1998 (6) TMI 83 - HC - Income Tax

Court classifies Advocate-General's salary as professional income, not salary.

The High Court of Madras ruled in favor of the Revenue, determining that the salary of an Advocate-General should be taxed under the head 'Profits and ... Characterisation of retainer fee as salary or professional income - employer-employee (master-servant) relationship - office held under State versus professional engagement - AdvocateGeneral's relationship with State as advocate and client - continuing profession while receiving remuneration from StateCharacterisation of retainer fee as salary or professional income - employer-employee (master-servant) relationship - AdvocateGeneral's relationship with State as advocate and client - The retainer fee paid to the AdvocateGeneral by the State is taxable as income from profession and not as salary. - HELD THAT: - The Court found that the relationship between the AdvocateGeneral and the State is essentially that of an advocate and a client and not that of master and servant. Though the payment was described as 'salary' in Government orders and was paid for holding the post, the assessee continued to carry on his profession as an advocate and did not exchange his professional status for employment. The Court distinguished holders of certain constitutional offices (such as judges) who do not carry on a profession in discharging their functions, observing that the AdvocateGeneral remains a practising professional when rendering services to the State. Applying this principle, the sum paid by the State was a retainer to secure the services of the professional advocate and retained the character of professional receipts. Earlier decisions relied upon by the Court were noted by name and and a preIndependence authority was applied to support the proposition that receipt of remuneration by virtue of holding an office does not necessarily create an employer-employee relationship. For these reasons the Tribunal's view that the amounts must be treated as 'salary' was rejected and the assessments treating the receipts as professional income were held to be sustainable.The common question is answered in the negative; the retainer/salary paid to the AdvocateGeneral is taxable under 'Profits and gains of business or profession' and not under 'Salaries'.Final Conclusion: The Court set aside the Tribunal's conclusion that the amounts were salary, holding them to be professional receipts taxable under income from business or profession for the stated assessment years; the question referred is answered in favour of the Revenue and there is no order as to costs. Issues:1. Classification of salary of Advocate-General for tax purposes.Detailed Analysis:The judgment by the High Court of Madras dealt with the classification of the salary of an Advocate-General for tax purposes. The Advocate-General was appointed under article 165 of the Constitution of India and held the office during the pleasure of the Governor. The Income-tax Officer initially treated the salary as a 'retainer fee' under the head 'Income from business and profession,' denying the standard deduction under section 16(1) of the Income-tax Act, 1961. However, the Commissioner of Income-tax (Appeals) ruled that the salary should be assessed under the head 'Salary,' allowing the deduction under section 16(1) of the Act. The matter was then appealed before the Income-tax Appellate Tribunal, which held that the salary should be treated as salary for assessment under section 16 of the Act, citing similar assessments of constitutional post holders like Judges and Governors. The Tribunal dismissed the Revenue's appeal.The main contention was whether the salary received by the Advocate-General should be taxed under the head 'Salaries' or 'Profits and gains of business or profession.' The Revenue argued that in the absence of an employer-employee relationship, the amount should be assessed under 'Income from business and profession.' Conversely, the Advocate-General contended that as per article 165 of the Constitution of India, the amount was paid for holding the post and should be assessed under 'Salary.'The High Court analyzed the relationship between the Advocate-General and the State, stating that it resembled that of an advocate and a client, rather than an employer-employee relationship. Referring to previous judgments, the Court emphasized that the Advocate-General continued to be a professional person receiving a retainer fee for services rendered, maintaining the character of professional income. The Court rejected the Tribunal's view that the salary should be taxed under 'Salary,' concluding that it should be assessed under 'Profits and gains of business or profession.'Based on the above analysis, the High Court answered the question in favor of the Revenue, holding that the retainer fee received by the Advocate-General should be taxed under the head 'Profits and gains of business or profession' and not under 'Salary.'