1946 (9) TMI 2 - HC - Income Tax

Summary

Issues Involved:
1. Whether the remuneration of Rs. 40,000 received by the assessee from Tata Sons Ltd. is salary chargeable under Section 7 of the Indian Income-tax Act.

Issue-wise Detailed Analysis:

1. Nature of Remuneration:
The primary issue is whether the remuneration of Rs. 40,000 received by the assessee from Tata Sons Ltd. is to be classified as salary under Section 7 of the Indian Income-tax Act. The remuneration included Rs. 100 per month and Rs. 38,800 as the assessee's share in the remuneration voted to the directors at an annual general meeting.

2. Articles of Association:
Article 97 of the company's articles of association, titled "Director's Remuneration," stipulates that directors (other than the managing director) shall receive Rs. 100 per month and any additional sum voted by the company in a general meeting. Article 101, read with Regulation 71 of Table A of the Indian Companies Act, provides that the business of the company shall be managed by the directors.

3. Role and Duties of the Assessee:
The assessee, a permanent director, did not attend the office daily nor was allotted day-to-day work but attended board meetings and was consulted on important matters. The Tribunal concluded that the remuneration was taxable under Section 7, considering the assessee as "substantially an employee of the company."

4. Legal Precedent:
The judgment references the case of Commissioner of Income-tax v. Armstrong Smith, which established that a director as such is not a servant of the company, and the fees received are by way of gratuity. A director can enter into a contractual relationship with the company, becoming entitled to remuneration as an employee, but in this case, the assessee had no such contract outside the articles.

5. Interpretation of Section 7:
Section 7(1) of the Income-tax Act specifies that tax is payable under the head 'salaries' for any salary, wages, annuity, pension, gratuity, fees, commissions, perquisites, or profits in lieu of or in addition to any salary or wages. The remuneration in question does not qualify as salary or wages. The argument that it is a gratuity and thus taxable under Section 7 was considered but ultimately rejected because a gratuity must be paid by an employer, implying a master-servant relationship, which did not exist here.

6. Relationship of Employer and Employee:
The judgment emphasizes that for remuneration to be taxable under Section 7, there must be an employer-employee relationship. The assessee's position as a director does not establish such a relationship. The remuneration was for her role as a director, not as an employee or servant of the company.

7. Classification of Income:
The judgment concludes that the sum of Rs. 40,000 does not fall under Section 7 but should be classified as income from other sources under Section 12. The remuneration is considered a gratuity paid to a director by virtue of her office, not as an employee.

Conclusion:
The question referred to the court was answered in the negative, indicating that the remuneration received by the assessee is not chargeable under Section 7 as salary but should be taxed under Section 12 as income from other sources. The assessee was ordered to pay the costs.