Salary taxation of rent-free accommodation depends on proof of employer-employee relationship and contractual control.

Rent-free residential accommodation is taxable as salary-related income under section 7 of the Indian Income-tax Act, 1922 only where it is shown to arise from an employer-employee relationship. The text explains that a director is not automatically an employee and that a board resolution appointing a financial adviser, without contractual terms or evidence of the company's control over the work done, does not establish the necessary master-servant relationship. On those facts, the perquisite could not be assessed under the salary head, and the addition for rent-free accommodation was deleted.

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Issues: Whether rent-free residential accommodation provided to a financial adviser was assessable under section 7 of the Indian Income-tax Act, 1922 as salary-related income.

Analysis: Section 7 applies only where the benefit is salary, wages, or a perquisite or profit in lieu of or in addition to salary, and that presupposes an employer-employee relationship between the payer and the payee. A director is not, by that reason alone, an employee. The assessee was appointed as financial adviser by board resolution, but the resolution contained no terms of engagement showing contractual employment. There was no finding that the assessee worked under the company's control in the manner of a servant, and the nature of his functions was not established. On those facts, the requisite master-servant relationship was not shown.

Conclusion: Section 7 of the Indian Income-tax Act, 1922 did not apply, and the addition on account of rent-free accommodation was rightly deleted in favour of the assessee.

Final Conclusion: The reference was answered for the assessee on the footing that the benefit was not taxable as salary-related income in the absence of an employer-employee relationship.

Ratio Decidendi: A perquisite is taxable under the salary head only if it is received in the course of an employer-employee relationship, which must be established by evidence of contractual engagement and the employer's right of control over the work done.

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