inter alia. claimed house rent allowance at Rs.81,000 and Office rent at Rs.10,000 were disallowed by reference to a reported judgment of the Karachi High Court cited as (1988) P'I'D 563 and that of the Tribunal reported as 1990 PTD (Trib.) 321. It was in this regard noted that the assessee was not a whole time Director of one company and, therefore, was not entitled to the benefits allowable under Rule 1 to Rule 18 of the Income Tax Rules, 1982 The provisions of Rule 3(2)(c) of the Ordinance were also reproduced to support the conclusion drawn.

2. Learned first appellate authority CIT(A) Zone 1, Lahore by way of its order dated 15-12-1997 maintained the treatment meted out to the assessee on both the aforesaid counts. Earlier it was found that the assessee did not qualify for being treated as an "employee" as defined in section 16(2)(e) of the Ordinance read with the definition of employee contained in the aforesaid Rule 3(2)(c) of the Ordinance. Both the aforesaid reported judgments were again referred to hold against the assessee. The operative part of the order reads;

"The wording of old Rule 39(3)(b) and Rule 3(2)(c) of Income Tax Rules, 1982 has remained unchanged. From the above stated position as clarified by the Honourable High Court, Karachi the appellant assessee, although did not receive remuneration from companies other than Mis Nida Investment and Printing Corporation (Pvt.) Ltd. Lahore, wherein she was also a director to perform certain specified functions like attending the meetings of the Board of Directors, signing the resolution passed by the Board of Directors and participating in administrative as well as financial matters pertaining to the declaration of annual declaration, she could not be termed as a whole time director of M/s Nida Investment and Printing Corporation (Pvt.) Ltd; and thus, was not entitled to the benefits, envisaged in Rule 3(2)(c) of the Income Tax Ordinance, 1982 i.e. entitlement to tax free perquisites. Therefore, in view of the existing position of law and rule the assessing officer's action to subject the perquisites including office allowance to tax is upheld "

Hence this appeal.

3. Parties have been heard. Learned A.R. for the assessee vehemently contends that the authorities below erred in law and in fact by applying the ratio settled in the aforesaid judgments. It is explained that the assessee is a whole time working Director of only one company namely M/s Nida Investment and Printing Corporation (Pvt.) Ltd, Lahore and that she was not an employee of other companies M/s Nida-e-Millat (Pvt.) Ltd. and M/s Nation Publications (Pvt.) Ltd. Further states that the assessee was involved only a Member of the Board in the said two companies where she did not render any services or perform any functions except to attend the Board Meetings. Also that even for attending Board meetings she never charged a meeting fee nor any other kind of remuneration, emouluments or consideration. Therefore, in the view of the learned A.R. she was squarely qualified for the benefit of exemption of house rent receipts and also to claim expenses wholly and necessarily incurred in the performance of her duties as a Director as contemplated in' Clause (39) of the Second Schedule read with section 14(1) of the Income Tax Ordinance.

4. Learned D.R. on the other hand, supports the impugned order. Also stresses the ratio and the findings recorded in the aforesaid judgments to say that these were attracted in the facts and circumstances of the case.

5. We will, however, agree with the submissions made at the Bar for the assessee. The aforesaid two cases are clearly distinguishable. In the first case re: CIT v. ''S. Mazhar Hussain (supra) the assessee was a Director of three companies and had made a claim for exemption in respect of conveyance allowance and entertainment allowance received from all the three companies. In the second reported judgment a Full Bench of the Tribunal in 1990 PTD (Trib.) 321 refused to interfere for the assessee who received salary as a Director of two companies and claimed house rent and conveyance allowance from each company. On the other hand, the assessee before us is a whole time Director in only one company while in the remaining two companies she is only on the Board and is not even receiving meeting fee. The word whole time as used in Rule 3(2)(c) of the said Rules does not bear a reference to exclusiveness. The definition of an employee as contained in section 16(2)(e) of the Ordinance in fact is a controlling provision in the light of which the definition of employee in the aforesaid Rule can be interpreted. According to the definition as contained in the Ordinance an employee is a person who, irrespective of his designation performs duties or functions in connection with the management and affairs of the company. The difference between working and a non-working Director is commonly used and understood in the sense that a working Director is involved in day to day functions of the company and also actively participates in its management. A non-working Director is generally a person who, along with other Members of the Board lays down policies and identifies the directions to be followed by the company. In a number of Government owned Corporations non-working Directors are usually Civil Servants who are nominated on Board of these companies/corporations in order to watch the interest of the Government. Many time a working Civil Servant is directed by the Government to even sign a memorandum or article of association as one of the original Directors for the purpose of incorporation of the company. These Directors generally do not receive a meeting fee but they are paid out of the funds of the companies/corporations for their actual spending in order to attend the meetings. That hardly means that these directors cease to remain a Civil Servant by merely attending the Board meetings. Nor it makes them a working director of such corporations. Although they do so under the direction of the Government yet academically speaking their attendance of the Board meetings and their participation to the policy matters so that the guidelines given by the Government are carried out will not derogate from their status of being whole time Civil Servant.

6. As explained by the learned A.R. for the assessee she is neither performing any duty nor a function in connection with the management or affairs of any of the other two companies of which she was a non-working Director. She is actively engaged in performing her functions as working Director to one company only namely M/s Nida Investment and Printing Corporation (Pvt.) Ltd. Lahore. Since the assessing officer jumped to a conclusion by simply referring to the aforesaid two decisions the actual working of the assessee was not examined at length even in the company in which she was a whole time Director. In absence of such inquiry we find no other alternate but to accept the factual contentions as made by the learned A.R. of the assessee as are borne out from the record.

7. To refuse the benefit of exemption or mode of computation of income as contemplated in the aforesaid rules the kind of finding recorded by the authorities below was totally irrelevant. Whether or not a person is working whole time Director for more than one company is necessarily a question of fact to be resolved and decided on the basis of material available on record or the inquiries conducted in this behalf. The other facit of the preposition that if an assessee was involved only in policy matters with respect to other companies, is again a question of fact which needs to be considered in the light of attending circumstances which will certainly differ from case to case. The assessing officer in the case before us and then the appellate authority adopted a very narrow and pedantic approach to interpret the word whole time as used in Rule 3(2)(c) of the Income Tax Rules, 1982. We entertain no doubt in our mind that a person being whole time Director in one company can very well once in a while attend the meeting of Board of Directors of other companies. This is not only followed in big commercial groups but also where families control a number of commercial organisation. The intention of law, it will be seen, is to discourage and forestall taking of undue benefit by the Directors who are receiving similar allowance from more than one company. To disentitle a person even where it is in receipt of these allowances from only one company would in fact negate the purpose for which the definition was introduced. Such an approach is per se discriminative, restrictive and unreasonable. We will rather go one step further and say that even mere receipt of board meeting fee and actuals will not dis-entitle a person who is otherwise working whole time for one company and is actively contributing in the management and affairs of that company only. To attend Board meeting of another company in order to watch interest of employer or personal interest of the working Director will not in any manner reduce him from this status of being a whole time Director in one company. To us rather it appears appropriate to say that participation in the Board meeting of other companies which are inter connected associated or otherwise related to each other an account of commonness of interest financial or commercial as good a part of duties of a whole time Director as it could be to attend the meeting of the Board of the Company of which he was working whole time.

8. Since the reported judgments relied upon by the authorities below are distinguishable and since the assessing officer failed to bring home that the assessee in any way performed any duty or functions with respect to the other two companies namely Nida-e-Millat (Pvt.) Ltd. and M/s National Publications (Pvt.) Ltd. we will agree with the submissions made at the Bar and direct that the claimed house rent allowance shall be treated in accordance with the said Income-tax Rules considering the assessee as a whole time Director of one company namely M/s Nida Investment and Printing Corporation (Pvt.) Ltd. Lahore.

9. As regard the claim of office rent we find that there is some kind of confusion. In the assessment order a sum of Rs.10,000 appears to have been claimed as office rent which was refused by the assessing officer holding that the assessee was not a whole time Director. In the first appellate order, however, this claim has been described as office allowance claimed under clause 39 of Part 1 of the Second Schedule to the Income Tax Ordinance, 1979, In the grounds of appeal it has been described in the same manner. However, since there appears some contradiction in the alleged claim at the assessment stage and since the claimed expenses with reference to the said clause of the Second Schedule needs a verification we will set aside the order to that extent and remit the issue to the assessing officer. He will consider the claim in the light of the aforesaid clause. and satisfy himself "if it was necessarily incurred" by the assessee as a whole time Director of the aforesaid company.

10. No other issue has been pressed at the Bar.

11.This appeal succeeds to the extent and in the manner stated above.

C.M.A./547/Trib.Appeal partly accepted.