1. These ten appeals involving a common issue, relating to two different assessees and pertaining to different assessment years which have been heard together are being disposed of by this common order. It may be pointed out that common grounds have been taken by the assessee in these appeals. For the sake of example, the grounds taken in ITA No.1659/A/96 are being reproduced here : 2. That the learned lower Court erred in not allowing standard deduction from the salary income received from M/s Kohli Bros.
Colour Lab. (P) Ltd. 3. That the learned lower Court erred in facts and legal aspects of the case in holding that there is no relationship between the employee and employer.
4. That the appellant is working under supervision and control of Board of Directors and as such is an employee of the company and so standard deduction should have been allowed.
5. That the judicial decision cited by the learned lower Court is distinguishable and as such should not have been followed.
6. That the order passed is against merit, circumstances and legal aspects of the case.
2. Shri Prakash Naram, advocate, appeared on behalf of assessee-appellant, whereas Shri Ram Lal, learned Departmental Representative represented the Department.
The assessee, namely, Shri Sandeep Kohli and Shri Vishal Kohli, the appellants in these appeals, were directors of a private company viz., M/s Kohli Bros., Colour Lab. (P) Ltd. In the capacity of the directors, they had received certain remunerations and on these remunerations they claimed standard deduction under s. 80 [sic-16(i)] of IT Act.
To take example of asst. yr. 1993-94 (ITA No. 1659/A11/96) the assessee had shown income on account of such remunerations at Rs. 48,000. This income was shown under the head "salary". The gross salary was shown at Rs. 48,000 and income was taken as Rs. 36,000 after claiming deduction under Section 16(i) of IT Act, amounting to Rs. 12,000. The AO, on scrutiny of the record, found that there was no relationship of employee and employer between the assessee and the company, the assessee was asked to show cause as to why the claim of deduction under Section 16(i) may not be disallowed.
In reply to the said query, the assessee submitted replies dt. 5th Dec., 1995, and 17th Dec., 1995. It was pleaded on behalf of the assessee that he was appointed as a. whole-time director by the company and the assessee who was working as an employee, received salary from the company on which he was entitled to claim deduction under Section 80 [sic-Section 16(i)] of IT Act. On behalf of the assessee reliance was also placed on the following decisions : The AO considered the specific pleas taken by the assessee before him and after referring to the relevant material 'including the memorandum of association, etc. and also various decisions, held that the assessee cannot be treated to be an employee of the company and, therefore, the remuneration received by him was not in the nature of salary. On this conclusion, he disallowed the claim of deduction under Section 16(i) of the Act and treated the receipt of Rs. 48,000 as income from other sources. In support of conclusions, he also placed reliance on the following decisions ; 4. The assessee preferred appeal against the order of AO. In appeal before CIT(A), it was contended on behalf of the assessee that there existed employer-employee relationship between the company and the directors and the payment received by the assessee from the company was taxable as salary in support of this plea, reference was also made to Article 59(b) of article of association which is as follows : "The whole-time director shall work under the control and supervision of the board of director and shall exercise such powers as may be determined by the board. However, in case the board does appoint managing director, whole-time director or directors, shall have power as conferred by these articles on the managing director." It was also pointed out that in earlier year such payments received from the company were treated as salary income by the IT authorities.
On behalf of the assessee, reliance was also placed on the decision in the case of Ram Prasad v. CIT (1972) 86 ITR 122 (SC).
5. The learned CIT(A) after considering the entire matter, dismissed the appeal by making following observations : "The company was incorporated in the year 1985. It has only three shareholders and all of them are directors. These three directors are Shri Sandeep Kohli, his brother Vishal Kohli and his mother Smt.
Kamal Kohli. Salary has been paid to all the three directors. All the three directors had claimed that they were employees of the company and the salary received is taxable as income from salary. It is true that Article 59(b) of articles of association of the company prescribes that the director shall work under the supervision of board of directors and shall exercise such powers as may be determined by the board, but the facts remains that the powers of each of the directors were never defined. The directors, themselves, were controllers and the masters. Neither there was any employer and employee relationship nor there was master-servant relationship." 6. The assessee has challenged the findings of the learned first appellate authority before us.
7. Before us, Shri Prakash Narain, the learned counsel for the assessee, submitted that in the case of assessee, who was whole-time director of the company, the relationship of employer and employee existed. In order to establish his point, he made specific reference to Article 58 of the articles of association which is reproduced below : (a) The board of directors may also appoint one or more whole-time directors to look after and carry on the day-to-day business operations of the company and their remuneration shall also be fixed by the board, subject to Section 314 of the Companies Act, 1956.
(b) The whole-time directors shall work under the control and supervision of the board of the directors and shall exercise such powers as may be determined by the board. However, in case the board does not appoint managing director, the whole-time director or directors shall have power as are conferred by these articles on the managing director.
He also made reference to Articles 33, 35, 41, 44, 45, 47, 48 and 56 of memorandum of articles of association of Kohli Bros. Colour Lab.
(P) Ltd., a copy of which has been placed on record.
According to the learned counsel, the nature of functions discharged by the assessee was that of servant. He further submitted that a director may enjoy dual capacity i.e., he may work in the board of directors and he may also work as an employee. In support of his arguments he placed reliance on the following decisions : 8. The learned Departmental Representative Shri Ram Lal contended that the assessee was not a salaried employee of the company and, therefore, was not entitled to claim deduction which was rightly disallowed by the Departmental authorities. He also submitted that articles of association and the resolution referred by the learned counsel for the assessee do not indicate or show that the assessee was appointed as an employee of the company. We have carefully considered the facts and circumstances relating to this matter, the material brought to our notice, various decisions cited on behalf of the assessee and the rival submissions.
9. The main issue involved in these appeals is as to whether the receipt of remunerations by the assessee from the company was in the nature of salary and as to whether the assessee was entitled to claim deduction on such salary under Section 16(i) of IT Act for computing his income chargeable to tax.
10. For deciding the above issue, it is essential to ascertain the status, nature of employment, conditions of work and responsibilities of the person employed. In other words, it is to be examined as to whether there existed any relationship of master and servant or employer and employee between the assessee and its company and whether the assessee was earning 'salary' from the company, as its employee or servant. If so, whether he was entitled to the deduction from such salary as claimed by him.
11. The income from salaries is chargeable to tax under Section 15 of IT Act and computation of income from salary is to be made after allowing deductions. The term 'salary' has not been defined under IT Act although Section 15 defines the sources from which salary income is earned and charged to tax and Section 17(1) provides that salary include 'wages' etc.
12. There are several authorities on the point relating to the relationship of employer and employee and master and servant or agent and principal. In Halsbury's Laws of England at p. 193, the difference between the relationship of an agent and principal and between master and servant has been clarified in the following terms : "An agent is to be distinguished on the one hand from a servant and on the other from an independent contractor. A servant acts under the direct control and supervision of his master, and is bound to conform to all reasonable orders, given to him in the course of his work, an independent contractor on the other hand, is entirely independent of any control or interference and merely undertakes to produce a specified result, employing his own means to produce that result. An agent, though bound to exercise his authority in accordance with all lawful instructions which may be given to him from time to time by his principal, is not subject in its exercise to the direct control or supervision of the principal. An agent as such is not a servant, but 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." 13. In the case of Gestetner Duplicators (P) Ltd v. CIT (1979) 117 ITR 1 (SC), the Hon'ble Supreme Court of India, while defining the terms 'salary' in the context of company, has observed as under: "Salary is payment for the work done or service rendered, made by an employer to his employee, 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 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." 14. So far as the test to determine as to whether the person working- for the company is its servant or agent of the company, is concerned, the Hon'ble Supreme Court in the case of Ram Prasad v. CIT (supra) laid down the following guidelines : "The question whether a person is a servant or agent is one of construction of articles of association of the company and the agreement, if any, arrived at between the company and the persons.
Thus, if on the basis of the articles of association or agreement or resolution of the shareholders, relationship of an employee and employer is established, then a person can be said to be a servant of the company." 15. In the case of Smt Shanti Devi (supra), the Hon'ble Orissa High Court has held that where memorandum of association is stipulated that a director may be called upon to perform extra service for the company and in such an event, the company would remunerate such directors allotting specific duties to the directors but no proof of extra service rendered by the directors, was found then it cannot be said that relationship of employee and employer was there. In that case, the Hon'ble High Court of Orissa upheld the disallowance of deduction on the ground that ' resolution of the company did not spell out the relationship of master or servant. The Hon'ble Court observed that merely because there was a resolution by the board of directors, where directors alternately remunerate 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.
16. In the case of Sardar Harpreet Singh (supra) the Hon'ble Allahabad High Court applied the above test and held that the assessee who was appointed as joint managing director was not acting as an employee and was working as one of the owner's of the company. Thus, in that case it was found that the relationship of employer and employee was lacking.
The remunerations received by such joint managing director was not found eligible for deduction under Section 16(i) as the receipt was not treated to be salary.
17. In the case of Kaiam Chand Prem Chand (P) Ltd. (supra) the Hon'ble Gujarat High Court after considering the decision of Hon'ble Supreme Court of India, in the case of CIT v. Manmohan Das (1966) 59 ITR 699 (SC) the decision of Bombay High Court in CIT v. Lady Navajbai R.J.Tata (1947) 15 ITR 8 (Bom), the decision in the case of CJT v. L.
Armstrong Smith (1946) 14 ITR 606 (Bom) and the decision of Calcutta High Court in Satya Paid v. CJT and also the decision of Supreme Court of India in the case of Ram Prasad (supra) and other decisions held that the resolution passed by the company laying down the terms of employment created the relationship of master or servant.
18. The authorities may be multiplied on the issue. However, the legal propositions may be summarised as below : The assessee working for the company and receiving remuneration for such work, should show, (a) that there was relationship of master and servant or employer and employee between the company and himself.
(b) that such relationship involved the element of supervision and control by the employer, that is the company.
(c) that the duties or functions discharged by such person show that he was working as a salaried person and was doing regular work allotted to him by the company.
19. In the context of above legal propositions, we proceed to examine the factual position in the present case.
20. At the outset, it may be mentioned that there was no appointment letter or agreement specifically laying down the terms of so-called appointment of the assessee as a whole-time director. The only material placed before us to prove the relationship of employer and employee in the case of present assessee, is in the form of article of association and the resolution dt. 1st June, 1991.
The relevant article of articles of association are arts. 44, 45 and 58 which are reproduced below : Article 44 : Each director shall receive, out of funds of the company by way of remuneration, a sum not exceeding Rs. 250 (rupees two hundred and fifty) or any other amount as may be decided by the director, for each meeting of the board or any committee or sub-committee thereof attended by him in addition to his travelling, boarding and lodging and other expenses incurred.
Art. 45 : If any director, being willing, shall be called upon to perform extra service or to make any special exertions in going or residing away from the place of his normal residence for any of the purposes of the company or has given any special attendance for any business of the company, the company may remunerate the director so doing either by a fixed sum or by a percentage on profits or otherwise as may be determined by the directors and such remuneration may be either in addition to or in substitution for his share in the remuneration above provided, subject to Section 314 of the Act Article 58 : (a) The board of directors may also appoint one or more whole-time directors to look after and carry on the day-to-day business operations of the company and their remuneration shall also be fixed by the board, subject to Section 314 of the Companies Act, 1956.
(b) The whole-time directors shall work under the control and supervision of the board of the directors and shall exercise such powers as may be determined by board. However, in case the board does not appoint managing director, the whole-time director or directors shall have power as are conferred by these articles on the managing director.
21. The relevant portion of resolution dt. 1st June, 1991, relating to appointment of assessee Shn Sandeep Kohli as the director is reproduced below: (a) Resolved that Shri Sandeep Kohli be paid remuneration of Rs. 2,500 p.m. from 1st June, 1985 along with the following : (i) Provident fund and benefits under the company's gratuity scheme in accordance with company's rules and regulations in force from time to time.
(ii) Reimbursement of medical expenses actually incurred for himself, wife, and dependent children the total cost of which to company shall not exceed one month's salary." 22. It may be pointed out that vide resolution adopted in the meeting of board of directors dt. 15th Feb., 1993, the salary of all the directors was increased to Rs. 4,000 p.m. w.e.f. 1st April, 1993. A perusal of the minutes of the meeting of 1st June, 1991, and 15th Feb., 1993 (paper 13 to 24 paper book) goes to show that there were three directors in the company, namely, Shri Sandeep Kohli, Smt. Kamal Kohli and Shri Vishal Kohli besides Shri Gurucharan Kohli. The first directors whose names appear in Article 35 of companies articles of association were : As revealed out on perusal of minutes of first annual general meeting, on the proposal of G. Kohli, remuneration of Rs. 2,500 p.m. was decided to be paid to Smt. Kamal Kohli, Likewise on the proposal of Mrs. Kamal Kohli it was resolved that Shri Sandeep Kohli will be paid remuneration of Rs. 2,500 p.m. from 1st June, 1985, vide resolution adopted in the first annual general meeting two directors named above were also to be provided with other facilities, like benefits under the Company Gratuity Scheme, reimbursement of medical expenses, leave travel assistance and telephone facilities, etc.
23. The assessee has not filed any other documents on the issue relating to the employment of Shri Sandeep Kohli as worker or an employee or agent of the company. This shows that there was no other separate appointment letter, agreement or correspondence for appointing Shri Sandeep Kohli as director or whole-time director.
24. It may be pointed out that in the resolution referred to above, there is no mention of the various duties and functions assigned or allotted to Shri Sandeep Kohli. In the said resolution nothing is said about the supervision and control which was to be exercised in relation to the duties of Shri Sandeep Kohli. Otherwise also, there is no record showing the details of actual services rendered by Shri Sandeep Kohli.
25. Coming to the version of the assessee that he was working as whole-time director, in view of Article 58 of the articles of association, it may be pointed out that there is no such order or resolution on record by which he was appointed as whole-time director, further, it may be pointed out that under Article 58 of the articles of association, the board of directors may appoint one or more whole-time directors to carry out day-to-day business operations but in our view such an appointment has to be specific in all respects. As provided in Clause 'b' of Article 58 such whole-time director is to work under the control and supervision of the board of the directors and is to exercise such powers as may be determined by the board. We may point out that the resolution has to be specific to give effect to such an article or provision.
26. It may be pointed out that in the case of the present assessee the details of duties assigned and amount of control and supervision to be exercised upon him are totally lacking. Hence even assuming that Shri Sandeep Kohli was paid remuneration for working as director by virtue of resolution referred to above, then it cannot be said that he was appointed as a whole-time director for doing work of the company. Since the elements of the supervision and control to be exercised upon him is totally lacking, in the relevant resolution appointing him as a director, it cannot be said that there was master-servant relationship between the company and the assessee. The plea that in accordance with the provisions of Companies Act or in pursuance of articles of association, general power of supervision and control was vested in the board of directors, cannot be accepted.
27. In our considered view, for establishing master and servant relationship, it was essential to prove that ; (i) Shri Sandeep Kohli was appointed as employee i.e., a whole-time director on a fixed salary for doing specific works or for discharging certain functions for and on behalf of the company, and (ii) That in the exercise of such functions or duties he was subject to the supervision and control of the board of directors of the company.
These conditions are not satisfied in the present case. Further, it was also not shown that in practice, for all purposes, Shri Sandeep Kohli who was one of the directors, was also appointed as an employee of the company and was actually working as such employee.
28. So far as the reliance placed by the assessee on the decisions referred to above, is concerned, on facts, all these decisions are distinguishable.
The learned counsel for the assessee has placed great reliance on the decision in the case of M.S.P. Rajes (supra). In that case, it may be pointed out, the resolution appointing Shri M.S.P. Rajes was very specific insofar as it expressly laid down the terms of his appointment as one of managing directors of the company. It will be in the fitness of things to reproduce the resolution dt. 12th May, 1996 in that case.
The resolution is as follows : "Resolved that Shri M.S.P. Rajes and Shri P. Palaniswamy, directors of the company be and are herewith by appointed as managing directors of the company for a term of five years from this day, and that Shri M.S.P. Rajes and P. Palaniswamy the managing directors of the company be and are hereby authorised to act for and on behalf of the company, in all matters, including the signing of any contracts with any authority or corporation. They shall be subject to the superintendence and control of the directors and shall represent the company in all matters except where the Act requires certain acts to be done by the board of directors at a meeting or by the company in general meeting.
Resolved that the said managing directors may exercise the powers and authorities conferred on them either jointly or severally. Each of the managing directors shall be paid a remuneration of five per cent of the net profits of the company as defined under Section 349 of the Companies Act, 1956, subject to a minimum of Rs. 2,500 p.m.
the minimum remuneration being payable monthly." In the context of this resolution, the Hon'ble Karnataka High Court considered the issue in detail and held that a managing director of a limited company may have a dual capacity. He may be both director as well as an employee. It is, therefore, evident that in his capacity as a managing director, he may be regarded as having not only the capacity as persona of a director but also the persona of an employee or an agent depending upon the nature of his work and the term 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 as an agent, for the term "Employee" is facile enough to cover any of these relationships. The Hon'ble Court has also observed as follows: "The nature of his employment may be determined by the articles of association of the company and the agreement, if any, under which a contractual relationship between the director and the company has been brought about, where under the director is constituted as an employee of the company. 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 too narrow a 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 supervise the work to be done."...
On facts, in that case, it was found that there was sufficient power of superintendence and control vested in the board of directors and, therefore, the existence of such power rendered the relationship as that of employer and employee.
29. A comparison of the above resolution with the resolution in the case of Shri Sandeep Kohli, will bring out the difference very clearly, whereas, in the case of M.S.P. Rajes' (supra) both the nature of work as Well as the element of superintendence have been clearly laid down in the resolution itself the .same are lacking in the relevant resolution in the case of Shri Sandeep Kohli.
30. To conclude, in the present case, the terms of appointment of Shri Sandeep Kohli as director, do not go to show that he was also appointed as a servant of a company besides being a director.
31. Thus in view of the above factual position, we endorse our approval to the findings recorded by the learned CIT(A) that the directors appointed as whole-time director, cannot be considered to be the employees of the company. On applying the guidelines laid 'down' in the case of Ram Prasad (supra) by the Hon'ble Supreme Court of India and on applying the test laid down in the case of Sardar Harpreet Singh (supra) by the Hon'ble Allahabad High Court. We hold that the assessees cannot be treated to be an employee or servant of the company. It is also clarified that the decision in the case of Karam Chand Prem Chand (P) Ltd. (supra) and in the case of Bijay Kishore Kapoor (supra) also do not support the case of the assessee as, on facts, these decisions are distinguishable from the present case.
32. In view of the above discussion, we do not find any force in the contention raised on behalf of the assessee. In our view, the relationship of master and servant is not proved between the company and the assessees in the present cases and therefore, the remuneration paid to the directors cannot be treated as salary and, therefore, the assessee is not entitled to the deductions claimed by him.
33. We, therefore, do not find any scope to interfere in the findings of the learned CIT(A) which are affirmed by us. Consequently, all the grounds taken by the assessee are rejected.
Since most of the grounds taken in these appeals are common our findings recorded above shall apply to all these ten appeals.
34. In ITA No. 343/All/2000 and in ITA No. 342/All/2000 the assessee-appellants have taken ground No. 5 against disallowance of rebate under Section 88 of P.F. of Rs. 8,576 but these grounds as well as ground No. 5 in ITA No, 342/All/2000 have not been seriously pressed before us, hence, the same are also rejected.