T.L. Viswanatha Iyer, J.
1. The Kerala Agricultural Income-tax Appellate Tribunal has, at the instance of the assessee, referred the following question of law for the opinion of this court under Section 60 of the Agricultural Income-tax Act, 1950 (hereinafter referred to as 'the Act'):
'Whether, on the facts and in the circumstances of the cases, the Tribunal was justified in coming to the conclusion that, so far as the applicants are concerned, the remuneration paid to the managing director of a company mainly doing agricultural operations is not an allowable expenditure and it is only an appropriation of income of the company?'
2. We shall state in brief the facts leading to the reference. The assessee is a private limited company holding agricultural lands. They filed returnsof their agricultural income for purposes of assessment under the Act for the assessment years 1976-77, 1977-78, 1978-79 and 1979-80. In making the returns, the assessee had claimed an amount of Rs. 3,000, namely, the remuneration paid to its managing director as an item of allowable expenditure. The assessing authority completed the assessments for the four years in which, while entertaining the claim for deduction of the remuneration paid to the managing director, he limited the allowance to 50 per cent. of the amount, treating the balance 50 per cent. as referable to the other business activities of the assessee. Accordingly, only an amount of Rs. 1,500 was allowed in each year out of the remuneration paid to the managing director. The assessee took up the matter in appeal before the Appellate Assistant Commissioner who disposed of the appeals for the assessment years 1976-77 and 1977-78 by a common order, and the other two, by two separate orders. So far as the first two appeals are concerned, he was of the view that the remuneration paid to the managing director was not an allowable deduction 'as it was only an appropriation of income'. He held, therefore, that even the allowance of 50 per cent. made by the assessing authority required reconsideration. Accordingly, while sustaining the disallowance of 50 per cent. of the amount, he directed the assessing authority to consider the point afresh and modify the assessments, if necessary. So far as the subsequent two years are concerned, the Appellate Assistant Commissioner reiterated his view that the remuneration paid to the managing director was only an appropriation of the income and hence liable to be disallowed. He thus confirmed the disallowance of 50 per cent. but did not give directions for reconsideration of the deductibility of the 50 per cent. already allowed, as in the case of the assessments for 1976-77 and 1977-78.
3. The assessee took up these orders in appeal before the Appellate Tribunal which, by a common order dated July 5, 1985, agreed with the Appellate Assistant Commissioner that the remuneration paid to the managing director was only an appropriation of income. Accordingly, the Tribunal confirmed all the orders of the appellate authority, stating, inter alia, that they were not interfering with the order of the Appellate Assistant Commissioner for the years 1978-79 and 1979-80 regarding the allowance of 50 per cent. of the amount by the assessing authority, in the absence of any cross-objections or appeal by the Revenue.
4. The assessee sought reference of various, questions of law arising out of this order, of this and other points, raised in the appeals. The Tribunal refused to refer the other questions, but referred the question relating tothe remuneration paid to the managing director as a question of law arising out of its order.
5. The position as it emanates from the orders of the three authorities is that the assessing authority accepted the deductibility of the remuneration paid to the managing director, but limited the deduction to 50 per cent. of the amount treating the balance as referable to the other business activities of the assessee. The Appellate Assistant Commissioner took the view that the remuneration paid was only an appropriation of income and, therefore, not an allowable deduction. While he gave a direction to the assessing authority to reconsider the allowance of 50 per cent. of this amount in the assessments for the years 1976-77 and 1977-78, he did not give any such direction for the later two years. The Appellate Tribunal agreed with the view of the Appellate Assistant Commissioner that the payment to the managing director was an appropriation of income, in support of which it sought to rely on the decisions of the Supreme Court in CIT v. R. M. Chidambaram Pillai : [1977]10ITR292(SC) and of this court in C. V. Mulk v. Commr. of Agrl. I. T. : [1979]120ITR670(Ker) .
6. There is no dispute at this juncture and there is no question raised about the excessive nature, if any, of the remuneration paid to the managing director. The only question is whether the remuneration paid to the managing director is merely an appropriation of income as in the case of the partnership.
7. The two decisions relied on by the Appellate Tribunal are both cases relating to assessment of firms. In Chidambaram Pillai's case : [1977]10ITR292(SC) , the Supreme Court was concerned with the amounts drawn as salaries by partners of a firm which owned tea estates. The question was whether the whole of this salary could be assessed to income-tax under the Income-tax Act, 1961, or only 40 per cent. which fell within the non-agricultural sector. The Supreme Court, speaking through Krishna lyer J., held that the salary of a partner was but an alias for the return, by way of profits, for the human capital--sweat, skill and toil--he has brought in for common benefit, and therefore, the amount of salary drawn by the partners was but an appropriation of the profits of the firm, forty per cent. of which alone was liable to assessment as income under the Income-tax Act, 1961. This decision was followed by this court in the decision in C. V. Mulk's case : [1979]120ITR670(Ker) with the observation that payment of remuneration to the managing partner of a firm was but a mode of division of the firm's profits. These cases are concerned with firms governed by the Indian Partnership Act. The case before us isdifferent. The assessee is not a firm. It is a private limited company. It is a corporate entity with a distinct legal personality of its own. The distinction between a partnership and an incorporated company is real and well-defined. Inter alia, a partnership is a combination of a number of persons for the purpose of carrying on an activity for profit. The firm is only a compendious expression for this combination of persons. In the case of a company, there is a legal personality created by the combination of persons which is distinct and different from its shareholders. The position is not in any way different in the case of a private company as evident from the condemnation by the Privy Council of the view 'too widely current that a private company need not be regarded as a corporation distinct from the persons composing it....' (Aveline Scott Ditcham v. James J. Miller, AIR 1931 PC 203). There can be an employer-employee relationship between a company and its shareholders employed with it (Catherine Lee v. Lee's Air Farming Ltd. [1961] AC 12 ), but in strict law, there cannot be a contract of service between a firm and one of its partners. (Vide Chidambaram Pillai's case : [1977]10ITR292(SC) . Therefore, any drawal by the managing director of a company even if it be a private one, cannot be equated with the payment made by a partnership to one of its partners employed in its work, that being a portion of the profits paid as a reward for the human capital brought in. Neither the Appellate Tribunal nor the Appellate Assistant Commissioner has kept this distinction between a company and a partnership in mind when they equated the payments made to the managing director by way of remuneration with the payments made by a firm to its partners. That this distinction was not noted is obvious from the way in which the Appellate Assistant Commissioner has referred to the payment made to the managing director of a company as remuneration paid to a partner.
8. It cannot be disputed that the managing director of the company is in overall charge of the affairs of the company. It is part of his functions to oversee and supervise the functioning of the company. Such supervision is essential for the proper functioning of the company for carrying on the agricultural operations to the ultimate benefit of the company and for deriving the agricultural income. The remuneration paid to the managing director is an item of expense which falls under Section 5(j) of the Agricultural Income-tax Act, 1950. This section provides for deductions of any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purpose of deriving the agricultural income in the computation of the taxable agricultural income of any person. The expendituredeductible under the section is not confined to the actual agricultural operations like ploughing the land, sowing the seed or harvesting the crop. Expenses incurred for the management, supervision, organisation, technical knowledge and assistance and other matters for raising the crops and their marketing are also comprehended within the provision.
9. This provision was considered by a Division Bench of this court in the decision in Commr. of Agrl. I.T. v. Malayalam Plantations Ltd. : [1978]115ITR624(Ker) , when it was observed :
'What Section 5(j) provides for is a deduction from the agricultural income in respect of expenditure laid out wholly and exclusively for the purpose of deriving the income. To confine this provision to cover only those expenses which are directly and immediately relatable to the derivation of income will be to import limitations which are not there, either in the language or in the context, and to hold that what is contemplated is only 'agricultural expenses' considered as an antithesis of 'agricultural income'. It appears that Section 5(j) of the Agricultural Income-tax Act and Section 10(2)(xv) of the Indian Income-tax Act, 1922, represent conceptions which are kindred though distinct. No doubt there should be connection between the item of expenditure and the earning or ensuring of income ; and the connection should not be remote, indefinite or fanciful. Whether there is such connection in a given case will be a question of fact, once the proper approach is seen to have been made.'
10. This court had again occasion to consider the very same provision in Cochin Malabar Estates and Industries Ltd. v. Commr. of Agrl. I.T. : [1982]135ITR536(Ker) , wherein the amount of salary paid to the manager working in an estate of the assessee was held deductible as an expenditure necessary for the derivation of the agricultural income. The nature of the deductible items of expenditure found elaborate consideration by the Supreme Court in the decision of Purtabpore Co. Ltd. v. State of Uttar Pradesh, : [1971]1SCR426 . That was a case which arose under the U. P. Agricultural Income-tax Act, 1948, and it allowed deduction of expenses incurred 'in raising the crop'. The contention of the State was that expenditure to be deductible should be directly related to the actual cultivation operations like ploughing of the land or sowing the seed or cutting the harvest. The Supreme Court negatived the contention and observed (at page 1581) :
'It is well known that modern agricultural farming which has become mechanised involves a high degree of organisation, technical skill, etc., in the same way as a well-run industry. If agricultural productionhas to be obtained with optimum results, it is necessary that there should be proper supervisory and other staff as also employment of such means as would be conducive to maximum production and proper marketing of the produce. It is axiomatic that the staff would require residential accommodation which will have to be kept in a proper state of repair. The staff will also need medical attention and other amenities which are normally afforded to employees nowadays. The benefit of provident fund can hardly be denied to them when it has become the accepted and normal feature in all forms of employment in modern times. If any motor vehicle is being maintained for enabling the supervisory or other staff to look after the farm, the expenses incurred thereon cannot be regarded as foreign to farming operations. The expenditure incurred on postage, telegrams, printing and stationery for the purpose of and in connection with farming would also be allowable. If certain periodicals are being subscribed to for obtaining technical knowledge and up-to-date information in the matter of agricultural farming, it is difficult to see how that could be disallowed. It is not necessary to refer to all other items the details of which have been given earlier. What has to be essentially determined under Section 6(2)(b)(iv) is whether the expenses were incurred on or for the purpose of the entire work and operations involved in raising the crops, making the same fit for marketing and the transportation of the produce to the market. The words 'raising the crop' cannot be confined simply to the ploughing of the land, sowing the seed and cutting the harvest. It must be emphasised that Section 6(2)(b)(iv) is not to be construed in a narrow and pedantic sense and must be given its full effect in the background of modern large scale farming and the organisation required for it.'
11. It may be noted here that the provision dealt with by the Supreme Court was much narrower in scope than Section 5(j) of the Kerala Act and yet the court gave a meaning which will make the deduction an effective one, consonant with the realities of modern trends in agricultural operations.
12. The assessing authority disallowed 50 per cent. of the remuneration paid to the managing director as referable to the other business activities of the company. But this line of thought was not pursued before the Appellate Assistant Commissioner or the Appellate Tribunal who proceeded only on the basis that the amounts drawn by the managing director were in the nature of appropriation of profits and were not items of expenditure at all. We have already held that this view is erroneous and that thepayments do not partake of the character of any appropriation of profits. It was remuneration pure and simple paid for services rendered by the managing director to the company. The very fact that the assessing authority allowed the deduction in part is proof positive that the managing director was being paid for the services rendered by him to the company for deriving the agricultural income. Therefore, and in the view that we have taken regarding the nature of the payments, it has to be held that the remuneration paid to the managing director was a deductible item of expenditure under Section 5(j) of the Act.
13. In the circumstances the question referred to us has to be answered in the negative, that is, in favour of the assessee and against the Revenue. We do so.
14. There will be no order as to costs.