Right of control test determines treasurer's remuneration as vocation income, with carry-forward loss relief upheld

Remuneration paid to a bank treasurer was held not to be salary because the bank did not retain the direct control over the manner of performance characteristic of a master-servant relationship; the arrangement was for service, not one of service, and the income was assessable as income from a vocation under section 10. On that footing, the loss incurred in the same vocation was eligible to be carried forward and set off against later profits under section 24(2), and an earlier refusal to allow carry forward did not bind the assessee in the subsequent assessment.

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Issues: (i) Whether the remuneration received by the treasurer from the bank was chargeable as salary under section 7 of the Indian Income-tax Act, 1922, or as income from a business, profession or vocation under section 10 of that Act; (ii) Whether the loss suffered in the earlier year could be carried forward and set off against the profits of the succeeding year under section 24(2) of the Indian Income-tax Act, 1922, notwithstanding the earlier refusal to allow carry forward.

Issue (i): Whether the remuneration received by the treasurer from the bank was chargeable as salary under section 7 of the Indian Income-tax Act, 1922, or as income from a business, profession or vocation under section 10 of that Act.

Analysis: The terms of the agreement showed that the treasurer had substantial responsibility for the cash department, power to appoint and control staff, and liability for losses caused by the staff, but the bank did not retain the kind of direct supervision or control that characterises a master-servant relationship. The decisive test was the existence of the right of control over the manner of performance. On the covenant structure, the arrangement was not one of service but one for service. At the same time, the occupation was not a profession or business, but the nature of the duties, the managerial discretion exercised, and the obligations undertaken brought the activity within the concept of a vocation.

Conclusion: The remuneration was not salary under section 7, but income from a vocation assessable under section 10, in favour of the assessee.

Issue (ii): Whether the loss suffered in the earlier year could be carried forward and set off against the profits of the succeeding year under section 24(2) of the Indian Income-tax Act, 1922, notwithstanding the earlier refusal to allow carry forward.

Analysis: The right under section 24(2) was held to be determined by the Income-tax Officer dealing with the assessment of the subsequent year, and an earlier determination under section 24(3) that the loss could not be carried forward did not bind the assessee. Since the income was held to arise from a vocation, the loss suffered in that vocation was eligible for carry forward and adjustment against later profits of the same source.

Conclusion: The assessee was entitled to carry forward and set off the loss against the subsequent year's profits, in favour of the assessee.

Final Conclusion: The agreement did not create a contract of service, and the income was taxable under the vocational head, with consequential entitlement to carry forward and set off the earlier loss from the same source.

Ratio Decidendi: Where the payer does not retain the right of direct control over the manner of performance, the relationship is not one of master and servant, and remuneration from the undertaking may be taxable as income from a vocation with the statutory benefit of carry forward and set off of losses from that vocation.

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