1992 (12) TMI 28 - HC - Income Tax

Summary

Issues Involved:
1. Whether the remuneration received by the assessee from Messrs. M. S. P. Exports P. Ltd. and M. S. P. Spices P. Ltd. as managing director was assessable under "Income from other sources" or "Income from salary".
2. Whether the assessee was entitled to the deductions claimed in respect of the said income received as remuneration in his capacity as managing director.

Detailed Analysis:

Issue 1: Classification of Income
The primary issue was whether the remuneration received by the assessee as managing director should be classified under "Income from other sources" or "Income from salary". The Tribunal had previously held that the remuneration was assessable under "Income from other sources". However, the Commissioner of Income-tax invoked section 263, arguing that the assessee should be treated as an employee of the companies, as his work was subject to the general superintendence and control of the board of directors.

The Tribunal's decision was challenged based on the Supreme Court's ruling in Ram Prashad v. CIT [1972] 86 ITR 122, which established that an individual is considered an employee if the employer exercises supervisory control over the work entrusted. The Tribunal had observed that the general power of superintendence exercised by the board of directors did not establish an employer-employee relationship. However, the court found that the resolutions appointing the managing directors clearly stated they were subject to the superintendence and control of the directors, indicating an employer-employee relationship. Therefore, the remuneration should be classified as "Income from salary".

Issue 2: Entitlement to Deductions
The second issue was contingent on the first. If the remuneration was classified as "Income from salary", the deductions claimed by the assessee would not be permissible. The Tribunal had allowed deductions for expenses like interest on borrowed funds, remuneration to assistants, and traveling expenses, assuming the income was from other sources. However, since the remuneration was determined to be salary, only permissible deductions under the head "Income from salary" could be allowed. Consequently, the court answered the second question in the negative, denying the deductions claimed by the assessee.

Conclusion:
The court concluded that the remuneration received by the assessee as managing director was assessable under "Income from salary" and not "Income from other sources". Consequently, the assessee was not entitled to the deductions claimed. Both questions were answered in the negative and in favor of the Revenue.