Director remuneration taxed as income from other sources where no employer-employee relationship existed under salary provisions.

Remuneration paid to a company director under the articles of association, without any separate contract of employment, is not salary unless an employer-employee relationship exists. Section 7 of the Indian Income-tax Act applies only where payment is made by an employer to an employee, including salary, wages, fees, commissions, perquisites or profits in lieu of salary. A director receiving payment only in that capacity is not necessarily a servant or employee of the company, and even a gratuity falls within the salary head only if paid by an employer to an employee. The remuneration was therefore not taxable as salary under Section 7 and was assessable as income from other sources under Section 12.

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Issues: Whether the remuneration received by a company director, who had no separate contract of employment and was paid under the articles of association, was assessable as salary under Section 7 of the Indian Income-tax Act or as income from other sources under Section 12.

Analysis: Section 7 applies to payments made by an employer to an employee under the head of salaries, including salary or wages, annuity, pension or gratuity, and fees, commissions, perquisites or profits in lieu of or in addition to salary or wages. The decisive factor is the existence of an employer-employee relationship. A director, merely by virtue of holding office and receiving remuneration under the articles, is not necessarily a servant or employee of the company. Where there is no independent contract of employment and the remuneration is paid only in the capacity of director, it cannot be treated as salary within Section 7. Even if the payment has the character of a gratuity, it must still be a gratuity paid by an employer to an employee to fall within that head.

Conclusion: The remuneration was not taxable as salary under Section 7 and was properly assessable as income from other sources under Section 12.

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