Allahabad H.C : Whether, on the facts and in the circumstances of the case, the learned Tribunal was legally correct in holding that the assessee was not entitled to standard deduction under s. 16(i) on the ground that the remuneration paid to the joint managing director was not salary ?

High Court Of Allahabad

Sardar Harpreet Singh vs. CIT

Sections 80U, 16(i)

Asst. Year1980-81

B.P. Jeevan Reddy, C.J. & R.A. Sharma, J.

IT Ref. No. 35 of 1986

11th September, 1990

Counsel Appeared

Vikram Gulati , for the Assessee

R. A. Sharma, J.:

At the instance of the assessee, the Tribunal, Delhi Bench “B”, New Delhi, under s. 256(1) of the IT Act, 1961 (hereinafter referred to as “the Act”), has referred the following two questions to this Court for its opinion :

“1. Whether, on the facts and in the circumstances of the case, the learned Tribunal was legally correct in holding that the assessee was not entitled to standard deduction under s. 16(i) on the ground that the remuneration paid to the joint managing director was not salary ?

2. Whether, on the facts and in the circumstances of the case, the learned Tribunal was legally correct in holding that the deduction under s. 80U of the Act allowed by the ITO was rightly withdrawn by the AAC of Income-tax ?”

2. The assessee, an individual by status, is a shareholder and also a director of a company, Hurana Motor and General Finance Private Limited (hereinafter referred to as “the company”). The company, by its resolution dated December 15, 1973, appointed the assessee as its joint managing director on a monthly remuneration of Rs. 700 which was increased subsequently by resolution dated March 31, 1975, to Rs. 850. In the asst. yr. 1980-81, the assessee claimed deduction under s. 16(i) of the Act on the remuneration received by him as joint managing director of the company. He also claimed deduction under s. 80U of the Act on the ground that he suffers from a permanent physical disability, which has substantially reduced his capacity to engage in a gainful employment or occupation and, in that connection, he filed a medical certificate from registered medical practitioner. The ITO, vide assessment order dated February 26, 1983, did not allow deduction under s. 16(i) of the Act on the remuneration received by the assessee as joint managing director of the company. However, deduction under s. 80U of the Act as per medical certificate was allowed by the AO. In appeal, the AAC, after considering the resolutions whereby the assessee was appointed as joint managing director and the relevant articles of association of the company, held that the assessee, while acting as joint managing director, was not working as an employee of the company and he was also not subject to the control of the board of directors and was, as such, not entitled to deduction under s. 16(i) of the Act on the remuneration received by him as joint managing director, Regarding the deduction under s. 80U of the Act, the AAC has held that “since the assessee is actively engaged in the conduct of the business of the company and is enjoying regular remuneration, it cannot be said that he is having a permanent physical disability.” On this ground, deduction granted by the ITO under s. 80U of the Act was declared to be unjustified. The assessee, thereafter, filed second appeal before the Tribunal, Delhi, who has affirmed the order of the learned AAC. The Tribunal has, however, as mentioned above, referred the aforesaid two questions to this Court for its opinion at the instance of the assessee.

An assessee is entitled to deduction under s. 16(i) of the Act on the salary received by him from his employer. Sec. 17 of the Act, without defining the word “salary”, lays down as to what salary will include.As held by the Supreme Court in Gestetner Duplicators P. Ltd. vs CIT (1979) 8 CTR (SC) 371 : (1979) 117 Itr 1, salary is payment for the work done or service rendered, made by an employer to his employees ; but every person who works for the company is not necessarily its servant. A person who manages the business of a company may be its servant or agent depending on the nature of his service and the terms of his employment. The nature of employment may be determined by the articles of association of the company or agreement, if any, between the company and the person concerned. In this connection, reference may be made to the decision of the Supreme Court in Ram Prashad vs CIT 1972 CTR (SC) 97 : (1972) 86 ITR122, where the test to determine whether the person working for the company is its servant or agent has been laid down. One of the rough and ready tests in order to judge the nature of the employment, is whether, under the terms of the employment, the employer exercises a supervisory control in respect of the work entrusted to him, although whether a person is a servant or agent does not solely depend on the extent of supervision and the control exercised on him. The Supreme Court declared that the question whether the person is a servant or agent is one of construction of the articles of association of the company and the agreement, if any, arrived at between the company and the person concerned, and where, after considering the articles and the agreement, if any relationship of an employer and employee is estab lished, a person can be said to be a servant of the company and the remuneration received by him is liable to be treated as salary. It was further observed that a managing director may have a dual capacity and he may both be a director and an employee depending on the nature of the employment which is to be determined on the construction of the articles of the company and the agreement, if any. The AAC, after considering the articles and the resolutions of the com pany whereby the assessee was appointed as joint managing director, came to the conclusion that the assessee was not acting as an employee of the company and, as such, was not entitled to any deduction under s. 16(i) of the Act on the remuneration received by him as a joint managing director of the company. The Tribunal agreed with the aforesaid finding of the AAC and has held that the assessee was working as one of the owners of the company and not as its employee and the relationship of employer and employee was absolutely lacking and hence the remuneration received by him as joint managing director cannot be treated as salary on account of which he is not entitled to deduction under s. 16(i) of the Act. In our opinion, the approach and the finding recorded by the Tribunal is fully justified and does not suffer from any infirmity.

Regarding the other question about the deduction under s. 80U of the Act, it has come on record that when the assessee was about fifteen years old, he received extensive burn injuries in an explosion on his left arm and right leg, with the result that his right leg below the knee and the left arm below the elbow were amputated which made him a physically disabled person. A medical certificate from a registered medical practitioner was also filed by the assessee before, the lower authorities. The ITO granted deduction under s. 80U of, the Act to the assessee, but the AAC decided against the assessee on the ground that he is engaged in the business of the company and is hav ing regular remuneration on account of which, it cannot be said that he is suffering from some physical disability which had impaired his capacity to engage in any employment. The Tribunal adopted the same line of reasoning and decided against the assessee on the ground that the asses see as a director is running the business having been appointed as a joint managing director on a monthly remuneration in 1973, and was earning the income. The Tribunal further held that the assessee has not produced the medical certificate from a registered medical practitioner before the lower authorities and, as such, cannot be allowed any deduction. The finding of the Tribunal to the effect that the assessee has not produced a medical certificate from a registered medical practitioner was contrary to the material on record inasmuch as the assessee had produced such a certificate before the ITO as well as the AAC, as is clear from the assessment order and the order of the AAC. The assessee, as such, made an application under s. 254(2) of the Act before the Tribunal for rectifying the mistake on the ground that there was a medical certificate from a registered medical practitioner on record and the Tribunal was not justified in holding that the medical certificate was not filed by the assessee before the lower authorities.

The Tribunal, vide its order dated September 2, 1985, although agreeing with the assessee that its finding to the effect that no such certificate was filed before the lower authorities was not justified, had rejected that application after deleting the sentence, “no such certificate appears to have been produced before the lower authorities” from its order.

Under s. 80U of the Act, an assessee is entitled to deduction if he is totally blind or suffers from a permanent physical disability which has the effect of reducing substantially his capacity to engage in a gainful employment or occupation. The assessee, in this connection, has produced the medical certificate before the lower authorities which goes to show that he suffers from a permanent physical disability which has tile effect of reducing substantially his capacity to engage in a gainful employment or occupation. The ITO allowed the deduction under s. 80U of the Act but the AAC and the Tribunal have disallowed the deduction on the ground that he is engaged in the business of the company and earning money. The approach, both of the AAC and the Tribunal, is erroneous.

While considering the question of allowing deduction under s. 80U of the Act, what is to be looked into by the authorities is as to whether the assessee suffers from a permanent physical disability which has the effect of reducing substantially his capacity to engage in a gainful employment or occupation. It is not a condition precedent for allowing the deduction under this provision that the assessee should be unemployed or should not be earning anything. Merely because the assessee is earning income from some business, the deduction under s. 80U of the Act cannot be disallowed for, had he not suffered from a permanent physical disability, he could have earned more. In our opinion, the Tribunal was not justified in disallowing the deduction under s. 80U of the Act.

Our answer to question No. 1 is in the affirmative, In favour of the Department and our answer to the second question is in the negative, in favour of the assessee. There shall be no order as to costs.

[Citation : 187 ITR 679]

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