1972 (8) TMI 61 - SC - Income Tax

Supreme Court rules commission as salary, not deductible under section 10.

Ram Prashad Versus Commissioner of Income-tax

The Supreme Court upheld the High Court's decision that the sum of Rs. 53,913, a commission on gross profits, was a revenue receipt for the previous year, ... Whether the 10 per cent. gross profit payable to the assessee under the terms of the agreement appointing him as the managing director is liable to be assessed as salary or under the head 'income from business'? Held that:- A perusal of the articles and terms and conditions of the agreement definitely indicates that the assessee was appointed to manage the business of the company in terms of the articles of association and within the powers prescribed therein. Every power which is given to the managing director, therefore, emanates from the articles of association which prescribes the limits of the exercise of that power. The powers of the assessee have to be exercised within the terms and limitations prescribed thereunder and subject to the control and supervision of the directors which, in our view, is indicative of his being employed as a servant of the company. We would, therefore, hold that the remuneration payable to him is salary. Issues Involved:1. Whether the sum of Rs. 53,913 was a revenue receipt of the assessee of the previous year.2. Whether the amount is chargeable under section 7 or section 10 of the Income-tax Act.3. If the amount is chargeable under section 10, is the assessee entitled to a deduction of Rs. 53,913 under section 10(1) or section 10(2)Rs.Detailed Analysis:1. Revenue Receipt of the Previous Year:The High Court affirmed that the sum of Rs. 53,913, which was the 10% commission on gross profits, was indeed a revenue receipt for the assessee for the previous year. The assessee had given up this amount before the accounts were finalized and passed by the general meeting of the shareholders because the company would not be making net profits if the stipulated commission was paid to him. Despite this, the Income-tax Officer, the Appellate Assistant Commissioner, the Tribunal, and the High Court all held that the income had accrued to the assessee during the previous year.2. Chargeability under Section 7 or Section 10:The High Court held that the amount payable as commission was chargeable under section 7 as salary and not under section 10 of the Act. The court emphasized that 'salary' under section 7 of the Act includes commission, wages, perquisites, etc. The assessee contended that there must be a master-servant relationship for the income to be assessed as salary. However, the court noted that the relationship between the managing director and the company could be similar to that of a servant or an agent, depending on the nature of the employment and the terms of the agreement. The court referred to various cases and legal texts to support this view, concluding that the nature of the employment relationship must be determined by the articles of association and the terms of the employment agreement.3. Deduction under Section 10(1) or 10(2):The Tribunal, in its supplementary statement of the case, held that the assessee was not entitled to a deduction of Rs. 53,913 under section 10(1) or 10(2) of the Act. The court reiterated that since the amount was chargeable under section 7 as salary, no other question would arise regarding deductions under section 10. The court noted that the control and supervision exercised by the company over the managing director, as stipulated in the articles of association and the employment agreement, indicated that the managing director was employed as a servant and not as an agent. Therefore, the remuneration payable to him was assessable as salary.Conclusion:The Supreme Court upheld the High Court's judgment, affirming that the Rs. 53,913 commission was a revenue receipt for the previous year, chargeable under section 7 as salary, and not eligible for deduction under section 10. The appeal was dismissed with costs.