High Court Of Calcutta
Sajid Mowjee vs. Income Tax Officer
Sections 15, 17(1)(iv)
Asst. Years 1993-94, 1995-96, 1996-97
D.K. Seth & Maharaj Sinha, JJ.
GA No. 120 of 2003 & IT Appeal No. 237 of 2002
4th/5th August, 2005
Counsel Appeared
R.N. Dutta, Mrs. Sutapa Roychowdhury & T.N. Dey, for the Appellant : D.K. Shome, for the Respondent
JUDGMENT
D.K. Seth, J. :
4th Aug., 2005
This appeal relates to the asst. yrs. 1993-94, 1995-96 and 1996-97. Only one Court fee has since been paid. But now Court fee in respect of each assessment year is payable. The appellant shall put in the balance Court fees for the two assessment years within a period of four weeks. In default, this appeal shall be treated as appeal only in respect of the asst. yr. 1993-94 and the appeal in respect of the other two asst. yrs. 1995-96 and 1996-97 shall stand dismissed. 5th Aug., 2005.
2. We have passed an order yesterday on the question of payment of Court fees after which the hearing commenced and continued till today. Subject to the above order, we propose to dispose of the appeal in the manner hereafter. The questions :
3. In this appeal we are called upon to answer the following two questions on which the appeal was admitted :
“(a) Whether the respective sums shown as salary in the return for the asst. yrs. 1993-94, 199596 and 1996-97 shall be treated as income assessable under s. 15 or under s. 56 of the IT Act, 1961 ?
(b) Whether, on the facts and circumstances of the case, the conclusion of the learned Tribunal that there was no relationship of employer and employee between the company and the assessee is perverse and/or sustainable in law ?”
Facts :
4. The facts of this case as would be relevant for the purpose of answering the said question are summarized thus. The assessee was a wholetime director for the relevant assessment years of the company. The company is a private limited company in which the assessee held 24,254 equity shares of Rs. 10 each. His father Y. Mowjee, a director of the said company, held 24,101 equity shares, whereas the balance 570 shares were held by 40 other persons. In this background, the AO found that the assessee having full control over the affairs of the company by holding number of shares as well as paid-up capital, no relationship of employer and employee between the company and the assessee could be established. According to him, the assessee having full control over the company his attempt to establish himself as an employee thereof cannot be sustained. This order was affirmed by the CIT(A) and the learned Tribunal. Following the order of the learned Tribunal in respect of the asst. yr. 1994- 95 in these three assessment years, the assessee was held not to be an employee of the company and as such the receipt of remuneration as wholetime director could not come under the head salary and, therefore, it was taxed as income from other sources. Submission on behalf of the appellant/assessee :
5. Mr. Dutta, learned counsel for the appellant, draws our attention to the resolution under which the assessee was appointed wholetime director and his remuneration was fixed in the general meeting in which the resolution was adopted and to the memorandum and articles of association to point out that there were materials to establish relationship of employer and employee for the purpose of treating the remuneration received by the assessee under the head salary for the purpose of s. 15 of the IT Act, 1961. In order to sustain his contention, he relies on the decisions in Ram Singh & Ors. vs. Union Territory of Chandigarh & Ors. (2004) 1 SCC 126, CIT vs. L. Armstrong Smith (1946) 14 ITR 606 (Bom), Ram Prashad vs. CIT 1972 CTR (SC) 97 : (1972) 86 ITR 122 (SC), Jaswant Rai vs. CWT (1977) 107 ITR 477 (P&H) and Gulabrai Hanumanbox vs. CWT (1992) 198 ITR 131 (Gau). Submission on behalf of the Respondent/Department :
6. On the other hand, Mr. Shome submits that from the memorandum and articles of association it appears that the company took over the erstwhile partnership business carried on by this assessee and his father and that the company was only a camouflage. In fact, it was a partnership firm, as would appear from the subscription of shares which predominantly shows that the entire control vested with the father and son. Y. Mowjee and S. Mowjee, respectively, since described brothers by the AO in the assessment order and the CIT(A) and the learned Tribunal; this however, was corrected by Mr. Dutta. According to Mr. Shome, the appointment of the assessee as wholetime director could not be terminated. The right to terminate is a right of the employer. This may not be factor for ascertaining the relationship. He points out that by reason of the holding of the shares of the assessee, the Board could never take the resolution to terminate his employment or appointment. Therefore, according to him, it is a fit case for lifting the veil to ascertain the characteristics of the company and discover the real entity of the assessee and the device adopted by the assessee for the purpose of obtaining benefits within the scope and ambit of the Act.
6.1 He also draws our attention to the memorandum and articles of association and the resolution from the paper book and points out that these are materials which are not sufficient to establish any relationship of employer and employee and as such there is no scope for treating the receipt under the head salary for the purpose of computing tax under the Act. He relies on the decision in State of Gujarat & Anr. vs. Raman Lal Keshav Lal Soni & Ors. AIR 1984 SC 161 and particularly refers to para 27 of the said decision. Relying on the said decision, he points out that it is neither possible to define politic nor possible to lay down any definite test to determine when a person may be said to be an employee. No single factor may be considered absolutely essential; but all or some of the factors, such as the right to select for appointment, the right to take other disciplinary action, the right to prescribe the conditions of service, the nature of duties performed by the employee, the right to control the employee’s manner and method of the work, the right to issue directions and the right to determine and the source from which wages or salary are paid and a host of such circumstances may have to be considered to determine the existence of the relationship of master and servant. In each case, it is a question of fact whether a person is an employee or not. He also relies on the decision in CIT vs. Smt. Dipali Goswami (1986) 51 CTR (Cal) 139 : (1985) 156 ITR 36 (Cal) and points out that the relationship is required to be established for the purpose of claiming the receipt under the head salary for tax purpose.
6.2 He relies also on a decision in CIT vs. Manmohan Das (1966) 59 ITR 699 (SC) of the apex Court to explain the characteristic of the receipt to be treated under the head salary for the purpose of income-tax. According to him, in this case, the AO, the CIT(A) and the learned Tribunal were right in holding that the receipt could not be assessed under the head salary. He refers to the definition of salary in s. 17 and discusses in threadbare the distinction between the contract of employment and contract for employment. For the purpose of ascertaining the character of the receipt, he points out that it is only a contract of employment when the receipt could be brought under the head salary for the purpose of income-tax but not in case of a contract for employment. According to him, in this case, the wholetime director having been given free hand and he having not been under the control of the employer and none of the ingredients referred to in the decision in Raman Lal Keshav Lal Soni (supra) having been satisfied, the assessee could not be held to be an employee to assess the remuneration received by him under the head salary. Therefore, he prays for dismissal of the appeal. Secs. 15, 16, 17 : Scope :
7. After having heard the learned counsel for the respective parties, the principal questions supposed to be answered is as to whether the remuneration received by the assessee could be treated as salary for income-tax purpose or not. Admittedly, it is not the character of the recipient but the character of the receipt that is material for the purpose of determining as to under which head the receipt should be treated for the purpose of income-tax. The income under the head salary are dealt with in ss. 15, 16 and 17 of the Act which are relevant for our present purpose.
7.1 Sec. 15 enumerates the salaries chargeable to income-tax under the said head. Expln. 2 thereto provides that any salary, bonus, commission or remuneration, by whatever name called, due to, or received by a partner of a firm from the firm shall not be regarded as salary for the purpose of the said section. It may be noted that while the Explanation included the receipt by a partner of a partnership firm, it did not exclude the receipt by a director from a company, private limited or public limited. Admittedly, a company whether a private limited or public limited is a juristic person. Whether it can be a camouflaged or not cannot be questioned so long it continues to be a company registered under the Companies Act, 1956, either as a private limited or a public limited one, in order to exclude the income under the head salary received by an employee or a director as remuneration orcommission. Whereas the definition of salary in s. 17(1)(iv) includes any fees, commission, perquisites or profits in lieu of or in addition to any salary or wages. Under sub-s. (2) thereof the perquisites have been defined which is not material for our present purpose. If the income is one under the head salary, in that event the deductions provided under s. 16 from the salaries becomes available to an assessee. The assessee : Whether an employee :
8. So far as the decision in Raman Lal Keshav Lal Soni (supra) cited by Mr. Dutta is concerned, the same has no manner of application in the facts and circumstances of the present case in view of the fact that it dealt with the relationship between a principal employer and a contract labour. The question of control exercised by the contractor on the contract labour was considered in the said case and it was held that though the principal employer might not have control over the contract labour, yet that was not the determining factor for the purpose of establishing relationship of employer and employee between the principal employer and the contract labour. But that question has to be appreciated having regard to the Contract Labour (Abolition and Regulation) Act, 1970, which cast certain liability on the principal employer while engaging contract labour, in the context whereof the decision had proceeded. Therefore, this would not throw a complete light so far as the present case is concerned.
8.1 From the resolution at p. 23 of the paper book it appears that the assessee was co-opted on 15th June, 1983, and was elected as a director on 28th June, 1983, in the annual general meeting. The board of directors in its meeting held on 29th June, 1983, called an extraordinary general meeting on 29th July, 1983, suggesting the resolution appointing the assessee fixing the remuneration of the assessee at Rs. 2,400 comprising of house rent allowance of Rs. 300 and allowance of Rs. 100 for his service as a wholetime director of the company. This resolution has not been disputed to be carried on unanimously in the subsequent meeting held on 29th July, 1983. On the other hand, Mr. Shome points out that this resolution does not establish the relationship of employer and employee between the company and the assessee.
8.2 From the explanatory statement at p. 24 of the paper book, it appears that the board had sanctioned the said remuneration. Whether a director is an employee or not is dependent on the nature and character of the appointment and the terms and conditions or other provisions contained in the memorandum and articles of association. From p. 83 of the paper book containing cl. 13(b) of the memorandum and articles of association, it appears that the remuneration of directors for part-time or wholetime services to the company shall be determined in accordance with law and subject to the provisions of the articles and of the Act, i.e., The Companies Act, 1956. At p. 90 of the paper book, cl. 21(m) specifies the powers of directors which provides in cl. (m) as follows :
“(m) subject to ss. 197A and 267 of the Companies Act, the directors may from time to time appoint one or more directors to be managing director or managing directors or wholetime director or wholetime directors for such period upon such terms as they may think fit and may vest in such managing director or whole time director, such of the powers hereby vested in the directors generally as they think fit, and upon such conditions and subject to such restrictions and generally upon such terms as to the remuneration and otherwise as they may determine. The remuneration of the managing director or wholetime director may be by way of salary or commission or participation in profits or by any or all of these modes.”
8.3 From p. 85 of the paper book it appears that while defining the powers of directors, it was mentioned that the control of the company shall be vested in the board which shall be entitled to exercise such powers including those mentioned in sub-cls. (a) to (n).
8.4 These are powers of the board of directors under which a managing director or wholetime director could be appointed upon such terms and on such remuneration as the board may determine. It had specified that the remuneration of the managing director or wholetime director may be by way of salary or commission or participation in profits or by any or all of these modes. Therefore, the remuneration allowed to the assessee can very well be treated as salary within the terms of the said memorandum and articles of association. The contention of Mr. Shome that the service of the assessee could never be terminated or determined because he held a major share, cannot be a factor for consideration in the present case in view of the fact that the assessee held 24,254 shares whereas the other director Y. Mowjee held 24,101 shares and the other members of the company who are 40 in number held 570 shares aggregating to 24,671 shares, which could be utilized for the purpose of determining the appointment of the assessee whether that would be exercised or not is not a question to be gone into for the purpose of determining the character of the receipt or the appointment.
8.5 Admittedly, the company is a juristic person and it is governed by the board of directors and is altogether independent entity other than the directors. Board of directors may control the company but such directors might have dual capacity, one as member of the board of directors and the other as an employee of the company or being in charge of the administration of the company as an independent administrator in the capacity of a director. The appointment of one of the members of the board of directors as wholetime director involved certain kind of responsibility to be carried out in terms of his appointment whether specified or not. The board has a right to appoint. It has a right to give directions, it may not have right to take disciplinary action. But it has right to prescribe conditions of service. It has right to determine the nature of the duties to be performed by the wholetime directors. It has right to determine the salary to be paid. Thus, it appears that some of the ingredients mentioned in Raman Lal Keshav Lal Soni (supra) are present in this case. Therefore, the company could be an employer while appointing one of its directors as wholetime director on a particular remuneration and prescribing the terms and conditions of his appointment.
8.6 Though the decision in Raman Lal Keshav Lal Soni (supra) related to matters other than revenue for the purpose of determining the characteristic of the post held by the person involved therein as to whether a civil post; but still then it had laid down that it is not necessary that all the factors are to be satisfied, satisfaction of some of the factors would be sufficient to determine the relationship. However, we may note that here the relationship is not for the purpose of labour legislation which stands altogether on a different footing or for the purpose of establishing the relationship of master and servant. We are supposed to determine the character of the receipt by reason of a relationship between the employer and the employee.
8.7 As observed earlier that there may be relationship of an employer and employee between the company and its managing director or a wholetime director but that is determined on certain facts as have been consistently held by different High Courts. In L. Armstrong Smith (supra) dealing with the IT Act, 1922, the High Court held that the assessee therein was managing the company’s business arising out of his contractual relation with the company provided by the articles for performing the services of managing the company’s business. Therefore, his remuneration fell to be taxed under s. 7 and not under s. 12 of the 1922 Act corresponding to ss. 16 and 56, respectively, of the 1961 Act.
8.8 In Ram Prashad vs. CIT (supra) while dealing with similar question again in relation to the 1922 Act, the Supreme Court had occasion to hold that a person engaged to manage a business may be a servant or an agent according to the nature of his service and the authority of his employment. It is not possible to lay down any precise rule of law to distinguish one kind of employment from the other. The nature of the particular business and the nature of the duties of the employee will require to be considered in each case in order to arrive at a conclusion as to whether the person employed is a servant or an agent. In each case the principle for ascertaining remains the same. In the words of the apex Court : “Though an agent as such is not a servant, a servant is generally for some purpose his master’s implied agent, the extent of the agency depending upon the duties or position of the servant. It is again true that a director of a company is not a servant but an agent inasmuch as the company cannot act in its own person but has only to act through directors who qua the company have the relationship of an agent to its capacity. A managing director may have a dual capacity. He may both be a director as well as an employee. It is, therefore, evident that in the capacity of a managing director, he may be regarded as having not only the capacity as persona of a director but also has the persona of an employee, or an agent depending upon the nature of his 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 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 and the terms of his employment. A similar view has been expressed by the Scottish Court of Session in Anderson vs. James Sutherland (Peterhead) Ltd., where Lord Normand, at p. 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 specifically I am of opinion that it is a contract of service and not a contract for service.”
8.9 In Gulabrai Hanumanbox (supra) the Gauhati High Court had taken the same view following Jaswant Rai vs. CWT (supra). On the other hand, Mr. Shome relies on Dipali Goswami (supra) where this Court had taken a view that it is the nature of the receipt and not the nature and character of the recipient that would determine the question whether the receipt is exempt from taxation.
8.10 In common parlance the wholetime director may not be an employee but even then the character of the receipt or remuneration having come within the definition of salary under s. 17(1) (iv) being a fee or remuneration in whatever name it is called and not being excluded by the Expln. (2) to s. 15, the remuneration received by the assessee cannot be treated to be anything other than income under the head salary. The income cannot be treated as income from other sources. Conclusion :
9. For all these reasons, having regard to the facts and circumstances of this case, the character of the recipient would not be material but the character of the receipt. The appointment shows that the board of directors have power to appoint and determine the fees or remuneration, etc. The assessee has a dual capacity. He is entrusted to manage the business. The contract is of employment and not for employment. The question is to be determined on the basis of the memorandum of articles of association, and the nature of the appointment, which clearly, as discussed above, indicates so. The facts disclose that the appointment is a contract of employment not a contract for employment. Therefore, we are of the firm opinion, having regard to the materials placed before us, that the receipt comes under the head salary as discussed above. Order :
10. In the circumstances, the appeal succeeds and is allowed. The order of the learned Tribunal and those of the CIT(A) and the AO, are set aside.
10.1 We answer the question (a) that the income is assessable under s. 15 of the IT Act not under s. 56 thereof; (b) for the purpose of income-tax there was a relationship of employer and employee between the company and the wholetime director and the finding of the learned Tribunal was perverse and cannot be sustained in law.
10.2 There will, however, no order as to costs.
Maharaj Sinha, J. :
I agree.
[Citation : 279 ITR 467]
