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Sardar Harpreet Singh v. Commissioner Of Income-Tax.
Summarized Opinion (R.A. Sharma, J.)
Factual and Procedural Background
The Income-tax Appellate Tribunal (Delhi Bench “B”) referred two questions under section 256(1) of the Income-tax Act, 1961 to this Court at the instance of the assessee. The assessee was a shareholder and a director of Hurana Motor and General Finance Private Limited and was appointed joint managing director by company resolution (initially Rs. 700/month from 15 December 1973, increased to Rs. 850 from 31 March 1975).
For the assessment year 1980–81 the assessee claimed: (a) a standard deduction under section 16(i) of the Act for the remuneration received as joint managing director, and (b) a deduction under section 80U on account of permanent physical disability, supported by a medical certificate from a registered medical practitioner.
The Assessing Officer refused the section 16(i) deduction but allowed the section 80U deduction. On appeal the Appellate Assistant Commissioner found that the assessee was not an employee of the company (thus not entitled to deduction under section 16(i)) and also disallowed the section 80U deduction on the ground that the assessee was actively engaged in the business and receiving regular remuneration. The Income-tax Appellate Tribunal affirmed the Appellate Assistant Commissioner's order and, at the assessee's instance, referred the following two questions to this Court:
- Whether the Tribunal was legally correct in holding that the remuneration paid to the joint managing director was not salary for purposes of section 16(i)?
- Whether the Tribunal was legally correct in holding that the deduction under section 80U allowed by the Assessing Officer was rightly withdrawn by the Appellate Assistant Commissioner?
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the learned Tribunal was legally correct in holding that the assessee was not entitled to standard deduction under section 16(i) because the remuneration paid to the joint managing director was not salary?
- Whether, on the facts and in the circumstances of the case, the learned Tribunal was legally correct in holding that the deduction under section 80U allowed by the Income-tax Officer was rightly withdrawn by the Appellate Assistant Commissioner?
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 |
|---|---|---|
| Gestetner Duplicators P. Ltd. v. CIT, [1979] 117 ITR 1 (Supreme Court) | Explains that "salary" is payment for work or service by an employer to an employee, and that not every person who works for a company is necessarily its servant; the nature of the relationship depends on the terms of employment and the articles of association. | The Court relied on this principle to frame the inquiry whether the assessee's remuneration as joint managing director constituted salary — i.e., whether there existed an employer-employee relationship determined by the company's articles and appointments. |
| Ram Prashad v. CIT, [1972] 86 ITR 122 (Supreme Court) | Provides the test for distinguishing whether a person working for a company is a servant or an agent, including the "supervisory control" test and emphasises construction of the articles of association and any agreement. | The Court applied this test to uphold the Tribunal's and Appellate Assistant Commissioner's construction of the company's articles and resolutions, concluding that the assessee acted as one of the owners/managers and not as an employee, thus his remuneration was not salary for section 16(i). |
Court's Reasoning and Analysis
Issue 1 — Section 16(i) (whether remuneration was "salary")
- The Court noted the statutory context: section 16(i) permits deduction on salary; section 17 describes what "salary" includes but does not itself define the word.
- It adopted the principles from Gestetner and Ram Prashad: salary is payment by an employer to an employee for work or service, and whether a person is a servant (employee) or agent depends on construction of the articles of association and any agreement, considering supervisory control among other factors.
- The Appellate Assistant Commissioner examined the company's resolutions and articles of association and concluded the assessee was not working as an employee and was not subject to the board's control; the Tribunal affirmed that finding, describing the assessee as working "as one of the owners" and lacking an employer–employee relationship.
- The Court found that approach and conclusion to be fully justified and without infirmity, applying the cited Supreme Court tests to the material (articles and resolutions) before the lower authorities.
Issue 2 — Section 80U (deduction for permanent physical disability)
- Factual findings relevant to the section 80U claim were: when about 15 years old the assessee suffered extensive burn injuries resulting in amputations (right leg below knee and left arm below elbow), and a medical certificate from a registered medical practitioner was produced before the Assessing Officer and the Appellate Assistant Commissioner.
- The Assessing Officer allowed deduction under section 80U; the Appellate Assistant Commissioner and the Tribunal disallowed it primarily on the view that the assessee was actively engaged in the company's business and receiving regular remuneration, and therefore could not be said to have a disability substantially reducing capacity to engage in gainful employment.
- The Tribunal also incorrectly recorded that no medical certificate had been produced; the record showed that such a certificate had in fact been filed with the lower authorities. The Tribunal later rectified that mistaken sentence but left its substantive disallowance intact.
- The Court explained the correct legal test under section 80U: the relevant inquiry is whether the assessee suffers from a permanent physical disability which substantially reduces his capacity to engage in gainful employment or occupation. The statute does not require that the assessee be unemployed or earn nothing to qualify.
- The Court criticized the approach of the Appellate Assistant Commissioner and the Tribunal as erroneous, pointing out that the ability to earn some income does not negate the fact that the disability may substantially reduce capacity (i.e., had the disability not existed, the assessee could have earned more).
- Applying these principles to the record (including the medical certificate), the Court held that the Tribunal was not justified in disallowing the section 80U deduction.
Holding and Implications
Final Answers to the Referred Questions:
- Question 1: Answered in the affirmative, in favour of the Department — the Tribunal was legally correct in holding that the remuneration paid to the joint managing director was not salary for the purposes of section 16(i), and the assessee is not entitled to the section 16(i) deduction in respect of that remuneration.
- Question 2: Answered in the negative, in favour of the assessee — the Tribunal was not legally correct in holding that the deduction under section 80U was rightly withdrawn; the deduction under section 80U should not have been disallowed on the grounds relied upon by the lower authorities.
Direct Consequences:
- The assessee's claim for deduction under section 16(i) in respect of remuneration as joint managing director is rejected (Tribunal's conclusion on that point upheld).
- The disallowance of the assessee's deduction under section 80U is overturned; the Court concluded that the medical evidence on record established a permanent physical disability substantially reducing the assessee's capacity for gainful employment, and that earning some income does not defeat entitlement under section 80U.
- The Court recorded that there shall be no order as to costs.
The Court applied established Supreme Court tests (Gestetner and Ram Prashad) to the facts; it did not purport to create a new precedent but clarified that earning income does not, by itself, disqualify an assessee from relief under section 80U.
R.A Sharma, J.:— At the instance of the assessee, the Income-tax Appellate Tribunal, Delhi Bench “B”, New Delhi, under section 256(1) of the Income-tax Act, 4961 (hereinafter referred to as “the Act”), has referred the following two questions to this court for its opinion:
“1. Whether, on the facts and in the circumstances of the case, the learned Tribunal was legally correct in holding that the assessee was not entitled to standard deduction under section 16(i) on the ground that the remuneration paid to the joint managing director was not salary?
2. Whether, on the facts and in the circumstances of the case, the learned Tribunal was legally correct in holding that the deduction under section 80U of the Act allowed by the Income-tax Officer was rightly withdrawn by the Appellate Assistant Commissioner of Income-tax?”
2. The assessee, an individual by status, is a shareholder and also a director of a company, Hurana Motor and General Finance Private Limited (hereinafter referred to as “the company”).
3. The company, by its resolution dated December 15, 1973, appointed the assessee as its joint managing director on a monthly remuneration of Rs. 700 which was increased subsequently by resolution dated March 31, 1975, to Rs. 850. In the assessment year 1980-81, the assessee claimed deduction under section 16(i) of the Act on the remuneration received by him as joint managing director of the company. He also claimed deduction under section SOU of the Act on the ground that he suffers from a permanent physical disability, which has substantially reduced his capacity to engage in a gainful employment or occupation and, in that connection, he filed a medical certificate from a registered medical practitioner. The Income-tax Officer, vide assessment order dated February 26, 1983, did not allow deduction under section 16(i) of the Act on the remuneration received by the assessee as joint managing director of the company. However, deduction under section SOU of the Act as per medical certificate was allowed by the Assessing Officer. In appeal, the Appellate Assistant Commissioner, after considering the resolutions whereby the assessee was appointed as joint managing director and the relevant articles of association of the company, held that the assessee, while acting as joint managing director, was not working as an employee of the company and he was also not subject to the control of the board of directors and was, as such, not entitled to deduction under section 16(i) of the Act on the remuneration received by him as joint managing director. Regarding the deduction under section 80U of the Act, the Appellate Assistant Commissioner has held that “since the assessee is actively engaged in the conduct of the business of the company and is enjoying a regular remuneration, it cannot be said that he is having a permanent physical disability.” On this ground, deduction granted by the Income-tax Officer under section 80U of the Act was declared to be unjustified. The assessee, thereafter, filed second appeal before the Income-tax Appellate Tribunal, Delhi, who has affirmed the order of the learned Appellate Assistant Commissioner. The Appellate Tribunal has, however, as mentioned above, referred the aforesaid two questions to this court for its opinion at the instance of the assessee.
4. An assessee is entitled to deduction under section 16(i) of the Act on the salary received by him from his employer. Section 17 of the Act, without defining the word “salary”, lays down as to what salary will include. As held by the Supreme Court in Gestetner Duplicators P. Ltd. v. CIT, [1979] 117 ITR 1, salary is payment for the work done or service rendered, made by an employer to his employees; 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 the 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. In this connection, reference may be made to the decision of the Supreme Court in Ram Prashad v. CIT, [1972] 86 ITR 122, where the test to determine whether the person working for the company is its servant or agent has been laid down. One of the rough and ready tests in order to judge the nature of the employment, is whether, under the terms of the employment, the employer exercises a supervisory control in respect of the work entrusted to him, although whether a person is a servant or agent does not solely depend on the extent of supervision and the control exercised on him. The Supreme Court declared that the question whether the person is a servant or agent is one of construction of the articles of association of the company and the agreement, if any, arrived at between the company and the person concerned, and where, after considering the articles and the agreement, if any relationship of an employer and employee is established, a person can be said to be a servant of the company and the remuneration received by him is liable to be treated as salary. It was further observed that a managing director may have a dual capacity and he may both be a director and an employee depending on the nature of the employment which is to be determined on the construction of the articles of the company and the agreement, if any. The Appellate Assistant Commissioner, after considering the articles and the resolutions of the company whereby the assessee was appointed as joint managing director, came to the conclusion that the assessee was not acting as an employee of the company and, as such, was not entitled to any deduction under section 16(i) of the Act on the remuneration received by him as a joint managing director of the company. The Appellate Tribunal agreed with the aforesaid finding of the Appellate Assistant Commissioner and has held that the assessee was working as one of the owners of the company and not as its employee and the relationship of employer and employee was absolutely lacking and hence the remuneration received by him as joint managing director cannot be treated as salary on account of which he is not entitled to deduction under section 16(i) of the Act. In our opinion, the approach and the finding recorded by the Appellate Tribunal is fully justified and does not suffer from any infirmity.
5. Regarding the other question about the deduction under section 80U of the Act, it has come on record that when the assessee was about fifteen years old, he received extensive burn injuries in an explosion on his left arm and right leg, with the result that his right leg below the knee and the left arm below the elbow were amputated which made him a physically disabled person. A medical certificate from a registered medical practitioner was also filed by the assessee before the lower authorities. The Income-tax Officer granted deduction under section 80U of the Act to the assessee, but the Appellate Assistant Commissioner decided against the assessee on the ground that he is engaged in the business of the company and is having regular remuneration on account of which it cannot be said that he is suffering from some physical disability which had impaired his capacity to engage in any employment. The Appellate Tribunal adopted the same line of reasoning and decided against the assessee on the ground that the assessee as a director is running the business having been appointed as a joint managing director on a monthly remuneration in 1973, and was earning the income. The Appellate Tribunal further held that the assessee has not produced the medical certificate from a registered medical practitioner before the lower authorities and, as such, cannot be allowed any deduction. The finding of the Appellate Tribunal to the effect that the assessee has not produced a medical certificate from a registered medical practitioner was contrary to the material on record inasmuch as the assessee had produced such a certificate before the Income-tax Officer as well as the Appellate Assistant Commissioner, as is clear from the assessment order and the order of the Appellate Assistant Commissioner. The assessee, as such, made an application under section 254(2) of the Act before the Appellate Tribunal for rectifying the mistake on the ground that there was a medical certificate from a registered medical practitioner on record and the Appellate Tribunal was not justified in holding that the medical certificate was not filed by the assessee before the lower authorities. The Appellate Tribunal, vide its order dated September 2, 1985, although agreeing with the assessee that its finding to the effect that no such certificate was filed before the lower authorities was not justified, had rejected that application after deleting the sentence, “no such certificate appears to have been produced before the lower authorities” from its order.
6. Under section 80U of the Act, an assessee is entitled to deduction if he is totally blind or suffers from a permanent physical disability which has the effect of reducing substantially his capacity to engage in a gainful employment or occupation. The assessee, in this connection, has produced the medical certificate before the lower authorities which goes to show that he suffers from a permanent physical disability which has the effect of reducing substantially his capacity to engage in a gainful employment or occupation. The Income-tax Officer allowed the deduction under section 80U of the Act but the Appellate Assistant Commissioner and the Appellate Tribunal have disallowed the deduction on the ground that he is engaged in the business of the company and earning money. The approach, both of the Appellate Assistant Commissioner and the Appellate Tribunal, is erroneous. While considering the question of allowing deduction under section 80U of the Act, what is to be looked into by the authorities is as to whether the assessee suffers from a permanent physical disability which has the effect of reducing substantially his capacity to engage in a gainful employment or occupation. It is not a condition precedent for allowing the deduction under this provision that the assessee should be unemployed or should not be earning anything. Merely because the assessee is earning income from some business, the deduction under section 80U of the Act cannot be disallowed for, had he not suffered from a permanent physical dis-ability, he could have earned more. In our opinion, the Appellate Tribunal was not justified in disallowing the deduction under section 80U of the Act.
7. Our answer to question No. 1 is in the affirmative, in favour of the Department and our answer to the second question is in the negative, in favour of the assessee. There shall be no order as to costs.
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