TaxTMI 
TaxTMI 
2005 (8) TMI 94
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....hown as salary in the return for the assessment years 1993-94, 1995-96 and 1996-97 shall be treated as income assessable under section 15 or under section 56 of the Income-tax Act, 1961? (b) Whether on the facts and circumstances of the case, the conclusion of the learned Tribunal that there was no relationship of employer and employee between the company and the assessee is perverse and/or sustainable in law? Facts: The facts of this case as would be relevant for the purpose of answering the said question are summarized thus. The assessee was a whole-time director for the relevant assessment years of the company. The company is a private limited company in which the assessee held 24,254 equity shares of Rs. 10 each. His father Y. Mowjee, a director of the said company, held 24,101 equity shares. Whereas the balance 570 shares were held by 40 other persons. In this background, the Assessing Officer found that the assessee having full control over the affairs of the company by holding number of shares as well as paid-up capital, no relationship of employer and employee between the company and the assessee could be established. According to him, the assessee having full control ov....
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....oard could never take the resolution to terminate his employment or appointment. Therefore, according to him, it is a fit case for lifting the veil to ascertain the characteristics of the company and discover the real entity of the assessee and the device adopted by the assessee for the purpose of obtaining benefits within the scope and ambit of the Act. He also draws our attention to the memorandum and articles of association and the resolution from the paper book and points out that these are materials which are not sufficient to establish any relationship of employer and employee and as such there is no scope for treating the receipt under the head "Salary" for the purpose of computing tax under the Act. He relies on the decision in State of Gujarat v. Raman Lal Keshav Lal Soni, AIR 1984 SC 161 and particularly refers to paragraph 27 of the said decision. Relying on the said decision, he points out that it is neither politic nor possible to lay down any definite test to determine when a person may be said to be an employee. No single factor may be considered absolutely essential; but all or some of the factors, such as the right to select for appointment, the right to take othe....
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....ould be treated for the purpose of income-tax. The income under the head "Salary" is dealt with in sections 15, 16 and 17 of the Act which are relevant for our present purpose. Section 15 enumerates the salaries chargeable to income-tax under the said head. Explanation 2 thereto provides that any salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from the firm shall not be regarded as salary for the purpose of the said section. It may be noted that while the Explanation included the receipt by a partner of a partnership firm, it did not exclude the receipt by a director from a company, private limited or public limited. Admittedly, a company whether a private limited or public limited is a juristic person. Whether it can be a camouflaged or not cannot be questioned so long it continues to be a company registered under the Companies Act, 1956 either as a private limited or a public limited one, in order to exclude the income under the head "Salary" received by an employee or a director as remuneration or commission. Whereas the definition of salary in section 17(1)(iv) includes any fees, commission, perquisites or profits....
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....terms and conditions or other provisions contained in the memorandum and articles of association. From page 83 of the paper book containing clause 13(b) of the memorandum and articles of association it appears that the remuneration of directors for part-time or whole-time services to the company shall be determined in accordance with law and subject to the provisions of the articles and of the Act, i.e., the Companies Act, 1956. At page 90 of the paper book clause 21(m) specifies the powers of directors which provides in clause (m) as follows: "(m) subject to sections 197A and 267 of the Companies Act, the directors may from time-to-time appoint one or more directors to be managing director or managing directors or whole-time director or whole-time directors for such period upon such terms as they may think fit and may vest in such managing director or whole-time director, such of the powers hereby vested in the directors generally as they think fit, and upon such conditions and subject to such restrictions and generally upon such terms as to the remuneration and otherwise as they may determine. The remuneration of the managing director or whole-time director may be by way of sala....
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....of the duties to be performed by the whole-time directors. It has the right to determine the salary to be paid. Thus, it appears that some of the ingredients mentioned in Raman Lal Keshav Lal Soni, AIR 1984 SC 161, are present in this case. Therefore, the company could be an employer while appointing one of its directors as whole-time director on a particular remuneration and prescribing the terms and conditions of his appointment. Though the decision in Raman Lal Keshav Lal Soni, AIR 1984 SC 161, related to matters other than revenue for the purpose of determining the characteristic of the post held by the person involved therein as to whether a civil post; but still then it had laid down that it is not necessary that all the factors are to be satisfied, satisfaction of some of the factors would be sufficient to determine the relationship. However, we may note that here the relationship is not for the purpose of labour legislation which stands altogether on a different footing or for the purpose of establishing the relationship of master and servant. We are supposed to determine the character of the receipt by reason of a relationship between the employer and the employee. As ob....
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....t or an agent, for the term 'employee' is facile enough to cover any of these relationships. The nature of his employment may be determined by the articles of association of a company and/or the agreement, if any, under which a contractual relationship between the director and the company has been brought about, whereunder the director is constituted an employee of the company, if such be the case, his remuneration will be assessable as salary under section 7. In other words, whether or not a managing director is a servant of the company apart from his being a director can only be determined by the articles of association and the terms of his employment. A similar view has been expressed by the Scottish Court of Session in Anderson v. James Sutherland (Peterhead) Ltd. [1941] S.C. 203 where Lord Normand, at page 218, said: '... the managing director has two functions and two capacities. Qua managing director he is a party to a contract with the company, and this contract is a contract of employment; more specifically I am of opinion that it is a contract of service and not a contract for service'." In Gulabrai Hanumanbox [1992] 198 ITR 131 the Gauhati High Court had taken the same....