2013 (12) TMI 1312 - HC - Income Tax

Whether deduction u/s 16 is allowed on remuneration paid to directors - Held that - There was no appointment letter or agreement specifically laying down the terms of the so-called appointment of the assessee/appellant as an employee/whole time Director - The only material placed before the Tribunal to prove the relationship of the employer and employee was in the form of Article of Association and resolutions - The Tribunal further observed that in the said resolution, there is no mention of duties and functions assigned to the assessee/appellant - The appellants failed to establish the relationship of an employee and employer - The Directors appointed as Whole Time Director cannot be considered to be the employee of the Company - Tribunal has approved the findings recorded by the Commissioner, Income Tax - Commissioner of Income Tax (Appeals) as well as the Tribunal has recorded a concurrent finding of fact that the appellant has failed to bring on record any document to prove the relationship of Master and Servant between the assessee and the company - Decided in favour of Revenue.

Summary

Issues Involved:
1. Relationship of Employer and Employee between the Company and its Director.
2. Entitlement of the Director for deduction under the Head of Salary as per Sections 15 and 16 (1) of the Income Tax Act.
3. Estoppel of the revenue from changing its stand in the current assessment year compared to earlier assessment years.

Issue-wise Detailed Analysis:

1. Relationship of Employer and Employee between the Company and its Director:
The core issue was whether there exists a master-servant relationship between the company and its directors, which would classify the remuneration as salary under Section 15 of the Income Tax Act. The appellants argued that they acted in dual capacities: as directors during board meetings and as employees handling day-to-day operations. They cited the Articles of Association and resolutions by the Board of Directors to support their claim. However, the Tribunal found no concrete evidence such as appointment letters or specific agreements proving the appellants' employment status. The Tribunal concluded that the directors could not be considered employees, thus the remuneration could not be treated as salary. This finding was upheld by the High Court, which emphasized that the relationship must be proven and established on record, not merely on paper.

2. Entitlement of the Director for deduction under the Head of Salary as per Sections 15 and 16 (1) of the Income Tax Act:
The appellants claimed standard deductions under Section 16 of the Act, asserting that their remuneration should be taxed under the head "Salaries." They pointed out that for previous assessment years, their remuneration was treated as salary. However, the Assessing Officer, followed by the Commissioner of Income Tax (Appeals) and the Tribunal, disallowed these deductions. The Tribunal noted the absence of any documentation specifying duties, functions, or control over the directors, which are essential to establish a master-servant relationship. Consequently, the remuneration was assessed as income from other sources, not salary, and the appellants were not entitled to the standard deductions.

3. Estoppel of the revenue from changing its stand in the current assessment year compared to earlier assessment years:
The appellants contended that the revenue should be estopped from taking a different stance in the current assessment year compared to previous years where their remuneration was treated as salary. However, the High Court did not find merit in this argument. It upheld the Tribunal's decision, which was based on the lack of evidence proving the employer-employee relationship for the relevant assessment years. The court emphasized that findings of fact by lower authorities should not be reappraised unless there is clear evidence of perversity or error in law.

Conclusion:
The High Court dismissed all the income tax appeals, affirming the Tribunal's findings that the appellants failed to establish an employer-employee relationship with the company. Consequently, their remuneration could not be treated as salary, and they were not entitled to standard deductions under Section 16 (1) of the Income Tax Act. The court also ruled that the revenue was not estopped from changing its stance based on the facts and evidence presented for the current assessment year.