JUDGMENT
J.M. Mahapatra, J.
1. The question referred at the instance of the Revenue under Section 256(1) of the Income-tax Act, 1961, for our decision is :
” Whether, on the facts and in the circumstances of the case, the relationship between the assessees and the company in which he/she acted as a director can be said to be that of an employee and employer so that the assessees would be entitled to deduction under Section 16(i) of the Income-tax Act, 1961?”
2. The assessees in the different cases are all directors of Messrs, Kapoor Motor Engineering Private Ltd., a company registered under the Companies Act, 1956. The different cases involve a common question of law, though they pertain to different assessment years and to different assessees. These references have, therefore, been heard analogously and are being disposed of by this common judgment. For the relevant years, the assessees were all assessed as individuals and they claimed their remuneration as “salaries” and claimed standard deduction thereon under Section 16(i) of the Income-tax Act, 1961 (for short, “the Act”). The assessing authority, namely, the Income-tax Officer, did not accept the contention of the assessees that the remuneration received by them were salaries and, accordingly, did not allow the standard deduction. On appeal, the Appellate Assistant Commissioner confirmed the order of the Income-tax Officer. The Tribunal, however, accepted the contention of the assessees and said that the assessees were entitled to standard deduction treating the remuneration as salaries on the basis that the assessees received the
remuneration as employees of the company. This has led to the filing of the references by the Department.
3. We have heard Mr. A. K. Ray, learned counsel appearing for the Revenue, as also Mr. N. Paikray, learned counsel appearing for the assessees. Mr. Ray took us through the provisions of the Act dealing with the method of computation of total income subject to tax under different heads of income as are provided under Section 14 of the Act. He laid emphasis on the fact that the income under the head “Salaries” ( Chapter IV– Sub-head ‘A’) is only entitled to general deductions as is envisaged under Section 16(i) of the Act, He made a reference to the Companies Act, 1956, to explain the situation of a managing director or a director who, as such, enjoys dual capacity as a director and also as an employee of the company. But, when such a situation arises, the obligation remains with the person who claims entitlement to receive from the company as salary, to establish the relationship of master and servant or an employer and employee. This has to be established as a fact and subject to the agreement as might have been in their option between the present concern and the company, where he is a director or managing director. According to Mr. Ray, in the present batch of cases, the assessees have failed to establish the master and servant relationship, and as such their claim for deduction has justifiably been disallowed by the Income-tax Officer.
4. On the other hand, Mr. Paikray, learned counsel for the assessees, has put emphasis on the fact that the memorandum of association adopted by the company in its different articles proved that a director may be called upon to perform extra services for the company and, in such an event, the company would remunerate such director. He has put emphasis on Article 57 which is extracted hereunder :
” If any director is called upon to perform services or to make any special exertion for any of the purposes of the company, the company shall remunerate such director either by a fixed sum or otherwise, as will be determined by the board of directors and such remuneration may be either in addition to or in substitution of his remuneration for attending meetings subject to the provisions of Section 315 of the Companies Act, 1956, and in addition to the provision made in point 56. Such director shall also be entitled to be paid for travelling, hotel and other expenses, if any, incurred in consequence of his services or exertion as aforesaid.”
5. He also drew our attention to Article 71 wherein it is stated that directors and managing directors are subject to the superintendence and
control of the board of directors. It is also seen that article 53 provides as follows :
” The above directors shall hold office until they or any of them voluntarily resign by giving three months’ notice in writing subject to the provisions of Section 262 of the Act. Any casual vacancy among the directors shall be filled by the board of directors at a meeting of the board.”
6. Learned counsel for the assessee further lays emphasis on the resolution adopted by the board of directors on August 14,1976. Our attention was drawn to resolution No. 6 of the said meeting wherein, according to learned counsel, each of the directors was allotted specific duties. The said resolution No. 6 is also extracted hereunder for a proper appreciation.
” It was resolved that the duties generally shall be assigned for the management of the company subject to the control and supervision of the board be and are hereby assigned to the several directors as shown against each and the same be allotted as modified at any later date.”
Names of directors
Specific duties and function assigned
1.
Sri Rajendra Kapoor
Sales and liaisoning
2.
Smt. Santi Devi
Look after Ravindra Auto Engineers and purchases
3.
Sri Jogender Kapoor
Supervision of workshop and spares section
4.
Smt. Ritu Kapoor
Assisting the managing director generally
5.
Smt. Kiran Kopoor
Supervision of accounts.
(Sd.) Rajendra Kapoor,
(Sd.) Ritu Kapoor,
(Sd.) Jogender Kapoor,
(Sd.) Kishanlal
(Sd.) Santi Devi,
14-8-1986.
7. Now the question is whether the claim of the assessees that the receipts from the company in the shape of remuneration are salaries and, therefore, entitled to general deduction under Section 16(i) of the Act. For this, it is necessary to examine whether the memorandum of association and resolution No. 6 adopted in the meeting of August 14, 1976, spell out the relationship of master and servant.
8. Learned counsel on both sides have relied upon, the authority of the apex court in the case of Ram Prashad v. CIT [1972] 86 ITR 122. At page 126, their Lordships of the Supreme Court have held :
” 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 ascertainment remains the same.”
9. At page 130, it is further observed :
” The real question in this case is one of contraction 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, and it could hardly be said that he is not a servant of the company.”
10. There is no controversy that a director of a company enjoys a dual capacity. He might be a director as well as an employee, but that he is an employee must not be merely on paper, rather it should be proved and established on record as a fact. In the present case, the articles of association are contrary/contradictory to the proposition of dismissal of a director. The resolution speaks of allotment of work and leaves the matter merely to be inferred. No attempt was made to prove this fact on record. In what manner they really render extra services to the company as was expected and required of them in the resolution remained only on paper. Merely because there has been a resolution by the board of directors where directors are ultimately remunerated in the meeting of the board does not give out in any manner the reality or truth that the director did serve as an employee. Learned counsel cited before us a case of the Calcutta High Court, namely, Stya Paul v. CIT [1979] 116 ITR 335. In the aforesaid case, the assessee was the managing director and the chairman of the company. Examining the facts, their Lordships held that ( at page 340 ) :
” No servant of any company can appoint a director, not to speak of dismissing him. These two powers, in our opinion, lead to an irresistible conclusion that the assessee is not a servant of Surrendra (Overseas) Pvt. Ltd., although this company and its directors exercise some amount of supervisory control over him and his appointment can lawfully be terminated by this company without amending its articles if he is found to be guilty of fraud, misfeasance, dishonesty, wilful default, gross negligence and the like causes.”
11. This case is not of much help in the present situation except to the extent that it throws light on a situation of supervisory control and in respect of some sort of powers being exercised on the director by the company ; the matter ended there and that was not enough to make out
the relationship of employer and employee.
12. Learned counsel for the Revenue also cited before us a decision of the Allahabad High Court in the case of Sardar Harpreet Singh v. CIT [1991] 187 ITR 679, wherein the same test as laid down in Ram Prashad’s case [1972] 86 ITR 122 by the apex court has been followed. It is not necessary to multiply the authorities.
13. On the aforesaid analysis, we are of the view that, in the instant case, the relationship of employee and employer is lacking, and this being so, the assessees were rightly assessed by the Income-tax Officer without taking into account the claim of deduction under Section 16(1) of the Act. Our answer, therefore, is that the assessees are not entitled to any deduction under Section 16(i) of the Income-tax Act, 1961. Accordingly, we answer the references in favour of the Revenue and against the assessees.
D.P. Mohapatra, J.
14. I agree.