A managing director gave up his 10% commission on gross profits and disputed its taxability. The Supreme Court held that under the articles and service agreement he was a servant of the company, so the commission was salary under section 7 of the Income-tax Act, and dismissed the appeal.
Appeal dismissed with costs; commission held taxable as salary under s. 7.
This page shows the compact analysis of this judgement. The full analysis — procedural history, issue-by-issue holdings with ratio and obiter, advocates, and paragraph-level evidence for every claim — is being added to the record in batches and will appear here when this judgement has been through it.
115
A
RAM PERSHAD
v.
COMMISSIONER OF INCOME-TAX, NEW DELIU August 24, 1972
[K. S. HEGDE, P. JAGANMOHAN REDDY AND H. R. KHANNA, JJ ,j
Income tta% A.ct ( 11 of 1922) s. 7-commis:;iolt to Managir~g director of ContfJQifY-Ij IQ/ary. '
M~er 41ld Servant or age7tcy-Teats for.
The usessee was a managioa 4irector of a company. Article 139 ot the articl~ of auociation of the company enjoi.na that notwithatandina: any· c thin& contained in the articles the managiug dtrector is expre&aly allowed aenerally to work for and contract with the company and scally to do the work of an agent and manaaer and also to do other work for the company on such terms and conditions and on such remuneration as m1ty from time to time be agreed upon between him and the directors of th oompany. Article 142 provides that the managing director shall worl for the execution of the decisions that may be arrived at by the Board of Director& from time to time atld shall be empowered to do all that D may be necessary in the execution of the decision of the ro.anagement ot tbe company and shall do all thinp usually necessary or desirable in tbe ·management of affirs of the company or carrying out its objects. SeVC£aJ clauses· of article 140 specifically empower the Board of Directors to exercise control over· the managing director. Under the terms of the agreement entered into between the assessee and the company the manag· ing director was appointed for 20 years but he could be removed withu1 that period if be d:d not discharge his work diligently, or, if be was found E oot to be acting in the interest of the company. Under the agreement, in addition to monthly salary, car allowance, free board and lodging he was also to receive 10% of the gross profit5 of the company as commisaioa. For the assessment year 195657, the assessee gave up the amount repre· tenting the 10% of gross profits, because, the company would not hi: making net profits if the stipulated commission was paid to him, nd. claimed that the amount so given up was not liable to be included in his F total income. The Income-tax Officer. the Appellate Assistant Commislioner, The Tribunal and -the High Court, on reference, held that th amount was taxable as 'salary' under s. 7 of the Indian Income-tax Act. 1m which include3 commission.
Dismissing the appeal to this Court,
HELD : The assessee ·had to exercise his powers under ·the a.green1en t 'fritbin the terms and limitations prescribed under the articles of associaG tion and subject to the control and supervision of the directors. Thi~ iii indicative of his being employed as a servant of the company. and there· -fore. the remuneration payable to him was salary within the meanin~ of section 7. [9950-H; 996A~B]
-., (a) The nature of the particular business and the nature of the duties of the emp1oyce should be considered in each case in order t~.. ... amive at a conclusion as to whether the person employed is a scrv2.nt H or an agent, and, it is not possible to lay down any precise rule of 1 a w to distinguish one kind of employment from the other. (989D-FJ
(b) A managing director has the dual capacity of a diredor as well as an employee, and whether he is the one or the other depend~ up~..1n
[1973] 1 s.c.~.
SUPREME COURT REPORTS
!'86
the articles of association and the terms of his emplo-yment. Anderion v. James Sutherland (Peterhead) Limited, [1941] S.C. 203t 218, referred to. [989G~ 990B]
(c) Whether a person employed by a company is a servant or an Olgent is not soldy dependent on the extent of supervision and control exercised on him. The control which tbe cumpany exircises over the assessee need not necessarily be one which tells him what to do from day to day. Nor does supervision imply that it should be a continuous cise of the power to oversee or superintend the work to be done.
B·
[993&-F; 9950-F]
(d) In the present case, a perusal of the articles and terms and conditions of the agreement definitely indicate that the assessee was appointed lo manage the business of the company ;., terms of the articles of association and witi1ill the ;uwt:;.-. pt'escribed therein. The control and sup.ervision exercised by the company is exercisable in terms of the articles of association by the Board of Directors and the company in its aenc· ral meeting. [994G.H; 995G-F]
(e) Under s. 17(2) of the fudian Companies Act, 1913, regulation no. 71 of table A, ...yhich 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 com~ pany they have every right to control and supervise the assessee's work whenever they deem it necessary.· As a managing director, the appellant functions a.l5o as a member of the Board of Directors whose collect;vc decision be has to carry out in terms of the articles of associatioQ and be can do nothing which be is not permitted to do. [995F.JI]
(f) 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.
c
I)
L
(g) 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 and if he could be dismissed or his employment can be termin.ated by the company if his work is not satisfactory, it could not he said that he is not a servant of the company. [993F-C1
Morvi Industries Ltd. v. Commissioner of lnco;ne-tax, 82 I.T.R. 835 SC. Commissioner of lllcome-tax v. Manmohan Das 59 I.T.R.. 699. Dharan1:adltra Chemical Wo,..ks Ltd. v. StMe of Saurashtra, [19571 S.C.R. 152, 157, Piyare Lal Adisilwar Lal v. Commr. of Income-tax, 40 I.T.R. 17, Camar Shaffi Tyabji v. Commissioner of E.P.T. Hyderabad, 39 I.T.R. 611 and l.akshminaraymz Ram Gopul v. Govt. of Hyderahad, 23 I.T.R. 449, referred to. ·
F
G
Cnn. APPELLATE JuRISDICTION.: C. A. No. 1946 of 1968.
Appeal by spcial leave from. the judgment and ordered dated September 29,1967 of the De]bi High Court in 1. T. Rference No. 46~D of 1962. ·
· ,··
A. K. Sen. T-1. K. Pw·; and S. K. Dhingra, for the appellant. L. l'. Sinha Solicitor GeHeral of India, B. D. Sharma and R. N. Sachthey for the respondent.
~· . , I I
RAM PERSHAD v. C.I.T. (Jaganmohan Reddy, J.)
987
A
The Judgment of the Court was delivered by
The questions cf law which were referred to the Hh!h Cvurt under s. 66(1) of the Act arc as follows :- ...,
G
th .~ Income4ax Act ?
H
... . .!· if the aiount.js cl1argeable under section 10, is the assessee nti.lr.d to a oed ucuon of Rs. 53 913/under s 1 0 ( 1 ) "1 ~ . 10(2) ? ' . .. ,,
!he High Court answered the first question in the affinnative and m favour of the revenue, and on the second question it was of
[1973] 1 s.c~.
998
SUPllEME COURT REPORTS
the view that the amount payable as commission was chargeable under s. 7 as salary and not under s. 10 of the Act. On this view.. it did not think it necessary to answer the third question.
When the matter came up earlier, this Court on November 9, ] 971 considered it necessary to call for a further statement or the case from the Tribunal· on the third question on the basis of the materials before it and having regard to the decision of Morvi Industries Ltd. v. CommiSsioner of lncome-tax(1 ). The Tribunal in its supplementary statement of case has answered tho questioa against the assessee and in favour of the Department in holding that the assessee is not entitled to a deduction of the, sum of R~. 53,913/- either under s.lO(l) or 10(2) of the Act.
It is not disputed that the commission payable to him woulc1 be a revenue receipt nor is it disputed that if it is chargeable under s. 7 no othor question would arise having regard to tho findin& based on the decisioo in Morv; Industries case (supra) that the amount of Rs. 53,913/~ had accrued to the assessee in the year .of account. It is therefore necessary for us to consider whether lbe 10 per cent gross profits payable to the assessee under the tenns of the agreement appointing him as the Managing Director ii liable to be assessed as salary or under the head 'income from business~. It may be mentioned that •salary' under s. 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 maste; 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, how~ver, 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 Palmt-r, Gower, Penington 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 tbr~ terms of his employment, the employer exercises a supervisory ·control in respect of the work entrusted to him. A servant acts 1mder the direct control and supervision of his master. An agent, (1) 82 I.T.R.835 S.C.
A
c
D
F
G
ll
, /
RAM PERSHAD V. C.I.T. (Jagamnohan Reddy, J.)
989 ·
..
[1973] 1 S.C.R.
SUPREME COURT REPORTS
990
.articll-"S of association of a company and/or the agreement if any under which a contractual relationship between the Director and' 1he 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 s. 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 aud the tenns of his employ~ ment. A similar view has been expressed by the Scottish Court of Session in Anderson v. James Sutherland (Peterhead) Limited(1 ) where Lord No1mand at p.218 said :
~' . . . . . . the managing director has two functions and capacities. Qua managing director he is a party to a contract with the company, and this contract is a con ... tract of employmenf; more specifically I am of opinion that it is a contract of service and not a contract for service.''
A number of cases have been referred before us but the conclusion ]n each of the decistons turned on the particular nature of em~ ployment and the facts disclosed therein. In each of these deci· sions the "context played a vital part in the conclusions arrived at." In Commissioner of Income-tax v. Manmohan Das(2) this Court had occasion· to consider the case of employment by a bank of a treasurer for its branches, sub·agencies and pay offices where he had to perform the duties, liabilities and responsibilities which by custom or contract usually devolved upon a treasurer as well as those specified in the agreement. The treasurer had to provide the staff for the cash section of the bank; he had power to suspend, transfer or dismiss any member of the staff and to appoint any other person in his place. He was responsible for an· the acts of the staff so appointed which resulted in loss or damage to the bank and was responsible for the protection of the property of the bank and for the receipt of any bad money, or base money etc., was requested to transmit from one place to another, under guard provided by the bank, moneys, documents and properties of the bank. It was held that though the office of the treasurer was created by the agreement 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 remune~ ration for holding an office did not necessarily give rise to . the reht\onshio of master and servant between the holder of the office Jnd the person who paid the remuneration. It was held that th~' treasurer was not a servant of the bank and the remuneration re~ ceived by him was not salary. Referring to the observations of (t) [1941[ S.C. 203 at 218. (2) 59 I.T.R. 699.
c
D
E
F
G
H
RAM PERSHAD v. C.I.T. (Jaganmohan {teddy, J.)
991
Bhagwati, J. in Dharangadhra Chemical Works Ltd. v. State. of Saurashtme ), 'Shah, J. observed (at p. 707) that the oorrect method of approach would be to con:Jider whether having regard to the nature of the work, there was due control and supervision by the employer. In Piyare Lal Adishwar .Lal v. Commr. of Ina come-tax(:.!), Kapur, J. said (at p. 24) that ~
8
[1973] I S.C.k.
SUPREME COURT REPORT<-;
992
principal in the business of the agency and they named the appellant with the approval of the Board of Directors.
A sintilr view -.vas taken by this Court in Lakshminarayttn Rdm Gopai v. Govt. of Hyderabad(1 ). Bhagwati, J. speaking for the Curt held that the assessee under the managing agency agreement having regard to certain indicia discernible from that ~greement was an agency. At p. 458 lhe functions of the a:;sessee which were inconsistent with his being a servant were ~pt!cified. They were :-
A
B
c
D
AH these circumstances went to establish that the appellants were ihc agents of the company and not merely the servant" L'-muncn•tcd by wages or salary.
In Commissioner of lnconu·tax Bombay v. Arms/rong Smithe) Stone, C.J. and Kl!nia, 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 :-.1ticlc5 o\ associat:on of the company provided that the assessee was to l>~ 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 the company; that all the other directors were to be under his control and were bound to confonn to his directions in regard to the con1pany's business; that his remuneration 'vas to be voted by the company at its annual general meeting md that the sum received by him for managing ·tbe company's business which arose from out of the contractual relationshitJ with the company provided by the articles for perfonning the ser''ices of managing the company's business. In these circumtances t was held that the remuneration was taxable under s. 7 and not under s. 12 of the Act. It appears that a large number of Englif)h cases were cited but these were not referred to. Stone. C.J. obc-rved (at pp. 609-610) :.,-
'~We have been referred to quite a large nUil,lber of English cases the effect of which, I think, be sum0) 25 I.T.R. 449. (2) 15 I.T.R. 606.
G
11
.RAM l)ERSHAD v. c.I.T. (Jaganmohan Reddy, J.) 993
A marised 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 B entitled to remuneration as an employee of the ompany. Furth{!r that relationship may be created either by. a service agreement or by the articles themsel\·es. Now, in this case there is no qustion of any service agreement outside the articles and, therefore, the relationship between the co~npany and the assessee, Mr. Smith, depends c upon the articles." (emphasis ours)
In Commissioner of Inoome-tax v. Nagi Reddy(!) the Madras High Court was considering the case of a Managing Director of ~t film company who was also the Managing Director of another tilm company on sithilar terms and remuneration, namely, that he was to get a monthly remunerati&n of Rs. 500/- and in addition D a commission of net profits. The question there was, whether the remuneration re.ceived by him as Managing Director from these two companies was income from business assessable under ~. 1 0 of the Act. · In that case a reference was made to the Bombay decision in Commr. of l.T. v. Armstrong Smith (supra).
E A det:~iled consideration of all the cases cited and the passages from text books referred to before us does not assist us in coming to the conclusion that-the test for determining whether the person employed by a company is a servant or agent is solely dependent on the extent of supervision and control exercised on hin1. TI1e real question in this case is one of construction of the articles of association and the relevant agreement which was F entered into between the company and the assessee. If the company is itself carrying on the business and the assessee is em:ploycd to 1nanage its affairs in tenns 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. Art. 109 of the G 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. Art. 136 states that subject to tb.e aforesaid agreement, the general management of the business of the company shall be in the hands of the Managing H 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 the management of --{l) 51 I.T.R. 178. \ 14-- L172Sup. CT/73
( 1973]1 S.C.R
994
SUPREME COURT REPORTS
A
A the affairs of the company. Art. 137 provided that the receipb signed by the Managing Director or on his behalf for any moneys or goods or prope11y received in the usual course of business of the company shall be eifcctual 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 Art. 138 he is authorised to subB delegate all or any 9f the powers. Art. 139 enjoins that notwith'it:.mding anything contajned in those ~~rticles the Managing Direc· tor is expressly allowed generlly 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 c time to time be agreed upon between him and the Directors of the Company. Art. 140 specifies powers in addition to the powers conferred on him as the Managing Director. Un<I:er Art. 141 the Mannging Director shall have charge and custody of all the property, books of account, papers, documents and effects belonging to the said company wheresoever situate. Art. 142 0 provides that the Managing Director shall work for the execution of the deCisions that mny be arrived at by t·he Board from time to time and shaH be empowered to do all that may be ntcessary in the execution of the decisions of the management of tb company and shall do all things usual, necessary or desirable in the management of the affairs of the company or carrying out it-; objects. Cl. (k) of the agreement dated 29~11-1955 E stipulates :-
E ....
"That the said Ram Pershad shall be at liberty to resign the said office upon giving three months' notice to the company of his desire to do so. If the said Managing Dlrcctor is found to be acting otherwise than in the interests of the company or is found to be not diligent to his duties as a Managing Director, the company in General Meeting may tetminate his services before the expiry of the said period· of 20 years."
F
The other terms of the agreement enumerate the .powers and duties given to him under the articles of association.
G
A perusal of the articles and tem1s and conditions of ilie agreement definitely indicate that the assessee was appointed to manage the business of the company in terms of the artiCles of association and within the powers prescdbed therein. Reference may particularly be made to Arts. 139 and 142 to ascertain the nalure of the control imposed by the company upon the Managing Director. Under the fonner the additional work which he can do as an agent or manager of the company can be done on tenus
H
RAM J>ERSHAD v. C.I.T. (Jaganmohan Reddy, J.)
99 5
[1973] 1 S.C.R.
SUPREME COURT REPORTS
996
prescribed thereunder and subject to the control and supervision A of the Directors which in our view is indicative of his being em~ ployed as a servant of the company.
We would therefore hold that the remuneration payable to him is salary. In this view, the other questions need not be con·~ rtidered, and tbe· appeal is dismissed with costs.
B
V.P.S. Appeal dismissed.
•
2 issues framed by the court
Whether the 10% commission on gross profits payable to the assessee as managing director was taxable as salary under section 7 or as income from business under section 10.
Whether a managing director is a servant of the company or an agent, having regard to the articles of association and the agreement.
Colour shows how this judgement treated each authority
Anderson v. James Sutherland (Peterhead) LimitedReferred
[1941] S.C. 203 at 218
Morvi Industries Ltd. v. Commissioner of Income-taxApplied
82 I.T.R.835 S.C.
Commissioner of Income-tax v. Manmohan DasReferred
59 I.T.R. 699
Dharangadhra Chemical Works Ltd. v. State of SaurashtraReferred
[1957] S.C.R. 152, 157 · Who else cites this
Piyare Lal Adishwar Lal v. Commr. of Income-taxReferred
40 I.T.R. 17
Qamar Shaffi Tyabji v. Commissioner of E.P.T., HyderabadDistinguished
39 I.T.R. 611
Lakshminarayana Ram Gopal v. Govt. of HyderabadReferred
25 I.T.R. 449
Commissioner of Income-tax Bombay v. Armstrong SmithRelied on
15 I.T.R. 606
Commissioner of Income-tax v. Nagi ReddyReferred
51 I.T.R. 178
4 provisions across 2 enactments
Ram Pershad
Commissioner of Income-tax, New Delhi
K. S. Hegde
P. Jaganmohan Reddy
H. R. Khanna
As recorded by the court registry
Judgements on the same questions, provisions and authorities, from every court
