1998 (6) TMI 83 - HC - Income Tax

Summary

Issues:
1. Classification of salary of Advocate-General for tax purposes.

Detailed Analysis:

The judgment by the High Court of Madras dealt with the classification of the salary of an Advocate-General for tax purposes. The Advocate-General was appointed under article 165 of the Constitution of India and held the office during the pleasure of the Governor. The Income-tax Officer initially treated the salary as a "retainer fee" under the head "Income from business and profession," denying the standard deduction under section 16(1) of the Income-tax Act, 1961. However, the Commissioner of Income-tax (Appeals) ruled that the salary should be assessed under the head "Salary," allowing the deduction under section 16(1) of the Act. The matter was then appealed before the Income-tax Appellate Tribunal, which held that the salary should be treated as salary for assessment under section 16 of the Act, citing similar assessments of constitutional post holders like Judges and Governors. The Tribunal dismissed the Revenue's appeal.

The main contention was whether the salary received by the Advocate-General should be taxed under the head "Salaries" or "Profits and gains of business or profession." The Revenue argued that in the absence of an employer-employee relationship, the amount should be assessed under "Income from business and profession." Conversely, the Advocate-General contended that as per article 165 of the Constitution of India, the amount was paid for holding the post and should be assessed under "Salary."

The High Court analyzed the relationship between the Advocate-General and the State, stating that it resembled that of an advocate and a client, rather than an employer-employee relationship. Referring to previous judgments, the Court emphasized that the Advocate-General continued to be a professional person receiving a retainer fee for services rendered, maintaining the character of professional income. The Court rejected the Tribunal's view that the salary should be taxed under "Salary," concluding that it should be assessed under "Profits and gains of business or profession."

Based on the above analysis, the High Court answered the question in favor of the Revenue, holding that the retainer fee received by the Advocate-General should be taxed under the head "Profits and gains of business or profession" and not under "Salary."