1960 (4) TMI 4 - SC - Income Tax

Whether in the facts and circumstances of the case and on a true construction of the agreement between the Central Bank of India and Sheel Chandra the salary and other emoluments received by Sheel Chandra as treasurer of the said bank are assessable under the head Salary or under the head Profits and gains of business? Whether in the facts and circumstances of the case, Sheel Chandra s emoluments as treasurer of the Central Bank of India Ltd. were rightly assessed in the hands of the Hindu undivided family of which he is the karta? Held that - The emoluments received by Sheel Chandra, were in the nature of salary and therefore assessable under section 7 of the Income-tax Act and not under section 10 of the Act as profits and gains of business and the salary was the income of the individual, i.e., Sheel Chandra, and not the income of the Hindu undivided family. The High Court was erroneous on both questions which were referred to it and they should both have been decided in favour of the appellant.

Issues Involved:
1. Nature of the employment of Sheel Chandra (whether as a servant or an independent contractor).
2. Determination of whether the emoluments received by Sheel Chandra as treasurer are assessable under 'Salary' or 'Profits and gains of business'.
3. Assessment of whether Sheel Chandra's emoluments as treasurer were rightly assessed in the hands of the Hindu undivided family (HUF) or as his individual income.

Issue-wise Detailed Analysis:

1. Nature of Employment:
The primary issue was to determine whether Sheel Chandra was a servant of the bank or an independent contractor. The High Court initially held that the relationship between Sheel Chandra and the bank was that of an employer and independent contractor, not master and servant. This conclusion was based on the agreement dated September 19, 1950, which outlined Sheel Chandra's duties and responsibilities, including the engagement and control of subordinate staff, responsibility for the correctness of financial transactions, and indemnification of the bank against losses.

However, upon appeal, it was argued that the agreement indicated a relationship of master and servant due to the bank's control over Sheel Chandra's duties, the requirement for him to perform his duties faithfully, and the bank's right to terminate his services. The court concluded that, given the control and supervision exercised by the bank over Sheel Chandra and his staff, and considering the nature of the duties which are peculiar to the employment of treasurers, Sheel Chandra was indeed a servant of the bank.

2. Assessability of Emoluments:
The second issue was whether the emoluments received by Sheel Chandra should be assessed under 'Salary' or 'Profits and gains of business'. The High Court had initially assessed the emoluments as 'Profits and gains of business', based on its interpretation of the agreement and the nature of the relationship between Sheel Chandra and the bank.

Upon review, the Supreme Court held that the emoluments received by Sheel Chandra were in the nature of salary. This conclusion was reached by examining the agreement as a whole and determining that the overall effect of the agreement and the duties performed by Sheel Chandra indicated a salaried employment relationship rather than a business engagement. Thus, the emoluments were assessable under section 7 of the Indian Income-tax Act, not under section 10.

3. Income of HUF or Individual:
The third issue was whether the emoluments received by Sheel Chandra as treasurer were rightly assessed in the hands of the Hindu undivided family (HUF) or as his individual income. The High Court had held that the emoluments were the income of the HUF, reasoning that Sheel Chandra was appointed treasurer partly because of the substantial security furnished by the HUF's property.

The Supreme Court, however, disagreed with this view. It noted that treasurership is a position requiring personal responsibility, trust, and integrity, and that Sheel Chandra's appointment was based on his personal qualifications and previous experience. The court found no evidence that the appointment was the result of any outlay or expenditure of or detriment to the family property. The mere fact that joint family property was given as security did not make the emoluments joint family property. Consequently, the salary was deemed to be the individual income of Sheel Chandra and not the income of the HUF.

Conclusion:
The Supreme Court allowed the appeal, setting aside the judgment and order of the High Court. It was determined that the emoluments received by Sheel Chandra were in the nature of salary, assessable under section 7 of the Indian Income-tax Act, and constituted his individual income rather than the income of the Hindu undivided family. The appellant was awarded costs in both the Supreme Court and the High Court.

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