Managing director remuneration depends on articles of association and supervisory control when deciding whether it is salary

A managing director's remuneration is taxable as salary under section 7 only if the articles and governing terms show a contract of service rather than an independent office. Where the office-holder was appointed for life as first and permanent director, chairman and managing director, and could appoint and remove additional directors, those powers were inconsistent with servant status, so the remuneration from that company was not salary. By contrast, where the articles kept control with the board, required compliance with board resolutions, and restricted powers on important matters, the managing director remained subject to supervisory control and the remuneration was salary. The tax treatment thus depended on the true nature of the office under the articles.

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Issues: (i) Whether the managing director's remuneration from Surrendra (Overseas) Pvt. Ltd. was taxable as salary under section 7 of the Indian Income-tax Act, 1922; (ii) Whether the managing director's remuneration from Aminchand Pyarelal (Calcutta) Ltd. was taxable as salary under section 7 of the Indian Income-tax Act, 1922.

Issue (i): Whether the managing director's remuneration from Surrendra (Overseas) Pvt. Ltd. was taxable as salary under section 7 of the Indian Income-tax Act, 1922.

Analysis: The relationship had to be determined from the articles of association and the true terms governing the office. Although the company had some supervisory control, the assessee was appointed for life as first and permanent director, chairman and managing director, and had the power to appoint and remove additional directors. Those powers were inconsistent with a contract of service and showed that he was not in the position of a servant.

Conclusion: The remuneration from Surrendra (Overseas) Pvt. Ltd. was not taxable as salary under section 7 and the finding was in favour of the assessee.

Issue (ii): Whether the managing director's remuneration from Aminchand Pyarelal (Calcutta) Ltd. was taxable as salary under section 7 of the Indian Income-tax Act, 1922.

Analysis: The articles vested control and management in the directors, required the assessee to act subject to board resolutions, restricted his powers in important matters, and did not give him independent dominance over the company's business. Those features established supervisory control and showed that his office was one of employment rather than a purely independent agency.

Conclusion: The remuneration from Aminchand Pyarelal (Calcutta) Ltd. was taxable as salary under section 7 and the finding was against the assessee.

Final Conclusion: The court held that the assessee was not a servant of Surrendra (Overseas) Pvt. Ltd. but was an employee of Aminchand Pyarelal (Calcutta) Ltd., so the salary assessment succeeded only in relation to the latter company.

Ratio Decidendi: Whether a managing director is a servant or an agent depends on the articles of association and the actual terms governing the office, especially the extent of supervisory control and the powers retained by the company over the office-holder.

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