RAM PERSHAD V. C.I.T. (1972) 2 SCC 696

RAM PERSHAD V. C.I.T. (1972) 2 SCC 696

FACTS

• Ram Pershad and his wife owned shares in a private limited company engaged in the hotel business.
• Ram Pershad became the first Managing Director of the company by virtue of Article of Association, under an agreement dated November 20, 1955.
• Terms of the agreement included a fixed monthly payment of Rs 2,000, a car allowance of Rs 500 per month, 10% of gross profits, and free board and lodging in hotel.
• For the assessment year 1956-57, Ram Pershad was assessed for Rs.53,913/- payable to him as 10% of the gross profits, which he gave up before being finalized due to the company's inability to pay.
• Ram Pershad claimed that the given-up amount was not taxable as it did not accrue to him, or if it did, it wasn't taxable under Section 7 or Section 10 of the Indian Income-tax Act, 1922.
• All lower authorities ruled the amount as taxable salary under Section 7.
• On appeal to the High Court, it was held that the amount was taxable under Section 7 as salary.

ISSUE

• Whether the amount is chargeable under Section 7 (i.e., as Salary) or Section 10 (i.e., as income from business) of the Income-tax Act. If chargeable under Section 10, whether the assessee is entitled to a deduction of Rs 53,913/- under Section 10(1) or Section 10(2)?

RULE

• To distinguish whether the remuneration given to a Managing Director is Salary or Income from business, the test is whether the MD is working as an Agent or Employee. This can be determined by the Article of Association or terms of the Contract.

HELD

• Lakshminarayan Ram Gopal v. Government of Hyderabad (25 ITR 449), The court concluded that the assessee, under the managing agency agreement, exhibited characteristics consistent with that of an agent rather than a servant. Therefore, the remuneration received was not considered as salary but as income from business. Similar, conclusion was made in Commissioner of Income-tax, Bombay v. Armstrong Smith (14 ITR 606) and Commissioner of Income-tax v. Negi Reddy (51 ITR 178)
• The articles of association indicated that Ram Pershad was appointed to manage the business of the company.
• The terms of control and supervision exercised by the company over Ram Pershad's work, as outlined in the articles and agreement, were indicative of his employment as a servant of the company.
• Therefore, the remuneration payable to him was considered as salary.
• Other questions were not considered in view of the above conclusion.
• The appeal was dismissed with costs.
COMMENTARIES RATIO/NOTE
• Director and managing director of a limited company: A director of a company as such is not a servant of the company and the fees he receives are by way of gratuity. As director simpliciter, he is not a servant. But he may enter into a contract of employment to serve as a managing director, or as a manager or to enter any special service to the company apart from doing his duty as a director. In my such event, he would also be an employee. Thus, the employer-employee relationship between the director of a company and the company may be created either by a service agreement or by the articles of the company themselves. However, mere resolution of the Board of Directors allotting work and payment of remuneration is not sufficient without proving and establishing on record that services were rendered by the director as an employee. In any case, where the person holds the office of a director of a company, remuneration by virtue of that office does not bring about the relationship of muster and servant. [Shanti Devi (1993) 199 ITR 800 (Ori)]