Managing director commission treated as salary where appointment terms showed a contract of service, not independent agency.

Commission payable to a managing director was held to be salary where the articles of association and appointment terms showed a contract of service rather than an independent agency. The decisive test was the true nature of the relationship created by the governing documents: the managing director was subject to the board's control, bound to implement board decisions, and removable for lack of diligence or acting against company interests. The absence of day-to-day supervision was not conclusive. On these features, the receipt fell within salary under section 7 of the Indian Income-tax Act, 1922, and not business income under section 10.

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Issues: Whether the commission payable to the managing director under the terms of his appointment was assessable as salary under section 7 of the Indian Income-tax Act, 1922, or as business income under section 10.

Analysis: The character of the receipt depended on the true nature of the relationship created by the articles of association and the agreement of appointment. A managing director may act in a dual capacity, but the decisive question is whether the terms of employment show that he is engaged under a contract of service or as an independent agent. The mere absence of day-to-day control is not conclusive. The articles here vested the general management in the managing director subject to the board's control, required him to carry out board decisions, allowed his removal for lack of diligence or if he acted against the company's interests, and enabled the directors and general meeting to supervise and control his work. These features were inconsistent with an agency arrangement and pointed to employment under a contract of service.

Conclusion: The commission was salary assessable under section 7 and not business income under section 10, so the appeal failed.

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