Case: Ram Pershad Vs. Commissioner Of Income-Tax, New Delhi

1. 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 Art. 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 Rs. 2,000/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 yearfor which the accounting 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 accured in the account year ended 31st March 1956, it is not taxable under S. 7 or S. 10 of the IndianAct, 1922 (hereinafter called the Act). TheOfficer, the Appellate Assistant Commissioner, the Tribunal and on a reference under S. 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 S. 7 of the Act and that the income had accrued to the assessee during the previous year. Against the judgment of the High Court, this appeal is by special leave.2. The questions of law which were referred to the High Court under S. 66 (1) of the Act are as follows :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 S. 7 or S. 10 of theAct?3. If the amount is chargeable under Section 10, is the assessee entitled to a deduction of Rs. 53,913/under S. 10 (1) or S. 10 (2)?The High Court answered the first question in the affirmative and in favour of the revenue, and on the second question it was of 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.

Court's reasoning:
12. A detailed consideration of all the cases cited and the passages from text books referred to before us do 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 him. Thereal 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 hand 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 the management of the affairs of the company. Article 137 provides that the receipts signed by the Managing Director or on his behalf for any moneys or goods or property received in the usual 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 Art. 138 he is authorised toall 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 the 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. Art. 140 specifies powers in addition to the powers conferred on him as the Managing Director. Under Art. 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 all that may be necessary in the execution of the decisions of the management of the company and shall do all things usual, necessary or desirable in the management of the affairs of the company or carrying out itsother terms of the agreement enumerate the powers and duties given to him under the articles of association.13. A perusal of the articles and terms and conditions of the agreement definitely indicates that the assessee was appointed to manage the business of the company in terms of the articles of association and within the powers prescribed therein. Reference may particularly be made to Arts. 139 and 142 to indicate 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 Art. 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 20 years for not discharging the work diligently or if he is found not to be acting in the interest of the company as Managing Director. These terms are inconsistent with the plea that he is an agent 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 assessees work whenever they deem it necessary. Every power which is given to the Managing Director therefore emanates from the articles of association which prescribe the limits of the exercise of that power. The powers of the assessee have to be exercised within the terms and limitations prescribed thereunder and subject to the control and supervision of the Directors which in our view is indicative of his being employed as a servant of the company.