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TMI Blog1972 (4) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting year is the year ending 30th September, 1955, the assessee was assessed in respect of Rs. 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 shareholders. The above amount was given up by him because the company would not be making net profits if the stipulated commission was paid to him. The assessee claimed that the amount given up by him was not liable to be included in his total income because the amount had not accrued to him at all, at any rate, in the accounting year ended 31st March, 1956, and that even assuming that it had accrued in the accounting year ended 31st March, 1956, it is not taxable under section 7 or section 10 of the Indian Income-tax Act, 1922 (hereinafter called the "Act"). The Income-tax Officer, the Appellate Assistant Commissioner, the Tribunal and, on a reference under section 66(1), the High Court have all held that the 10% commission on gross profits amounting to Rs. 53,913 was taxable as "salary" under section 7 of the Act and that the income had accrued to the assessee during the previous year. Against the judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. Applying these tests, it is submitted that the appointment of the assessee as a managing director is not that of a servant but as an agent of the company and accordingly the commission payable to him is income from business and not salary. In support of this contention, reference has been made to Halsbury's Laws of England, Bowstead on Agency and Treatises on Company Law by Palmer, Gower, Pennington and Buckley. There is no doubt that for ascertaining whether a person is a servant or an agent, a rough and ready test is, whether, under the terms of his employment, the employer exercises a supervisory control in respect of the work entrusted to him. A servant acts under the direct control and supervision of his master. An agent, on the other hand, in the exercise of his work, is not subject to the direct control or supervision of the principal, though he is bound to exercise his authority in accordance with all lawful orders and instructions which may be given to him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the term "employee" is facile enough to cover any of these relationships. The nature of his employment may be determined by the articles of association of a company and/or the agreement, if any, under which a contractual relationship between the director and the company has been brought about, whereunder the director is constituted an employee of the company, if such be the case, his remuneration will be assessable as salary under section 7. In other words, whether or not a managing director is a servant of the company apart from his being a director can only be determined by the articles of association and the terms of his employment. A similar view has been expressed by the Scottish Court of Session in Anderson v. James Sutherland (Peterhead) Ltd., where Lord Normand, at page 218, said: " . . . the managing director has two functions and two capacities. Qua managing director he is a party to a contract with the company, and this contract is a contract of employment; more sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n order or require what is to be done and how it is to be done but in the case of an independent contractor an employer can only say what is to be done but not how it shall be done. But, this test also does not apply to all cases, e.g., in the case of ship's master, a chauffeur or a reporter of a newspaper . . . In certain cases it has been laid down that the indicia of a contract of service are (a) the master's power of selection of the servant; (b) the payment of wages or other remunerations; (c) the master's right to control the method of doing the work; and (d) the master's right of suspension or dismissal." Learned advocate for the appellant relies on the decision of Qamar Shaffi Tyabji v. Commissioner of Excess Profits Tax. That was a case which turned upon the nature of the contract entered into between the industrial trust fund and the assessee which in turn was governed by the agreements between the company and the trustees. Under the latter agreements, the trustees were given general conduct and management of the business and affairs of the mills and were entitled to appoint employees and delegate to other persons all or any of the powers, etc., under the agreement sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to his directions in regard to the company's business; that his remuneration was to be voted by the company at its annual general meeting and that the sum received by him for managing the company's business which arose from out of the contractual relationship with the company provided by the articles for performing the services of managing the company's business. In these circumstances it was held that the remuneration was taxable under section 7 and not under section 12 of the Act. It appears that a large number of English cases were cited, but these were not referred to. Stone C. J. observed at: " We have been referred to quite a large number of English cases the effect of which can, I think, be summarised by saying that a director of a company as such is not a servant of the company and that the fees he receives are by way of gratuity, but that does not prevent a director or a managing director from entering into a contractual relationship with the company, so that, quite apart from his office of director he becomes entitled to remuneration as an employee of the company. Further that relationship may be created either by a service agreement or by the articles themselves. Now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... course of business of the company shall be effectual discharge on behalf of and against the company for moneys, funds, etc. It further provides that the managing director shall also have power to sign cheques on behalf of the company. Under article 138 he is authorised to sub-delegate all or any of the powers. Article 139 enjoins that notwithstanding anything contained in those articles the managing director is expressly allowed generally to work for and contract with the company and specifically to do the work of agent to and manager of and also to do any other work for the company upon such terms and conditions and on such remuneration as may from time to time be agreed upon between him and the directors of the company. Article 140 specifies powers in addition to the powers conferred on him as the managing director. Under article 141 the managing director shall have charge and custody of all the property, books of account, papers, documents and effects belonging to the said company wheresoever situate. Article 142 provides that the managing director shall work for the execution of the decisions that may be arrived at by the board from time to time and shall be empowered to do al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the company and not a servant. The control which the company exercises over the assessee need not necessarily be one which tells him what to do from day to day. That would be a too narrow view of the test to determine the character of the employment. Nor does supervision imply that it should be a continuous exercise of the power to oversee or superintend the work to be done. The control and supervision is exercised and is exercisable in terms of the articles of association by the board of directors and the company in its general meeting. As a managing director he functions also as a member of the board of directors whose collective decisions he has to carry out in terms of the articles of association and he can do nothing which he is not permitted to do. Under section 17(2) of the Indian Companies Act, 1913, Regulation No. 71 of Table A which enjoins that the business of the company shall be managed by the directors is deemed to be contained in the articles of association of the company in identical terms or to the same effect. Since the board of directors are to manage the business of the company they have every right to control and supervise the assessee's work whenever the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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