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TMI Blog1972 (8) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... . HEGDE, P. JAGANMOHAN REDDY AND H.R. KHANNA, JJ. A.K. Sen, H.K. Puri and S.K. Dhingra for the Appellant. Lal Narayan Sinha, B.D. Sharma and R.N. Sachthey for the Respondent. JUDGMENT Jaganmohan Reddy, J. The assessee and his wife owned a large number of shares in a private limited company engaged in the business of running hotels. By virtue of article 109 of the articles of association of the said company, the assessee became the first managing director on terms and conditions agreed to and embodied in an agreement dated November 20, 1955, between himself and the company. Under the said agreement, the assessee was to receive ₹ 2,000 per month, a fixed sum of ₹ 500 p. m. as car allowance, 10 per cent. of gross profits of the company and he and his wife were entitled to free board and lodging in the hotel. For the assessment year 1956-57 for which the accounting year is the year ending 30th September, 1955, the assessee was assessed in respect of ₹ 53,913 payable to him as 10% of the gross profits of the company which he gave up soon after the accounts were finalised but before they were passed by the general meeting of the shareh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n payable to him would be a revenue receipt nor is it disputed that if it is chargeable under section 7 no other question would arise having regard to the finding based on the decision in. Morvi Industries case ( supra ) that the amount of ₹ 53,913 had accrued to the assessee in the year of account. It is, therefore, necessary for us to consider whether the 10 per cent. gross profit payable to the assessee under the terms of the agreement appointing him as the managing director is liable to be assessed as salary or under the head income from business . It may be mentioned that salary under section 7 of the Act includes also commission, wages, perquisites, etc. On behalf of the assessee, it was contended that in order to assess the income as salary it must be held that there was a relationship of master and servant between the company and the assessee. For such a relationship to exist, it must be shown that the employee must be subject to the supervision and control of the employer in respect of the work that the employee has to do. Where, however, there is no such supervision or control it will be a relationship of principal and agent or an independent contractor. Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the duties of the employee will require to be considered in each case in order to arrive at a conclusion as to whether the person employed is a servant or an agent. In each case the principle for ascertainment remains the same. Though an agent as such is not a servant, a servant is generally for some purposes his master's implied agent, the extent of the agency depending upon the duties or position of the servant. It is again true that a director of a company is not a servant but an agent inasmuch as the company cannot act in its own person but has only to act through directors who qua the company have the relationship of an agent to its capacity. A managing director may have a dual capacity. He may both be a director as well as an employee. It is, therefore, evident that in the capacity of a managing director he may be regarded as having not only the capacity as persona of a director but also has the persona of an employee, or an agent depending upon the nature of his work and the terms of his employment. Where he is so employed, the relationship between him as the managing director and the company may be similar to a person who is employed as a servant or an agent, for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement and that he held office under it, that was not decisive of the question whether the remuneration earned by him was as a servant of the bank. Receipt of remuneration for holding an office did not necessarily give rise to the relationship of master and servant between the holder of the office and the person who paid the remuneration. It was held that the treasurer was not a servant of the bank and the remuneration received by him was not salary. Referring to the observations of Bhagwati J. in Dharangadhara Chemical Works Ltd. v. State of Saurashtra [1957] SCR 152, 157 (SC) , Shah J. observed that the correct method of approach would be to consider whether, having regard to the nature of the work, there was due control and supervision by the employer. In Piyare Lal Adishwar Lal. v. Commissioner of Income-tax [1960] 40 ITR 17 ; [1960] 3 SCR 669 (SC), Kapur J. said (at page 24) that: It is difficult to lay down any one test to distinguish the relationship of master and servant from that of an employer and independent contractor. In many cases the test laid down is that in the case of master and servant, the master can order or require what is to be done and how it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement was an agency. At page 458 the functions of the assessee which were inconsistent with his being a servant were specified. They were : 1.The power to assign the agreement and the rights of the appellants thereunder ; 2.The right to continue in employment as the agents of the company for a period of 30 years until the appellants of their own will resign ; 3.The remuneration by way of commission of 2 per cent. of the amount of sale proceeds of the produce of the company ; and 4.The power of sub-delegation of functions given to the agent under article 118. All these circumstances went to establish that the appellants were the agents of the company and not merely the servants remunerated by wages or salary. In Commissioner of Income-tax v. Armstrong Smith [1946] 14 ITR 606 (Bom.), Stone C.J. and Kania J. had held that under the terms of an agreement the managing director was a servant of the company. There they had to consider a case where the articles of association of the company provided that the assessee was to be the chairman and managing director of the company until he resigned office or died or ceased to hold at least one share in the capital of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether the person employed by a company is a servant or agent is solely dependent on the extent of supervision and control exercised on him. The real question in this case is one of construction of the articles of association and the relevant agreement which was entered into between the company and the assessee. If the company is itself carrying on the business and the assessee is employed to manage its affairs in terms of its articles and the agreement, he could be dismissed or his employment can be terminated by the company if his work is not satisfactory, it could hardly be said that he is not a servant of the company. Article 109 of the articles of association before its amendment and relevant for the period which we are considering provided that he shall be the managing director of the company for 20 years on terms and conditions embodied in the agreement. Article 136 states that subject to the aforesaid agreement, the general management of the business of the company shall be in the hands of the managing director of the company who shall have power and authority on behalf of the company to do the several things specified therein which are usually necessary and desirable for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e articles of association and within the powers prescribed therein. Reference may particularly be made to articles 139 and 142 to ascertain the nature of the control imposed by the company upon the managing director. Under the former the additional work which he can do as an agent or manager of the company can be done on terms and conditions and on such remuneration as can be agreed upon between him and the directors of the company and under the latter he had to execute the decisions that may be arrived at by the board from time to time. The very fact that apart from his being a managing director he is given the liberty to work for the company as an agent is indicative of his employment as a managing director not being that of an agent. Several of the clauses of article 140, as pointed out by the High Court, specifically empower the board of directors to exercise control over the managing director, such, for instance, to accept the title of the property to be sold by the company, providing for the welfare of the employees, the power to appoint attorneys as the directors think fit, etc. As pointed out earlier, under the terms of the agreement, he can be removed within the period of ..... 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