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Stya Paul v. Commissioner Of Income-Tax (Central), Calcutta

Calcutta High Court

Sep 30, 1977

Judgment

Subsequent
References

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Structured Summary of the Opinion (Deb, J.)

Factual and Procedural Background

This is a reference under s. 66(2) of the Indian Income-tax Act, 1922 for the assessment year 1954–55 (previous year ending 31 March 1954). The assessee served as managing director of two companies: Surrendra (Overseas) Pvt. Ltd. (for life) and Aminchand Pyarelal (Calcutta) Ltd. (for 20 years). The assessee's remuneration from both companies had been taxed under the head "Salary" and the appellate authorities had sustained that treatment. The questions of law referred to the court were (1) whether the sum of Rs. 31,142, being the managing director's remuneration, is taxable under s. 7 of the Indian I.T. Act, 1922, and (2) whether the managing director's remuneration was properly included in the assessee's income during the relevant year. The parties agreed that the answer to question No. 2 should follow the answer to question No. 1. There was no separate contract between the assessee and the companies; the terms were contained in each company's articles of association, which were placed on the record.

Legal Issues Presented

Whether, on the facts and in the circumstances of the case, the sum of Rs. 31,142 being the managing director's remuneration is taxable under s. 7 of the Indian I.T. Act, 1922?
Whether, on the facts and in the circumstances of the case, the managing director's remuneration was properly included in the income of the assessee during the relevant year?

Arguments of the Parties

Assessee's (Appellant's) Arguments — as advanced by Dr. Debi Pal

The assessee is an agent and not a servant of the companies because the articles do not provide for his dismissal from the office of managing director.
In respect of Surrendra (Overseas) Pvt. Ltd., the assessee is entitled to exercise all powers of the directors (per articles relied upon) and therefore the other directors have no supervisory control over him.
With respect to Aminchand Pyarelal (Calcutta) Ltd., the appointment as managing director for 20 years (art. 135) was relied upon to contend that he could not be removed during that term and hence could not be a servant of the company.
Authoritative decisions (e.g., Re Newspaper Proprietary Syndicate) were cited to support the proposition that a managing director may not be a servant of the company.

Revenue's (Respondent's) Arguments — as advanced by Mr. Suhas Sen and Mr. Ajit Sengupta

Because the assessee was appointed under the articles of association, and because companies can alter their articles or otherwise exercise corporate powers, the companies can effectively dismiss him; thus he should be treated as an employee (servant) and his remuneration taxed under s. 7.
Counsel cited several authorities to support the view that managing directors may be employees depending on the articles and the nature of control exercised.
Concerning Surrendra (Overseas) Pvt. Ltd., it was argued that arts. 79 and 69 (business to be managed by directors; majority decision at meetings) indicate that the business cannot be managed solely by the assessee and that the directors exercise supervisory control.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Shuttleworth v. Cox Brothers & Co. (Maidenhead) Ltd. [1927] 2 KB 9 (KB)	This case was cited by counsel (Mr. Sen); the opinion does not set out a specific rule from it in the text.	Cited by revenue; the court noted such authorities were relied upon but did not elaborate a specific application in the opinion.
Fowler v. Commercial Timber Co. Ltd. [1930] 2 KB 1 (CA)	Cited by counsel; the opinion does not state the precise rule invoked from the case.	Cited by revenue; no distinct application recorded in the opinion.
Southern Foundries (1926) Ltd. v. Shirlaw [1940] AC 701	Cited by counsel; the opinion does not state the specific principle from the case in the text.	Cited by revenue; the court distinguished or noted the authorities but did not rely on them expressly for a particular proposition in its reasoning here.
Shindler v. Northern Raincoat Co. Ltd. [1960] 2 All ER 239	Cited by counsel; the opinion does not detail the rule from this case in the narration.	Cited by revenue; no specific further application recorded in the opinion.
Allen v. Gold Reefs of West Africa Ltd. [1900] 1 Ch 656 (CA)	Cited by counsel; the opinion does not spell out the exact principle relied upon.	Cited by revenue; the court did not elaborate its application in the text.
Yeo v. Stewart [1947] 2 All ER 28 (KB)	Cited by counsel; the opinion does not set out the case rule.	Cited by revenue; no substantive application recorded in the opinion.
In re T.N. Farrer Ltd. [1937] Ch 352 (Ch D)	Cited by counsel; the opinion does not indicate the precise rule taken from the case.	Cited by revenue and distinguished where appropriate; no direct reliance recorded.
Catherine Lee v. Lee's Air Farming Ltd. [1961] AC 12 (PC)	Cited by revenue to support the proposition that a person can have dual capacities (director and manager) and may give directions in both capacities.	The court considered the citation but rejected the sweeping application that all managing directors must be servants; it held the true nature depends on the articles and terms.
CIT v. Lady Navajbai R. J. Tata [1947] 15 ITR 8 (Bom)	Cited for the proposition that mere provision for payment of remuneration is not decisive of the contractual character of the relationship.	The court referred to this authority to support the view that provision for payment alone does not decide whether the relationship is that of servant or agent.
CIT v. Manmohan Das [1966] 59 ITR 699	Cited to the same effect as above (payment provision not decisive).	Referred to as authority supporting the proposition that remuneration provision alone is not determinative.
Ram Prashad v. CIT [1972] 86 ITR 122 (SC)	Holds a director is generally not a servant but a managing director may have a dual capacity; the determination depends on the articles and terms of employment.	The court relied substantially on Ram Prashad's statement of principles about dual capacity and supervisory control; applied that test to both companies' articles to determine status.
Perrot and Perrot Ltd. v. Stephenson [1934] 50 TLR 44	Cited by counsel (Mr. Sengupta) in argument that business could not be entirely managed by one director under ordinary articles.	Referred to by counsel; the court considered the argument but determined Surrendra's specific articles conferred special powers on the assessee.
Dwijendra Chandra Chowdhury v. CIT [1966] 61 ITR 97 (Assam)	Held by the High Court that certain managing directors were not servants and their remuneration assessable under s. 10 (of 1922 Act).	The court noted this decision but observed that it had overlooked the distinction between an ordinary director and a managing director in some respects and therefore could not be followed fully.
Re Newspaper Proprietary Syndicate [1900] 2 Ch 349 (Ch D)	Cited by the assessee's counsel to support the proposition that a managing director can never be a servant of the company (as argued by Dr. Pal).	The court mentioned the citation but did not accept the absolute proposition that a managing director can never be a servant; it applied the article/term-based test instead.
Commissioner of Income-Tax, Bombay v. L. Armstrong Smith [1946] 14 ITR 606 (Bom)	Holds that where articles vest full control in a managing director for life and no one else can intervene in management, the relationship may be contractual of service and remuneration taxable under s. 7.	The court cited and quoted this case; it distinguished Smith's facts from Surrendra on the basis of the particular powers conferred and used it to contrast different factual situations.
L.N. Gadodia & Co. v. CIT [1951] 20 ITR 460 (All)	Described as decided on different facts and not throwing light on the present points.	The court noted it was not directly helpful on the issues before it.
Lakshminarayan Ram Gopal & Son Ltd. v. Government of Hyderabad [1954] 25 ITR 449 (SC)	Held that appellants were agents and not servants where the agency agreement created a business (commission earning) that allowed assignment and sub-delegation.	The court cited this case in relation to the nature of agency and business; it was used as authority that an agency relationship can exist and has tax consequences different from employment.
Piyare Lal Adishwar Lal v. CIT [1960] 40 ITR 17 (SC)	Held that, on the facts, the treasurer was a servant of the bank and the remuneration was assessable as salary.	The case was cited as an example where supervisory control and the nature of work led the Supreme Court to hold the person was a servant; used comparatively in analysis.
Commissioner of Income-Tax, Madras v. B. Nagi Reddy [1964] 51 ITR 178	Madras High Court followed Lakshminarayan and held additional remuneration of a managing director was not assessable under s. 10 (1922 Act); the court did not deal with s. 7 in that judgment.	Cited as a related authority; court noted its limited scope and did not base its decision on it.
K. R. Kothandaraman v. CIT [1966] 62 ITR 348 (Mad)	Where a managing director was appointed for five years and to act under supervisory control of the board, he was held to be an employee and monthly remuneration was assessable under s. 7.	The court cited this authority as an instance where facts supported treating a managing director as an employee; used for comparative purposes when assessing Aminchand Pyarelal.
Commissioner of Income-Tax v. Lakshmipati Singhania [1973] 92 ITR 598 (All)	Held that an adviser appointed by board resolution (without terms) was not a servant; rent-free accommodation not assessable as salary in that context.	Cited as an example where absence of contractual terms and supervisory control led to finding no service relationship; used for comparative analysis.
Halsbury's Laws of England (treatise) and recognised company law texts	Reliance placed by parties; the Supreme Court had already considered these texts in Ram Prashad's case.	The court noted that because Ram Prashad had considered these texts, it was unnecessary to discuss them further in the present opinion.

Court's Reasoning and Analysis

The court proceeded by applying the principle, reaffirmed in Ram Prashad v. CIT, that whether a managing director is a servant (employee) or an agent depends on the true nature of the contract and the articles of association. The court also observed generally that an appointment for a fixed term can be terminated before expiry for causes such as fraud, dishonesty, gross negligence, wilful default or misfeasance even if the contract does not expressly provide for such termination; thus the mere existence of a right to terminate or to amend articles is not alone decisive.

Analysis in respect of Surrendra (Overseas) Pvt. Ltd.:

The company was a private limited company; certain retirement provisions did not apply to the assessee. Relevant articles (noted in the opinion) included arts. 69, 76, 79, 80, 92–94 and especially art. 62.
Art. 92 named Mr. Stya Paul (the assessee) as first managing director for life with power to engage in other businesses; art. 93 conferred upon him power to act alone to exercise all powers exercisable by directors except certain specified powers.
Art. 62 granted him the power to appoint additional directors and to remove such directors appointed by him.
The court reasoned that the power to appoint and remove directors is inconsistent with the status of a mere servant, since no servant could appoint or dismiss a director. These powers were characterised as "pivotal" and led the court to conclude that the assessee was not a servant of Surrendra.
Consequently, the court held the remuneration from Surrendra was not assessable under s. 7 of the Act. The court also reiterated that provision for payment of remuneration alone is not decisive, citing earlier authorities (Lady Navajbai Tata, Manmohan Das, Ram Prashad).

Analysis in respect of Aminchand Pyarelal (Calcutta) Ltd.:

This company was a public limited company; control and management were vested in the board of directors by its articles and by the Companies Act. The assessee's obligations and limitations were spelled out in several relevant articles (arts. 125, 127, 128, 131, 133, 134, 135, 140, 141, 142 and 116 as to removal).
The articles required the assessee to manage the business with the help of directors and to act in terms of board resolutions; certain powers were explicitly reserved to the board and the company, including authority over the company seal.
The court applied the Supreme Court's observation in Ram Prashad that control need not be day-to-day and that supervision exercisable under the articles suffices to show employment-like control. The court found that the company and its board had supervisory control over the assessee.
Although art. 135 appointed him for 20 years, the court held that art. 116 (allowing removal of a director by extraordinary resolution, "subject to the provisions of any agreement for the time being in force") did not have its proviso engaged because there was no separate agreement protecting him; thus he could be removed as a director by the company and thereby lose the office of managing director as well.
Given the supervisory control and the ability of the company to remove him (including for misconduct), the court concluded the assessee was an employee (servant) of Aminchand Pyarelal and his remuneration was taxable under s. 7 of the Act.

Procedural and collateral points:

Both parties agreed that an answer to question No. 2 would follow the answer to question No. 1; the court therefore primarily addressed question No. 1 and answered question No. 2 accordingly.
The articles of association of both companies were placed on the record and examined closely; there was no separate employment contract.
The court referred to and compared multiple authorities, accepting the general tests set out in Ram Prashad and Armstrong Smith among others, and distinguishing other authorities on their facts.
On costs, given the divided success of the parties, the court made no order as to costs.

Holding and Implications

Holding:

With regard to Surrendra (Overseas) Pvt. Ltd.: the court answered Question No. 1 in the negative and in favour of the assessee — the assessee's remuneration from Surrendra is not assessable under s. 7 of the Indian I.T. Act, 1922.
With regard to Aminchand Pyarelal (Calcutta) Ltd.: the court answered Question No. 1 in the affirmative and against the assessee — the assessee's remuneration from Aminchand Pyarelal is assessable under s. 7 of the Indian I.T. Act, 1922.
Question No. 2 was answered in the same way for each company (i.e., following the answers to Question No. 1): in the negative for Surrendra (in favour of the assessee) and in the affirmative for Aminchand Pyarelal (against the assessee).

Implications (direct effect and precedential note):

Direct effect: The assessee's remuneration from Surrendra (Overseas) Pvt. Ltd. is not taxable as salary under s. 7 for the year in question; the remuneration from Aminchand Pyarelal (Calcutta) Ltd. is taxable as salary under s. 7 for the year in question.
No broad new rule of law was announced; the court applied existing principles (notably those in Ram Prashad and Armstrong Smith) to the specific articles and facts of the two companies. The decision turns on the factual construction of each company's articles and their legal consequences rather than on a novel doctrinal statement.

Order as to costs: No order as to costs was made owing to divided success. C.K. Banerji, J. concurred.

Show all summary ...

Deb, J.:— This is a reference under s. 66(2) of the Indian I.T Act, 1922,-for the assessment year 1954–55, the previous year ending on 31st March, 1954.

2. The assessee is the managing director of Surrendra (Overseas) Pvt. Ltd. for life and of Amin Chand Pyarelal (Calcutta) Ltd. for 20 years. Since his remuneration as the managing director of these two companies has been taxed under the head “Salary” and as the appellate authorities have sustained it, we are now concerned with the following questions of law:

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 31,142 being the managing director's remuneration is taxable under s. 7 of the Indian I.T Act, 1922?

2. Whether, on the facts and in the circumstances of the case, the managing director's remuneration was properly included in the income of the assessee during the relevant year?”

3. It may be noted here that the learned counsel appearing for both the parties ultimately agreed that our answer to question No. 2 should abide by our answer to question No. 1 and accordingly we have dealt with their arguments only on question No. 1 and have allowed the articles of association of both the companies to be kept on the record at their request. There is no separate contract between the assessee and the companies regarding his appointment as the managing director. Their agreements in this behalf are enshrined in the articles of association of the respective companies.

4. The articles of association of these companies do not provide for dismissal of the assessee from the office of the managing director. Dr. Debi Pal, learned counsel for the assessee, therefore, argues that the assessee is an agent and not a servant of the companies. Whereas Mr. Suhas Sen, learned counsel for the revenue, argues that as the assessee has been appointed under the articles of association as the managing director and the companies have inherent right to alter the articles, the companies can always dismiss him from that office by altering their articles and, accordingly, it should be held that he is an employee of the companies.

5. In support of his aforesaid contentions Mr. Sen cited the cases of Shuttleworth v. Cox Brothers & Co. (Maidenhead) Ltd., [1927] 2 KB 9 (KB); Fowler v. Commercial Timber Co. Ltd., [1930] 2 KB 1 (CA); Southern Foundries (1926) Ltd. v. Shirlaw, [1940] AC 701 : 10 Comp Cas 255 (HL), Shindler v. Northern Raincoat Co. Ltd., [1960] 2 All ER 239 : [1961] 31 Comp Cas 22; Allen v. Gold Reefs of West Africa Ltd., [1900] 1 Ch 656 (CA); Yeo v. Stewart [1947] 2 All ER 28 (KB) and In re T.N Farrer Ltd., [1937] Ch 352 (Ch D). In some of the aforesaid cases the agreements between the parties were not enshrined in the articles of association and, therefore, Mr. Sen also distinguished those cases from the instant case before us in which the agreements between the assessee and these companies, as already stated, are enshrined in their respective articles.

6. Though the arguments of Mr. Sen are attractive, the relationship between the assessee and the companies, in our opinion, should be determined on the basis of the existing articles of the companies in the accounting year and the true nature of contracts between them at the relevant time. Appointment of an agent or a servant for a fixed term can lawfully be terminated before the expiry of the term for fraud, dishonesty, gross negligence, wilful default, misfeasance and the like causes even in the absence of a specific term to that effect in the contract. Therefore, though the power or right to terminate an appointment is a relevant consideration, it does not necessarily lead to an irresistible conclusion that every contract is a contract for and not of service.

7. It may now be noted here that articles of both the companies provide that no director shall without the consent of the company in general meeting hold “any office of profit” under the company except that of a managing director, etc. Mr. Sen, accordingly, contends that it should be held that the assessee is a servant of these companies. But the expression “office of profit” is a term of wide import and it includes within its ambit an employee, an agent and also a contract and hence this expression by itself does not take us anywhere.

8. Mr. Sen also cited the case of Catherine Lee v. Lee's Air Farming Ltd., [1961] AC 12 : 31 Comp Cas 233 (PC) in support of his contention that the assessee has two different capacities, namely, the capacity of a director and the capacity of a manager. And as a director he gave direction to himself to do his duties as the manager of the companies and, therefore, it should be held that he is a servant of the companies. But we are not impressed by this contention, for it cannot be said that all managing directors are the servants of the companies and as already stated the true nature of the contracts between the assessee and the companies should determine their relationship.

9. We will now take up the articles of association of Surrendra (Overseas) Pvt. Ltd. which was incorporated as a private limited company under the provisions of the Indian Companies Act, 1913. Retirement by rotation under art. 68 does not apply to the assessee. Art. 69, inter alia, provides that the directors may meet together to despatch the businesses and the questions arising at any such meeting, shall be decided by a majority vote. Art. 76 deals with the disqualification of the directors and it provides that the office of the director shall be vacated in case of happening of any of the events specified therein. Art. 79 provides that the business of the company shall be managed by the directors. Other powers of the directors are specified in art. 80. Art. 94 relates to the remuneration of the managing directors and arts. 92 and 93 read as follows:

“92. Mr. Stya Paul, merchant, Bombay, shall be the first managing director of the company and he shall continue and be the managing director of the company throughout his life unless he voluntarily resigns from his office. It is specifically understood that Mr. Stya Paul is permitted to engage himself in other businesses as well besides holding his office as managing director.

93. As such managing director as aforesaid Mr. Stya Paul shall have power of acting alone to exercise all the powers exercisable under these presents by the directors except the power to make calls, forfeit shares or issue debentures.”.

10. In view of the aforesaid articles of this company, Mr. Sen argues that this company and its directors exercise a supervisory control over the assessee and, therefore, it should be held that the assessee is an employee of this company. As art. 79 of this company provides that its business shall be managed by the directors, Mr. Ajit Sengupta, learned counsel appearing with Mr. Sen, argues that the business of this company cannot be managed alone by the assessee in view of Perrot and Perrot Ltd. v. Stephenson, [1934] 50 TLR 44 : [1934] 4 Comp Cas 358 (Ch D). Mr. Sengupta also argues that art. 93 should be read subject to arts. 79 and 69 which, inter alia, provide that the directors may meet to despatch the business and any question arising in such meeting shall be decided by a majority vote. Accordingly, Mr. Sengupta argues that the assessee is bound to act in terms of the majority decision and, therefore, the other directors have a supervisory control over his activities as contended by Mr. Sen, and, hence, it should be held that the assessee is a servant of this company.

11. Dr. Pal, on the other hand, contends that the assessee is alone entitled to exercise all the powers of the directors and, therefore, the other directors have no supervisory control over him.

12. Now, art. 62 of Surrendra (Overseas) Pvt. Ltd. reads as follows:

“62. The first and permanent director, chairman and managing director of the company shall be Mr. Stya Paul, merchant, Bombay, and he shall have the power from time to time and at any time to appoint any other person to be an additional director and may at any time remove such director so appointed by him.”

13. The assessee is the managing director of this company for life. He is also the first and the permanent director and chairman of this company. His powers under art. 62 are of pivotal importance. He can from time to time and at any time appoint any person as an additional director and can also remove him. 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.

14. In the premises, it must be held that the assessee's remuneration as the managing director of Surrendra (Overseas) Pvt. Ltd. is not assessable under s. 7 of the Act. In this behalf, we may also say here that the provision for payment of remuneration by itself is not a decisive factor as held by Chagla J. (as he then was) in CIT v. Lady Navajbai R.J Tata, [1947] 15 ITR 8 (Bom) and by the Supreme Court in CIT v. Manmohan Das, [1966] 59 ITR 699 and also in Ram Prashad v. CIT, [1972] 86 ITR 122 (SC).

15. We will now deal with the remaining cases which were cited at the Bar in the context of the arguments made in connection with Aminchand Pyarelal (Calcutta) Ltd.

16. In Dwijendra Chandra Chowdhury v. CIT, [1966] 61 ITR 97 (Assam), it was held by the High Court of Assam and Nagaland that the managing directors were not the servants of that company and their remuneration wasassessable under s. 10 of the 1922 Act.

17. Mr. Sengupta, however, submits that this case should not be followed by us as the learned judges have failed to notice the distinction between an ordinary director who is an agent of the company and a managing director who is not only a director but also a manager and as a manager he is a servant of the company. Dr. Pal disputes the aforesaid contentions and cites the case of Re Newspaper Proprietary Syndicate, [1900] 2 Ch 349 (Ch D) and argues that a managing director can never be a servant of the company.

18. But in Ram Prashad's case, [1972] 86 ITR 122, 127 (SC) the Supreme Court says thus:

“It is again true that a director of a company is not a servant but an agent inasmuch as the company cannot act in its own person A managing director may have a dual capacity. He may both be a director as well as an employee. It is, therefore, evident that in the capacity of a managing director he may be regarded as having not only the capacity as persona of a director but also has the persona of an employee, or an agent depending upon the nature of his work and the terms of his employment. In other words, whether or not a managing director is a servant of the company apart from his being a director can only be determined by the articles of association and the terms of his employment.”

19. We are, therefore, unable to accept the aforesaid extreme contentions made on behalf of both the parties, although Mr. Sengupta was right in pointing out that the aforesaid distinction was lost sight of in Dwijendra Chandra Chowdhury v. CIT, [1966] 61 ITR 97 (Assam).

20. In Commissioner Of Income-Tax, Bombay v. L. Armstrong Smith, [1946] 14 ITR 606 (Bom), the assessee was the managing director and chairman for life under the articles of a company in which he held almost all the shares. The articles provided that he was to hold those offices until resignation or ceasing to be a shareholder of the company. His two nominees were the other shareholders and directors. Under the articles, the management of the company vested in the directors who were to act under the supervisory control and direction of the assessee whose remuneration for acting as the managing director was to be voted in the annual general meeting of the company. His remuneration as the managing director was held to be assessable under s. 7 of the Indian I.T Act, 1922, in the following terms at pages 610, 611 of the report:

“It is to be observed that Mr. Smith is under article 58 appointed for life and that there is vested in him the power to control and manage the whole of the company's business and that so long as he retains the said office no one else has any right to intervene in the management. In my opinion these articles fall under the head of creating a contractual relationship between the company and Mr. Smith by which Mr. Smith is to be in the service of the company. In these circumstances his remuneration falls to be taxed under section 7 and not section 12……”

21. The case of L.N Gadodia & Co. v. CIT, [1951] 20 ITR 460 (All) was decided on different facts and it does not throw any light on the points involved before us.

22. In Lakshminarayan Ram Gopal and Son Ltd. v. Government of Hyderabad, [1954] 25 ITR 449 it was held by the Supreme Court that the appellants were the agents and not the servants of the company and that the commission earned by them was liable to excess profits tax as their activities constituted a business from which the commission was earned by them under the terms of the agency agreement under which they were to act for 30 years as agents of the company and inasmuch as they were entitled to assign the agency agreement including their rights thereunder and were also entitled to sub-delegate their functions under that agreement.

23. In Piyare Lal Adishwar Lal v. CIT, [1960] 40 ITR 17 (SC), the assessee was a HUF and its karta was Sheel Chandra, who was a treasurer of a bank under an agreement which could be terminated by three calendar months' notice by either side. After considering the nature of his work and the supervisory control over him by the bank, it was held by the Supreme Court that he was a servant of the bank and the remuneration received by him was assessable under the head “Salary”.

24. In Commissioner Of Income-Tax, Madras v. B. Nagi Reddy., [1964] 51 ITR 178, the Madras High Court was concerned with the question as to whether the additional remuneration received by the managing director of two companies was assessable under s. 10 of the Indian I.T Act, 1922, and it was answered in the negative by following the decision of the Supreme Court in the case of Lakshminarayan Ram Gopal & Son Ltd., [1954] 25 ITR 449 (SC). Their Lordships of the Madras High Court, however, did not deal with s. 7 of the Act as stated by them at page 186 of the report.

25. In terms of a separate agreement as provided in the articles of association of a company in the case of K.R Kothandaraman v. CIT, [1966] 62 ITR 348 (Mad), the assessee became the managing director for 5 years and was to act under the supervisory control of the board of directors. It was held by the Madras High Court that the assessee was an employee of the company and his monthly remuneration was assessable under s. 7 of the Indian I.T Act, 1922.

26. In Commissioner Of Income-Tax. v. Lakshmipati Singhania, [1973] 92 ITR 598 (All), the assessee was appointed as an adviser of a company by a board resolution which did not contain any terms and conditions under which he was to work. He was allowed a rent-free accommodation and the question was whether the value of the rent-free accommodation was assessable as salary or perquisite. The Allahabad High Court answered the question in the negative by holding that he was not a servant of the company.

27. Reliance was also placed before us on Halsbury's Laws of England and the recognised text books on company law. As the Supreme Court has already considered them in Ram Prashad's case, [1972] 86 ITR 122, it is unnecessary for us to discuss them or to enumerate the principles discussed in the aforesaid cases. We will, however, refer to Ram Prashad's case, [1972] 86 ITR 122 (SC) while dealing with the arguments of Dr. Pal.

28. Dr. Pal argues that the directors of Aminchand Pyarelal (Cal) Ltd. have no supervisory control over the assessee and, therefore, the assessee is not a servant of this company. But we are not impressed by it.

29. This company was incorporated as a public limited company under the Indian Companies Act, 1913. The control of this company is vested in the directors under art. 133. The management of the business of the company is also vested in the directors under the provisions of the Indian Companies Act, 1913. The assessee is to manage the business of the company with the help of the directors under art. 134, and he is also bound to act in terms of the resolutions of the board of directors of this company under arts. 125, 127, 128 and 131. Moreover, arts. 140 and 141 show that the powers enumerated therein cannot be exercised by the assessee as the managing director of this company. They also show that the company has a final say over those matters. The assessee has also no power to use the seal of the company without the authority of the board of directors as provided in art. 142.

30. In the premises, it must be held that this company and its directors exercise a supervisory control over the assessee in view of the following observations of the Supreme Court in Ram Prashad's case, [1972] 86 ITR 122, 132:

“The control which the company exercises over the assessee need not necessarily be one which tells him what to do from day to day……Nor does supervision imply that it should be a continuous exercise of the power to oversee or superintend the work to be done. The control and supervision is exercised and is exercisable in terms of the articles of association by the board of directors and the company in its general meeting. As a managing director he functions also as a member of the board of directors whose collective decisions he has to carry out in terms of the articles of association and he can do nothing which he is not permitted to do. Under s. 17(2) of the Indian Companies Act, 1913, Regn. No. 71 of Table A, which enjoins that the business of the company shall be managed by the directors, is deemed to be contained in the articles of association of the companjr in identical terms or to the same effect. Since the board of directors are to manage the business of the company they have every right to control and supervise the “assessee's work whenever they deem it necessary. Every power which is given to the managing director, therefore, emanates from the articles of association which prescribes the limits of the exercise of that power. The powers of the assessee have to be exercised within the terms and limitations prescribed thereunder and subject to the control and supervision of the directors which, in our view, is indicative of his being employed as a servant of the company.”

31. It may now be noted here that as the assessee has been appointed as the managing director for 20 years under art. 135 of Aminchand Pyarelal (Calcutta) Ltd., Dr. Pal argued that the assessee cannot be removed before 20 years from the office of the director under art. 116, the relevant portion whereof reads as follows:

“Subject to the provisions of any agreement for the time being in force the company may by extraordinary resolution remove any director before the expiration of his period of office……”

32. Dr. Pal made the aforesaid contention in support of his earlier submission, namely, that this company has no power to dismiss the assessee from the office of the managing director and, therefore, he is not a servant of this company. But art. 135 is solely confined to the assessee's appointment as the first managing director of this company and apart from it there is no agreement on the record relating to his directorship.

33. Therefore, the words “subject to the provisions of any agreement for the time being in force in art. 116 do not apply to him in his capacity of a director. He can accordingly be removed from the office of the director under art. 116 which is an overriding article giving a specific right to the company to remove any director “before the expiration of his period of office by an extraordinary resolution”. And if he is so removed, he will automatically be dismissed from the office of the managing director, because it is elementary that no one can be a managing director of a company unless he is director of that company. Further, he can be dismissed by the company without amending its articles if he is found to be guilty of fraud, misfeasance, gross negligence, dishonesty, wilful default and the like causes.

34. In the premises, the contentions of Dr. Pal must fail and we hold that the assessee is an employee of Aminchand Pyarelal (Calcutta) Ltd. and his remuneration is taxable under s. 7 of the Indian I.T Act, 1922. Our above conclusion also disposes of question No. 2 and we accordingly answer the questions as follows:

Question No. 1.— With regard to Surrendra (Overseas) Pvt. Ltd., it is in the negative and in favour of the assessee and with regard to Aminchand Pyarelal (Calcutta) Ltd., it is in the affirmative and against the assessee.

Question No. 2.— With regard to Surrendra (Overseas) Pvt. Ltd., it is in the negative and in favour of the assessee and with regard to Aminchand Pyarelal (Calcutta) Ltd., it is in the affirmative and against the assessee.

35. This case has been well argued by the learned counsel for the parties and in view of their divided success we make no order as to costs.

C.K Banerji, J.:— I agree.