Judgment:
Ajit K. Sengupta, J.
1. By this reference under Section 256(1) at the instance of the Commissioner of Income-tax, West Bengal (VI), Calcutta, the Tribunal has sought for our opinion on the following question :
'Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the remuneration of the assessee as managing director of the company, Messrs. Pile Foundation Construction Co. (India) Pvt. Ltd., is assessable under the head 'Salary' as there existed the relationship of the employee and employer ?'
2. The matter arises out of the income-tax assessments of the assessee for the assessment years 1978-79, 1980-81 and 1981-82, respectively. The assessee has shown the director's remuneration under the head 'Salaries' and claimed standard deduction under Section 16(1) of the Income-tax Act, 1961. The Income-tax Officer was of the opinion that the assessee, as managing director, enjoyed wide power and control on the affairs of the company and accordingly his position did not stand on par with that of other employees of the company and that the existence of any contractual relationship between the assessee and his employer could not also be established or proved. Therefore, the remuneration was assessed under the head 'Other sources' and no standard deduction under Section 16(1) was allowed.
3. On appeal, the Appellate Assistant Commissioner, after referring to Clauses 68(a) and 49 of the articles of association of the company, observed that the assessee being the first managing director of the company had to act and discharge all the duties and powers vested in the board of directors and that, on a total reading of the memorandum and articles of association, it cannot be said that the employer-employee relationship existed between the assessee and the company of which he was the managing director. In that view, he upheld the action of the Income-tax Officer.
4. The Tribunal observed that Clause 68(a) of the articles of association on the basis of which the Income-tax Officer had come to his conclusion was not happily worded and that a combined reading of Clauses 64, 65, 66 and 68 made it clear that the managing director shall act and discharge all the duties and powers subject to the direct control and supervision of the board of directors. The Tribunal thereby held that the remuneration of the assessee from the said company as managing director is assessable under the head 'Salary' as there existed the relationship of employer and employee.
5. The contentions of learned counsel appearing for the parties are that the answer to the question will depend on the interpretation of the relevant clauses of the articles of association of the company. On a combined reading of Clauses 64, 65, 67 and 68, it appears that the managing director is to act and discharge all the duties and powers subject to the direct control and supervision of the board of directors. Clause 65(b) provides for the superintendence, control and direction over the wholetime directors of the company. Clause 68(b) provides for the appointment of one of the directors to the office of managing director, the appointment of the managing director terminates automatically as and when he ceases to be a director. Clause 50(A) provides that the shareholders of the company shall be entitled to remove any director in accordance with the provisions of the Companies Act. Thus, it is clear that the jural relation between the company and its director and, for that matter, the managing director is that of a master and a servant. The Supreme Court in Ram Prashad v. CIT : [1972]86ITR122(SC) , has categorically laid down that the employer-employee relationship arises where the person employed performs his duties subject to the control and supervision and disciplinary power of the person who employs him. The latter is the employer and the former is the employee. In the words of the Supreme Court, '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 and he can be dismissed or his employment can be terminated by the company, if his work is not satisfactory, it can hardly be said that he is not a servant of the company.'
6. As already observed, the managing director as well as other directors are to perform their duties subject to the control of the board of directors and are also liable to removal from office if the general will of the company as expressed in the resolution of the shareholders in general meeting so commands. This power of removal furnishes a clear indication that the director in the light of the clauses of the articles of association cannot but be the servant of the company. The power of removal of the directors from the office of director is the test whether the remuneration arises from employer-employee relationship and in the course of employment.
7. Accordingly, we answer the question in the affirmative and against the Revenue and in favour of the assessee.
8. There will be no order as to costs.
Shyamal Kumar Sen, J.
9. I agree.