2005 (8) TMI 94 - HC - Income Tax

Salary assessable under section 15 or 56 relationship of employer and employee - In common parlance the whole-time director may not be an employee but even then the character of the receipt or remuneration having come within the definition of salary under section 17(1)(iv) being a fee or remuneration in whatever name it is called and not being excluded by Explanation 2 to section 15, the remuneration received by the assessee cannot be treated to be anything other than income under the head Salary . The income cannot be treated as income from other sources. - The facts disclose that the appointment is a contract of employment and not a contract for employment. Therefore, we are of the firm opinion, having regard to the materials placed before us, that the receipt comes under the head Salary Held that income is assessable under section 15 of the Income-tax Act and not under section 56 Held that there was a relationship of employer and employee between the company and the whole-time director

Summary

Issues Involved:
1. Whether the sums shown as salary in the return for the assessment years 1993-94, 1995-96, and 1996-97 should be treated as income assessable under section 15 or section 56 of the Income-tax Act, 1961.
2. Whether the conclusion of the Tribunal that there was no employer-employee relationship between the company and the assessee is perverse and/or sustainable in law.

Detailed Analysis:

Issue 1: Assessment of Income as Salary or Other Sources

The primary question was whether the remuneration received by the assessee, a whole-time director, should be classified under "Salary" (section 15) or "Income from Other Sources" (section 56) of the Income-tax Act, 1961. The court emphasized that it is the character of the receipt, not the recipient, that determines the tax treatment. Sections 15, 16, and 17 of the Act were scrutinized, particularly noting that while section 15 excludes partnership income from being classified as salary, it does not exclude a director's remuneration from a company.

The court examined the company's memorandum and articles of association, which provided for the appointment and remuneration of directors, including whole-time directors. The remuneration included salary, commission, or participation in profits, aligning with the definition of salary under section 17(1)(iv). This indicated that the remuneration could be treated as salary, making the deductions under section 16 applicable.

Issue 2: Employer-Employee Relationship

The court analyzed whether the relationship between the company and the whole-time director constituted an employer-employee relationship. The court referred to several precedents, including Ram Prashad v. CIT and L. Armstrong Smith, which established that a managing director could have a dual capacity as both a director and an employee, depending on the terms of employment and the articles of association.

The court found that the board of directors had the authority to appoint and remunerate the whole-time director, indicating an employer-employee relationship. The assessee's significant shareholding did not negate this relationship, as the company's juristic personality and the board's control over appointments and remuneration were decisive factors.

Conclusion:

The court concluded that the remuneration received by the assessee as a whole-time director should be classified under "Salary" for income tax purposes. The tribunal's finding that there was no employer-employee relationship was deemed perverse and unsustainable in law. The appeal was allowed, and the orders of the Tribunal, Commissioner (Appeals), and Assessing Officer were set aside.

Order:

The court ruled that the income is assessable under section 15 of the Income-tax Act and not under section 56. It affirmed the existence of an employer-employee relationship for tax purposes and overturned the Tribunal's findings. The appeal was allowed with no order as to costs.