Salary characterization: commission to managing director held remuneration and taxable as salary under section 7.

The note addresses whether a commission payable under company articles and a service agreement constituted a revenue receipt accruing in the relevant year and whether it was taxable as salary or business income. The commission was held to be a revenue receipt accruing in the relevant previous year. On construction of the articles and agreement - which conferred duties, removable status, board supervision and authority to execute board decisions - the managing director occupied a contractual capacity akin to employment; the commission therefore constituted remuneration assessable as salary under section 7 rather than business income.

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Issues: (i) Whether the sum of Rs. 53,913 payable as 10% of gross profits was a revenue receipt accruing to the assessee in the relevant previous year; (ii) Whether that sum is chargeable as "salary" under section 7 of the Income-tax Act, 1922, or as "income from business" under section 10 of the Income-tax Act, 1922.

Issue (i): Whether the sum of Rs. 53,913 was a revenue receipt of the previous year.

Analysis: The amount payable as commission pursuant to the agreement and articles was a revenue receipt by its nature. Earlier findings (Tribunal and High Court) and the view adopted on accrual, having regard to the contractual provisions and decision in Morvi Industries Ltd., support that the sum had accrued to the assessee in the relevant year of account.

Conclusion: The sum of Rs. 53,913 was a revenue receipt accruing to the assessee in the relevant previous year (answer in favour of the revenue).

Issue (ii): Whether the sum is chargeable under section 7 or section 10 of the Income-tax Act, 1922.

Analysis: The characterisation turns on construction of the articles of association and the service agreement. The articles and agreement conferred powers, duties and removable status upon the managing director, permitted board supervision and control, authorised execution of board decisions, power of sub-delegation, custody of company property, and expressly contemplated employment as managing director with remuneration. Those provisions demonstrate that, apart from corporate office, the managing director occupied a contractual capacity akin to an employee (contract of service) subject to control and removable for non-diligence, so that the commission formed part of remuneration for services resembling salary rather than independent agency or business receipts.

Conclusion: The sum of Rs. 53,913 is chargeable as salary under section 7 of the Income-tax Act, 1922 (conclusion in favour of the revenue, against the assessee).

Final Conclusion: On construction of the articles and the contractual terms, the commission payable to the managing director constituted remuneration assessable as salary; the appeal is dismissed.

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