1972 (4) TMI 1 - SC - Income Tax

Remuneration received by the managing director as a percentage of company s gross profits in addition to monthly remuneration - held that the remuneration payable to him is salary - appeal of assessee is dismissed

Summary

Issues Involved:
1. Whether the sum of Rs. 53,913 was a revenue receipt of the assessee of the previous year.
2. Whether the amount is chargeable under section 7 or section 10 of the Income-tax Act.
3. If the amount is chargeable under section 10, is the assessee entitled to a deduction of Rs. 53,913 under section 10(1) or section 10(2)?

Detailed Analysis:

Issue 1: Revenue Receipt
The High Court answered the first question in the affirmative, concluding that the sum of Rs. 53,913 was indeed a revenue receipt of the assessee for the previous year. This conclusion was reached based on the fact that the commission payable to the assessee was a revenue receipt and had accrued to him during the relevant accounting year.

Issue 2: Chargeability under Section 7 or Section 10
The High Court determined that the amount payable as commission was chargeable under section 7 as salary and not under section 10 of the Indian Income-tax Act, 1922. The court considered whether the relationship between the company and the assessee was that of master and servant or principal and agent. It was concluded that the assessee, as the managing director, was under the control and supervision of the company, thereby establishing a master-servant relationship. This was evident from the articles of association and the terms of the agreement, which provided the company with the authority to terminate the assessee's services and exercise control over his duties.

The judgment emphasized that the nature of employment and the extent of control and supervision were crucial in determining whether the managing director was a servant or an agent. The court cited various cases to illustrate that the control and supervision exercised by the employer need not be continuous or day-to-day but should be sufficient to establish a master-servant relationship. Therefore, the remuneration received by the assessee was classified as salary under section 7.

Issue 3: Deduction under Section 10(1) or Section 10(2)
The Tribunal, in its supplementary statement of the case, answered the third question against the assessee, holding that he was not entitled to a deduction of the sum of Rs. 53,913 under either section 10(1) or section 10(2) of the Act. Given that the amount was chargeable under section 7 as salary, the question of deduction under section 10 did not arise.

Conclusion:
The Supreme Court upheld the High Court's judgment, affirming that the sum of Rs. 53,913 was a revenue receipt and chargeable as salary under section 7 of the Indian Income-tax Act, 1922. The appeal was dismissed with costs, and the court did not find it necessary to consider the other questions due to the conclusion reached on the primary issues.