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Commissioner Of Income-Tax. v. Lakshmipati Singhania
Factual and Procedural Background
This reference under section 256(1) of the Income-tax Act, 1961 was made at the instance of the Commissioner of Income-tax, U.P., Lucknow. The assessee was L. Lakshmipati Singhania, an individual, for the assessment years 1958–59 and 1959–60. During the relevant previous years the assessee acted as a financial adviser to J.K. Jute Mills Ltd.; he had earlier been a director of the company and, after resigning as director, was appointed financial adviser by a resolution of the board of directors. The company allowed him rent-free residential accommodation in a company-owned house at Calcutta and he was not to receive any further remuneration.
The Income-tax Officer treated the benefit of rent-free accommodation as income from other sources under section 12 of the Indian Income-tax Act, 1922, estimating its value at Rs. 36,000 per annum and assessing that amount for the two assessment years. On appeal the Assistant Commissioner held that the perquisite was assessable under section 7 (salaries) and reduced the quantum to Rs. 28,000. Both the assessee and the department appealed to the Income-tax Appellate Tribunal (ITAT). The ITAT dismissed the department's appeal and allowed the assessee's appeal, holding that section 7 was not applicable. The Commissioner of Income-tax referred the following question of law to the court for decision.
Legal Issues Presented
- “Whether the Tribunal was correct in holding that the provisions of section 7 of the Indian Income-tax Act, 1922, did not apply to the facts and circumstances of the case and in deleting the addition of Rs. 28,000 from each of the assessments made for the assessment years 1958-59 and 1959-60?”
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-tax v. Mills Stores Co. [1941] 9 I.T.R. 642 (Sind.) | Authority for the proposition that taxation under the "salaries" head (section 7) requires an employer-employee (master-servant) relationship between payer and payee. | Cited to support the general rule that section 7 applies only where a master-servant relationship exists; applied as part of the court's requirement to establish such a relationship before taxing a perquisite under section 7. |
| Commissioner of Income-tax v. R. Johnstone [1934] 2 I.T.R. 390 (Rang.) | Same proposition: section 7 applies only in presence of employer-employee relationship. | Relied upon to reinforce the principle that master-servant relationship is a precondition for section 7 taxation; used in the court's reasoning that such relationship was not shown here. |
| David Mitchell v. Commissioner of Income-tax [1956] 30 I.T.R. 701 (Cal.) | Illustration/support for requiring employer-employee relationship for section 7 to apply. | Cited as additional authority for the proposition and applied in the court's analysis that section 7 cannot be invoked without establishing the requisite relationship. |
| Commissioner of Income-tax v. Lady Navajbai R.J. Tata (observation of Chagla J.) | The fact that a person holds an office and receives remuneration by virtue of that office does not necessarily create a master-servant (employer-employee) relationship. | Quoted and applied to show that holding an office (e.g., as director) does not automatically make one an employee; used to support the conclusion that the assessee's appointment did not, on the material, establish employment. |
Court's Reasoning and Analysis
The court began by identifying the statutory scope of section 7 of the Indian Income-tax Act, 1922: tax under the head "salaries" includes salaries, wages, annuities, pensions, gratuities and any fees, commissions, perquisites or profits in lieu of or in addition to salary or wages. The court acknowledged that rent-free accommodation is a perquisite and thus could be assessable as the assessee's income if it were received in lieu of salary payable to him.
However, the court emphasized that section 7 can apply only where an employer-employee (master-servant) relationship exists between the payer and the payee. It relied on cited authorities to state this principle and reiterated Chagla J.'s observation that holding an office and receiving remuneration does not necessarily create such a relationship.
Applying these principles to the facts, the court noted that the assessee's appointment as financial adviser was by a board resolution and not under any contract; the resolution contained no terms or conditions describing the engagement. There was no finding that the assessee worked under the control of the company or that the company had the right to control how he carried out his functions. The court also noted that the assessee's actual functions were not shown. On this material the court held that it was not possible to infer a master-servant relationship between the assessee and the company; absent that relationship, section 7 was inapplicable.
Holding and Implications
Holding: The court answered the referred question in the affirmative — it held that the Income-tax Appellate Tribunal was correct in concluding that the provisions of section 7 of the Indian Income-tax Act, 1922 did not apply to the facts of the case and in deleting the addition of Rs. 28,000 from each assessment for the years 1958–59 and 1959–60.
Direct consequences: The additions of Rs. 28,000 to the assessments were deleted. The assessee was awarded costs of Rs. 200.
Broader implications: The opinion rests on established principles requiring an employer-employee relationship before perquisites can be taxed under section 7; the court applied those principles to the facts and did not purport to lay down any new legal rule. No broader precedent beyond these applications was announced in the opinion.
Gulati, J.:— This is a reference under section 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax, U.P, Lucknow.
2. The assessee is L. Lakshmipati Singhania, assessed as an individual.
3. The assessment years are 1958-59 and 1959-60. During the previous years relevant to these assessment years, the assessee acted as a financial adviser to a limited company by the name of J.K Jute Mills Ltd. He was previously a director of that company. He resigned from the directorship. Later on he was appointed by the company as financial adviser under a resolution of the board of directors. He was allowed a rent-free residential accommodation in a house belonging to the company at Calcutta. He was not to receive any further remuneration from the company. The Income-tax Officer considered that the benefit derived by the assessee from the company of free residential accommodation at Calcutta was income of the assessee which could be assessed under section 12 of the Indian Income-tax Act, 1922, as income from other sources. He accordingly estimated the value of rent-free accommodation at Rs. 36,000 per annum and assessed this amount in the hands of the assessee for the two assessment years. On appeal, the Assistant Commissioner of Income-tax came to the conclusion that, although the value of rent-free accommodation was asssesable in the hands of the assessee, yet it could be assessed under section 7 which is the provision for the assessment of tax on salaries. He reduced the quantum of assessment to Rs. 28,000. The assessee and the department both felt aggrieved with this order and went up in second appeal before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal dismissed the appeal of the department and allowed that of the assessee holding that, in the circumstances of the case, section 7 was not applicable. At the instance of the Commissioner of Income-tax the following question of law has been referred to us for decision:
“Whether the Tribunal was correct in holding that the provisions of section 7 of the Indian Income-tax Act, 1922, did not apply to the facts and circumstances of the case and in deleting the addition of Rs. 28,000 from each of the assessments made for the assessment years 1958-59 and 1959-60?”
4. Section 7 of the Indian Income-tax Act, 1922, provides that the tax shall be payable by an assessee under the head “salaries” in respect of any salary or wages, any annuity, pension or gratuity, and any fees, commissions, perquisites or profits in lieu of or in addition to, any salary or wages, which are allowed to him by or are due to him.
5. Now, in the instant case, the assessee was allowed no salary but only rent-free accommodation. Rent-free accommodation is undoubtedly a perquisite and it can be assessed as the assessee's income, if it is received by him in lieu of salary payable to him.
6. No payment can fall to be taxed under section 7 unless the relationship of employer and employee exists between the payer and the payee. See Commissioner of Income-tax v. Mills Stores Co. [1941] 9 I.T.R 642 Sind.., Commissioner of Income-tax v. R. Johnstone [1934] 2 I.T.R 390 Rang.. and David Mitchell v. Commissioner of Income-tax [1956] 30 I.T.R 701 Cal... Whether in a given case the relationship of master and servant exists between the payer and the payee would depend on the facts and circumstances of each case. As observed by Chagla J. in Commissioner of Income-tax v. Lady Navajbai R.J Tata:
“The fact that a person may hold an office and that he should receive a remuneration by virtue of that office does not necessarily bring about a relationship of master and servant between him and the person who pays him the remuneration or the relationship of an employer and an employee.”
7. A director of a company holds an office under the company, but as a director he is not a servant or an employee of the company. But there may be special terms in the articles of association or there may be an independent contract which may bring about a contractual relationship between the company and the director and constitute the director an employee of the company. In the instant case the assessee was appointed as a financial adviser of the company not under any contract but by means of a resolution by the board of directors. The resolution does not contain any terms and conditions of the engagement of the assessee as a financial adviser. Ordinarily, in the case of a master and servant, the servant works under the control of the master. The master can tell the servant what to do and how to do. Generally, a servant is not only a person who receives instructions from his master, but is also subject to the master's right to control the manner in which he carries out those instructions. Now, there is no finding in this case that the assessee was under the control of the company, while discharging his functions as the financial adviser. Indeed, what exactly were his functions is not known. It is, therefore, not possible from the resolution of the board itself to draw an inference that there existed the relationship of master and servant between the assessee and the company. Unless such a relationship is established, section 7 has no application.
8. We are satisfied that the Tribunal was right in its view. We accordingly answer the question in the affirmative. The assessee is entitled to the costs which we assess at Rs. 200.
9. Question answered in the affirmative.
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