1972 (8) TMI 61 - SC - Income Tax

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 ... Chargeability under section 7 as salary - agency versus master-and-servant relationship - construction of articles of association and service agreement - control and supervision test for characterising employment - accrual of incomeChargeability under section 7 as salary - agency versus master-and-servant relationship - construction of articles of association and service agreement - control and supervision test for characterising employment - Whether the 10% commission payable to the managing director under the agreement and articles was taxable as salary or as income from business. - HELD THAT: - The Court examined the articles of association and the agreement appointing the appellant as managing director and applied the established test distinguishing a servant from an agent, namely the nature and degree of control and supervision exercisable by the employer, read in the context of the particular business and the duties conferred. The articles and agreement conferred broad management powers on the managing director but expressly subjected those powers to the board's decisions, permitted removal for non-diligence or acting against company interests, authorised the board to control various facets of the working, and contemplated execution of board decisions by the managing director. Those features indicated that the managing director's powers sprang from and were limited by the articles and were exercisable under the board's control. The Court held that control need not be day-to-day supervision; the capacity of the board to control, supervise and terminate the appointment where necessary was sufficient to characterise the relationship as one of employment. Consequently the commission payable under the contractual appointment was remuneration in the nature of salary and assessable as such under section 7 of the Act.The 10% commission payable to the managing director is remuneration assessable as salary.Final Conclusion: The appeal is dismissed. The sum payable to the managing director under the articles and service agreement is to be treated as salary assessable under section 7; other questions were not considered as unnecessary in view of this conclusion. 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.