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Interpretation of Section 7 and Section 12 of the Indian Income-tax Act regarding taxation of income received by an individual from a company as salary. Determining the legal relationship between an individual and a company based on the articles of association. Applicability of Section 7 for taxing income arising from a contractual relationship between an individual and a company. Analysis: The judgment by the Bombay High Court, delivered by Stone, C.J., and Kania, J., addresses a reference under Section 66(1) of the Income-tax Act concerning the taxation of a sum received by an assessee from a company as salary. The main issue revolves around whether the income of Rs. 48,000 falls under Section 7 or Section 12 of the Indian Income-tax Act for the assessment year 1943-44. The facts reveal that the assessee, previously engaged in a business taken over by a private limited company, received remuneration as per the company's articles of association. The court delves into the provisions of Section 7 and Section 12 of the Income-tax Act. Section 7 pertains to "Salaries" and includes income from salary, wages, annuity, pension, gratuity, fees, commissions, perquisites, or profits due from a company. It emphasizes the conditions of employment or service for the assessee. On the other hand, Section 12 deals with "Income from other sources" and covers income not falling under the preceding heads. The court references English cases to distinguish between a director's role as a servant of the company and a contractual employee, highlighting the importance of service agreements or articles of association in establishing the relationship. The judgment scrutinizes the articles of association of the company in question, focusing on the provisions related to the appointment and powers of the assessee as Chairman and Managing Director. The court concludes that the articles create a contractual relationship between the company and the assessee, designating the latter as an employee for managing the company's affairs. Drawing parallels with a previous Indian case, the court asserts that the remuneration received by the assessee is for his services in managing the company, thereby falling under Section 7 for taxation purposes. In the final decision, the court rules in favor of taxing the income under Section 7 and directs the Commissioner to bear the costs. Kania, J., concurs with the judgment, affirming the interpretation of the legal relationship between the company and the assessee based on the articles of association. This comprehensive analysis of the judgment highlights the meticulous examination of the legal provisions, precedents, and factual circumstances to resolve the taxation issue concerning income received by an individual from a company as salary under the Indian Income-tax Act.
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