Salary Characterisation: payment under company articles constituted remuneration taxable as salary under tax law.

The question is whether a corporate payment constituted salary by virtue of a contractual service relationship created in the articles of association. The articles appointed the assessee as Chairman and Managing Director with powers to control and manage, specified duties and provided for remuneration to be voted by the company, thereby creating contractual obligations to perform services. Applying the principle that a director may be an employee where an agreement or articles establish a service contract, the payment was held to be remuneration for services and taxable as salary under the relevant income tax provision.

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Issues: Whether the sum of Rs. 48,000 received by the assessee from Armstrong Smith Ltd. is income from salary chargeable under Section 7 of the Income-tax Act.

Analysis: The question turns on the legal relationship between the company and the assessee and whether the articles of association create a contractual service relationship making the payment remuneration for services. Section 7(1) taxes salary, wages and any fees, commissions, perquisites or profits in lieu of or in addition to salary payable by a company; Section 12 is residuary for income not falling under preceding heads. The articles appointed the assessee as Chairman and Managing Director with power to control and manage the business, provided that he shall remain in that office until resignation, death or ceasing to hold a share, and subjected other directors to his control. The articles vest authority and duties, provide for remuneration to be voted by the company, and thus constitute a contractual relationship by which the assessee performs services for the company and is remunerated for those services.

Analysis: Established authorities show that a director is not invariably a servant, but may enter into a distinct contractual relationship (by agreement or by articles) making him an employee for remuneration. Applying these principles, the Court concluded that the articles here create a service relationship and that the Rs. 48,000 was remuneration for managing the company.

Conclusion: The payment of Rs. 48,000 is income from salary chargeable under Section 7 of the Income-tax Act; issue answered in the affirmative (in favour of Revenue).

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