TMI Blog1965 (11) TMI 146X X X X Extracts X X X X X X X X Extracts X X X X ..... 22, 1957. The preamble referred to the services of the assessee in promoting the company and his experience in the line of business and by clause (1) he was appointed as the managing director of the company for a period of five years from the date of its incorporation. Clauses (2) to (4) and clause (9) defined his powers and duties as a managing director which were to be exercised by him subject to the supervision, direction and control of the board of directors and also subject to the provisions of the memorandum and articles of association. In consideration thereof and subject to the relative provisions in the Companies Act, 1956, and of the services to be performed by the managing director, clause (5) provided that the company shall pay to the managing director in respect of each year of account of the company...a monthly remuneration of ₹ 1,250 plus commission at the rate of five per cent. on the net profits made by the company. The commission was to become due and be paid to him yearly and he would be entitled to draw the same immediately after the annual accounts of the company of each year were made up by him and profits certified by the auditors of the company and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that as the resolution of the company was passed long after the accounting year of the assessee, it could not, in any event, abrogate the right of the assessee under the agreement and, literally read, the resolution had only the effect of stopping the payment of remuneration. At the instance of the assessee, the reference has been made to us, under section 66(1) of the Act, of the following question: Whether, on the facts and in the circumstances of the case, the sum of ₹ 11,250 is assessable under section 7 of the Income-tax Act? Having regard to the frame of the question, we are not called upon to answer whether the remuneration for the nine months would fall within section 10 or section 12. The question is confined to whether the sum is assessable under section 7. Two aspects of this question have been presented to us on behalf of the assessee: (1) Whether the sum represents salary, and (2) if it is salary, whether there was real income accrued to the assessee in that sum. On the first aspect, the submission for the assessee is that the relationship of the assessee with the company is such that he could hardly be treated as an employee. Under the terms of the agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and control show that the relationship between the company and the assessee is that of an employer and an employee. The Companies Act, 1956, under the provisions of which the company here was incorporated, defines the terms director , manager , managing agent and managing director . Notwithstanding the nomenclature, it appears that, with reference to the terms of the agreement and the functions the assessee is called upon to exercise thereunder, he is virtually a manager but under the definition of a manager he has the management of the whole or substantially the whole of the affairs of the company. It may be seen that the term manager as defined in the Companies Act, 1956, includes also a director or any other person occupying the position of a manager by whatever name called, and whether under a contract of service or not. In this case, the agreement, in our view, cannot be construed as anything other than a contract of service. It may be that a director of a company only by reason of that capacity will not be a servant of the company: Commissioner of Income-tax v. Lady Navajbai R.J. Tata [1947] 15 I.T.R. 8, 11. But there is nothing to prevent him from being a servant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was suggested in the course of the arguments before the Supreme Court that the managing agency was not a business. But the Supreme Court considered that this question was immaterial for the purpose of income-tax because of section 13 and so refrained from deciding the point. Even so, it pointed out, in passing, that the point was directly decided in Inderchand Hari Ram v. Commissioner of Income-tax [1952] 22 I.T.R. 108, to which we have made a reference. It may be seen, therefore, that Commissioner of Income-tax v. K.R.M. T.T. Thiagaraja Chetty Co. [1953] 24 I.T.R. 525; [1954] S.C.R. 258 did not decide the question and does not help in deciding the question we are called upon to answer. It may be that the concept of a servant may, in a sense, involve an element of agency but, on that account, a servant is not to be regarded as an agent; and an agent is never a servant. We have already held that, having regard to the terms of the agreement and the functions which the assessee exercised with reference to them, he should be regarded as a manager. In any case, at best, he may be treated as a managing director under a contract of service. Though a director simpliciter is not a serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this question too we do not decide as it is unnecessary. That takes us to the second aspect of the question. The argument for the assessee is that if section 7 applies, no salary accrued to the assessee during the relevant period. It is stated that, in view of the resolution of the board of directors, he became disentitled to payment of the salary and so the assessee had no vested right in the credit entries and that, unless he had such rights, the mere book entries cannot be taken to be an accrual of salary to the assessee. We are afraid that the argument proceeds on a wrong conception of the effect of the entries in the books of the company and of the resolution of the board of directors. As we said, under the agreement dated May 22, 1957, the company shall pay to him a monthly remuneration of ₹ 1,250 and he will be entitled to draw that remuneration every month. These are the words used in the agreement: .....the company shall pay to the managing director........in monthly instalments not exceeding ₹ 1,250 per month. This is not subject to any exception and the agreement does not provide for the board of directors, by a resolution, to stop or deny payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esolutions passed by the company, the assessee gave up a considerable part of the commission in December, 1950. The Tribunal held that what was forgone exceeded the proportionate profit provided for in the agreement; nevertheless, it also found that the excess was given up for reasons of commercial expediency. The Bombay High Court held: It was the real income of the assessee-company for the accounting year that was liable to tax and the real income could not be arrived at without taking into account the amount forgone by the assessee. In ascertaining the real income the fact that the assessee followed the mercantile system of accounting did not have any bearing. The accrual of the commission, the making of the accounts, the legal obligation to give up part of the commission, and the forgoing of the commission at the time of the making of the accounts were not disjointed facts; there was a dovetailing about them which could not be ignored. The real income of the assessee was ₹ 27,644 and the amount of ₹ 97,000 forgone by the assessee could not be included in the real income of the assessee for the accounting year. It was further observed that the principle of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On more or less similar circumstances, this court took that view in Kothari Mehta Co. (P.) Ltd. v. Commissioner of Incometax [1963] 50 I.T.R. 753. There the managing agency commission under the terms of the agreement should be paid every year out of the profits of that year. There was also a provision that the commission should become payable to the managing agents on the company's auditors certifying the company's annual balance-sheet. The audited accounts of the company for each year contained a statement to the effect that the managing agents had waived the commission due to them on the profits. The accounts bore dates which were subsequent to the assessment years. The question arose whether if the managing agency commission had accrued to the assessee immediately upon the close of its accounting year, was anything more than a disposal of the income which had accrued to it and whether it would justify the claim that there was no accrual at all till the date of the waiver was made. The question was answered against the assessee. The learned judges there observed at page 757: As we have pointed out, there is no evidence of any agreement of any description which opera ..... X X X X Extracts X X X X X X X X Extracts X X X X
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