1986 (8) TMI 136 - AT - Income Tax

Summary

Issues:
Assessment of remuneration received by the Managing Director under the head of income - salary or other sources.

Analysis:
The case involved the assessment of remuneration received by the late Managing Director of a company under the head of income - whether as salary or from other sources. The Managing Director had a long-standing relationship with the company, and a fresh agreement was executed appointing him for a five-year term. The agreement outlined his duties, powers, entitlements, and remuneration structure, including a percentage of net profits, minimum monthly remuneration, and various perquisites. The Government of India approved the agreement, further solidifying the terms. The Articles of Association of the company provided for the management of the business by the Board of Directors and the delegation of powers to Managing Directors. The Managing Director was considered an employee of the company based on the terms of the agreement and the Articles of Association, rather than an agent.

The appellate tribunal considered precedents such as Ram Prasad vs. CIT New Delhi, Satya Paul vs. CIT (Central), Calcutta, and CIT vs. Travancore Chemical Mfg. Co. These cases emphasized that the relationship between a Managing Director and a company should be determined based on the Articles of Association and the terms of employment. If the company is carrying on business and the Managing Director is employed to manage its affairs as per the articles and agreement, the individual should be considered a servant of the company. The tribunal found that the relationship between the company and the Managing Director in this case was that of an employer and employee, as evidenced by the agreement and the Articles of Association, which were similar to those in the cited cases.

Based on the analysis of the agreement, Articles of Association, and relevant case law, the tribunal upheld the order of the Appellate Authority Commissioner (AAC) and concluded that the remuneration received by the Managing Director should be assessed under the head of income - salary. The tribunal also ruled that standard deduction was allowable in this case. Consequently, the appeals filed by the Revenue were dismissed, and the decision of the AAC was upheld.