http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 10  

PETITIONER: RAM PERSHAD

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, NEW DELHI

DATE OF JUDGMENT24/08/1972

BENCH: REDDY, P. JAGANMOHAN BENCH: REDDY, P. JAGANMOHAN HEGDE, K.S. KHANNA, HANS RAJ

CITATION:  1973 AIR  637            1973 SCR  (3) 985  1972 SCC  (2) 696

ACT: Income  tar  Act (11 of 1922) s.  7-Commission  to  Managing director of Company-If salary. Master and Servant or agency--Tests for.

HEADNOTE:  The assessee was a managing director of a company.  Article 139  of the articles of association of the  company  enjoins that notwithstanding anything contained in the articles  the managing director is expressly allowed generally to work for and contract with the company and specifically to do     the work  of an agent and manager and also to do other work  for the  company  on  such  terms and  conditions  and  on  such remuneration as may from time to time be agreed upon between him  and the directors of the company. Article 142  provides that  the managing director shall work for the execution  of the  decisions that may be arrived at by the Board of   from time  to time and shall be empowered to do all that  may  be necessary in the execution of the decision of the management of the company and shall do all things usually necessary  or desirable  in  the management of affairs of the  company  or carrying  out  its objects. Several clauses of  article  140 specifically  empower  the Board of Directors  to   exercise control over the managing director. Under the terms of  tile agreement entered into between the assessee and the  company the  managing  director was appointed for 20  years  but  he could be removed within that period if he did not  discharge his work diligently, or, if he was found     not    to    be acting in the interest of the company. Under the  agreement, in addition to monthly salary, car allowance, free board and lodging  he was also to receive 10% of the gross profits  of the company as commission. For the assessment year  1956-57, the  assessee  gave up the amount representing  the  10%  of gross profits, because, the company would not be  making net profits  if  the  stipulated commission  was  paid  to  him, And,      claimed that the amount so given up was not liable to be included in hi,. total income. The Income-tax Officer, the  Appellate Assistant Commissioner, The Tribunal and  the High  Court, on reference, held that the amount was  taxable as ’salary’ under s. 7 of the Indian Income-tax Act.   1922, which includes commission.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 10  

Dismissing the appeal to this Court, HELD  :  The assessee had to exercise his powers  under  the agreement within the terms and limitations prescribed  under the  articles of association and subject to the control  and supervision of the directors, This is   indicative  of   his being  employed as a servant of the company, and  therefore, the  remuneration  payable  to him  was  salary  within  the meaning   of section 7. [995G-H; 996A-B]      (a)  The  nature  of the particular  business  and  the nature of the  duties  of the employee should be  considered in  each  case  in order to arrive at  a  conclusion  as  to whether the person employed is a servant     or  an   agent, and, it is not possible to lay down any precise rule of law to distinguish one kind of employment from the other. [989D- F]      (b)  A  managing director has the dual  capacity  of  a director as    well  as an employee, and whether he  is  the one or the other depends upon 986 the   articles  of  association  and,  the  terms   of   his employment.    Anderson  v.  James  Sutherland   (Peterhead) Limited, [1941] S.C. 203., 218, referred to, [989G; 990B] (c)Whether a person employed by a company is a servant or an agent is not solely dependent on tile extent of  supervision and control exercised on him.  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 cise of the power to oversee or superintend the work to be done. [993F-F; 995D-F] (d)In  the  present case, a perusal of  the  articles  and terms  and conditions of the agreement  definitely  indicate that  the assessee was appointed to manage, the business  of the  company  in terms of the articles  of  association  and within  the  powers  prescribed therein.   The  control  and supervision  "exercised  by the company  is  exercisable  in terms  of  the  articles  of association  by  the  Board  of Directors  and the company in its general meeting.  [994G-H; 995G-F] (e)Under  s.  17(2)  of the Indian  Companies  Act,  1913, regulation  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 company  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.   As  a managing  director, the appellant function also as a  member of  the Board of Directors whose collective decision he  has to carry out in terms of the articles of association and  he can do nothing which he is not permitted to do. [995F-H]  (f)  The  very fact that apart from his  being  a  managing director he, is given the liberty to work for the company as an  agent  is  indicative of his employment  as  a  managing director not being that of an agent. [995B] (g)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 if he could be  dismissed or  his employment can be terminated by the company  if  his work  is not satisfactory , it could not be said that he  is not a servant of the company. [993F-C] Morvi  Industries  Ltd. v. Commissioner  of  Income-tax,  82 I.T.R.  835 SC.  Commissioner of Income-tax v. Manmohan  Das 59 I.T.R.. 699, Dharangadhra Chemical Works Ltd. v. State of Saurashtra, [1957] S.C.R. 152, 157, Piyare Lai Adishwar  Lal

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 10  

v. Commr. of Income-tax, 40 I.T.R. 17, Camar Shaff Tyabji v. Commissioner   of  E.P.T.  Hyderabad,  39  I.T.R.  611   and Lakshminarayan  Ram  Gopal v. Govt. of Hyderabad,  23  I.T.R 449.referred to.

JUDGMENT: CIVIL   APPELLATE   JURISDICTION.:  C.  A.   No.   1946   of 1968. Appeal by special leave from the judgment and ordered  dated September 29,1967 of the Delhi High Court in 1. T. Reference No. 46-D of 1962. A.   K.  Sen,  H.  K.  Puri  and  S.  K.  Dhingra,  for  the appellant. L.   N. Sinha Solicitor General of India, B. D. Sharma and R. N. Sachthey for the respondent. 987 Tile Judgment of the Court was delivered by Jaganmohan Reddy, J. The assessee and his wife owned a large number of shares in a private limited company engaged in the business  of running hotels.  By virtue of Art. 109  of  the Articles  of Association of the said company,  the  assessed became  the  first Managing Direction  on  terms  conditions agreed  to  and  embodied in  an  agreement  dated  November 20,1955  between  himself and the company.  Under  the  said agreement,  the  assessee was to receive  Rs.  2,000/- per month, a fixed sum of Rs. 500/p.m. as car allowance, 10  per cent  of  gross profits of the company and he and  his  wife were  entitled to free board and lodging in the hotel.   For the assessment year 1956-57 for which the accounting year is the  year  ending  30th September  1955,  the  assesses  was assessed in respect of Rs. 53,913/- payable to him as 10% of the gross profits of the company which he gave up soon after the  accounts were finalised but before they were passed  by the  general meeting of the shareholders.  The above  amount was given up by him because the company would not be  making net  profits if the stipulated commission was paid  to  him. The assessee claimed that the amount given up by him was not liable to be included in his total income because the amount had  not  accrued  to  him  at all,  at  ,my  rate,  in  the accounting year ended 31st March 1956 and that even assuming that  it  had accrued in the account year ended  31st  March 1956,  it is not taxable under s. 7 or s. 10 of  the  Indian Income-tax  Act, 1922 (hereinafter called the  ’Act’).   The Income-tax  Officer, the Appellate  Assistant  Commissioner, the  Tribunal  and on a reference under s.  66(1)  the  High Court have all held that the 10% commission on gross profits amounting to Rs. 53,913/- was taxable as ’salary’ under s. 7 of  the Act and that the income had accrued to the  assessee during the previous year.  Against the judgment of the  High Court, this appeal is by special leave. The  questions of law which were referred to the High  Court under s. 66(1) of the Act are as follows :- 1.   Whether  the sum of Rs. 53,913/- was a revenue  receipt of the assessee of the previous year ? 2.   Whether the amount is chargeable under s. 7 or s. 10 of the Income-tax Act ? 3.   If  the amount is chargeable under section 10,  is  the assessee  entitled to a deduction of.  Rs.  53,913/-  tinder s.10(1) or s. 10(2) The   High  Court  answered  the  first  question   in   the affirmative and in favour of the revenue, and on the  second question it was of 988

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 10  

the   view  that  the  amount  payable  as  commission   was chargeable  under S. 7 as salary and not under S. 10 of  the Act.  On this view, it did not think it necessary to  answer the third question. When  the matter came up earlier, this Court on November  9, 1971 considered it necessary to call for a further statement of  the case from the Tribunal on the third question on  the basis  of the materials before it and having regard  to  the decision of Morvi Industries Ltd. v. Commissioner of Income- tax(1). The Tribunal in its supplementary statement of  case has answered the question against the assessee and in favour of  the  Department  in holding that  the  assessee  is  not entitled  to a deduction of the, sum of Rs. 53,913/-  either under s.10(1) or 10(2) of the Act. It is not disputed that the commission payable to him would be   a  revenue  receipt nor is it disputed that  if  it  is chargeable under s. 7  no other question would arise  having regard  to  the  finding  based on  the  decision  in  Morvi Industries case (supra) that the amount of Rs. 53,913/-  had accrued  to  the  assessee in the year of  account.   It  is therefore  necessary for us to consider whether the  10  per cent  gross profits payable to the assessee under the  terms of the agreement appointing him as the Managing Director  is liable  to be assessed as salary or under the  head  ’income from business’.  It may be mentioned that ’salary’ under  s. 7  of the Act includes also commission,  wages,  perquisites etc. On behalf of the assessee, it was contended that in order to assess the income as salary it must be held that there was a relationship  of master and servant between the company  and the assessee.  For such a relationship to exist, it must  be shown  that the employee must be subject to the  supervision and control of the employer in respect of the work that  the employee  has  to  do.  Where, however,  there  is  no  such supervision  or  control  it  will  be  a  relationship   of principal and agent or an independent contractor.   Applying these  tests,  it is submitted that the appointment  of  the assessee as a Managing Director is not that of a servant but as  an agent of the company and accordingly  the  commission payable  to him is income from business and not salary.   In support  of  this  contention, reference has  been  made  to Halsbury’s Laws of England, Bowstead on Agency and treatises on Company Law by Palmer, Gower, Penington and Buckley. There is no doubt that for ascertaining whether a person  is a  servant or an agent, a rough and ready test is,  whether, under the terms of his employment, the employer exercises  a supervisory control in respect of the work entrusted to him. A  servant acts under the direct control and supervision  of his master.  An agent, (1)  82 I.T.R.835 S.C. 989 on  the  other  hand, in the exercise of  his  work  is  not subject  to  the  direct  control  or  supervision  of   the principal,  though he is bound to exercise his authority  in accordance with all lawful orders and instructions which may be  given to him from time, to time by his  principal.   But this  test is not universal in its application and does  not determine  in  every case, having regard to  the  nature  of employment, that he is a servant.  A doctor may be  employed as a medical officer and though no control is exercised over him  in respect of the manner he should do the work  nor  in ’respect  of the day to day work, he is required to  do,  he may  nonetheless  be a servant if his employment  creates  a relationship of master and servant.  Similar is the case  of a  chauffeur  who  is  employed to drive  the  car  for  his

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 10  

employer.  If he is to take the employer or any other person at his request from place ’A’ to place ’B’ the employer does not  supervise the manner in which he drives  between  those places.   Such examples can be multiplied.  A person who  is engaged  to manage a business may be a servant or  an  agent according to the nature of his service and the authority  of his  employment.  Generally it may be possible to  say  that the greater the amount of direct control over the person em- ployed, the stronger the conclusion in favour of his being a servant.   Similarly the greater the degree of  independence the greater ,the possibility of the services rendered  being in the nature of principal and agent.  It is not possible to lay down any precise rule of law to distinguish one kind  of employment  from  the other.  The nature of  the  particular business  and the nature of the duties of the employee  will require to be considered in each case in order to arrive  at a conclusion as to whether the person employed is a  servant or  an agent.  In each case the principle for  ascertainment remains the same. Though an agent as such is not a servant, a servant is gene- rally  for  some purposes his master’,; implied  agent,  the extent  of the agency depending upon the duties or  position of  the  servant.  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 but has only  to  act through directors who qua the company have the  relationship of  an agent to its capacity.  Managing Director may have  a dual  capacity.   He  may  both be a  Director  as  well  as 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.  Where he  is  so employed,  the  relationship  between him  as  the  Managing Director  and the Company may be similar to a person who  is employed as a servant or an agent for the term ’employed’ is facile  enough  to cover any of  these  relationships.   The nature of his employment may be determined by the 990 articles of association of a company and/or the agreement if any,  under  which a contractual  relationship  between  the Director and the company has been brought about,  whereunder the  Director is constituted an employee of the company,  if such  be the ,case, his remuneration will be  assessable  as salary under s. 7. 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.  A similar view has  been  expressed  by the Scottish Court  of  Session  in Anderson  v. James Sutherland (Peterhead)  Limited(1)  where Lord Normand at p.218 said :               "........   the  managing  director  has   two               functions   and  capacities.    Qua   managing               director he is a party to a contract with  the               company,  and this contract is a  contract  of               employment; more specifically I am of  opinion               that  it  is a contract of service and  not  a               contract for service." A  number  of  cases have been referred before  us  but  the conclusion in each of the decisions turned on the particular nature  of employment and the facts disclosed  therein.   In each of these decisions the "context played a vital part  in the conclusions arrived ,at." In Commissioner of  Income-tax v.  Manmohan Das(2) this Court had occasion to consider  the case  of  employment  by  a bank  of  a  treasurer  for  its

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 10  

branches,  sub-agencies  and  pay offices where  he  had  to perform  the duties, liabilities and responsibilities  which by  custom or contract usually devolved upon a treasurer  as well  as those specified in the agreement.   The  treasurer had  to provide the staff for the cash section of the  bank; he  had power to suspend, transfer or dismiss any member  of the staff and to appoint any other person in his place.   He was  responsible for all the acts of the staff so  appointed which  resulted  in  loss  or damage to  the  bank  and  was responsible for the protection of the property of the  bank and  for the receipt of any bad money, or base  money  etc., was  requested to transmit from one place to another,  under guard provided by the bank, moneys, documents and properties of  the  bank.  It was held that though the  office  of  the treasurer  was  created by the agreement and  that  he  held office  under  it,  that was not decisive  of  the  question whether  the remuneration earned by him was as a servant  of the bank.  Receipt of remuneration for holding an office did not necessarily give rise to the relationship of master  and servant between the holder of the office and the person  who paid  the remuneration.  It was held that the treasurer  was not  a servant of the bank and the remuneration received  by him was not salary.  Referring to. the observations of (1) [1941]  S.C. 203 at 218. (2) 59 I.T.R. 699. 991 Bhagwati, J. in Dharangadhra Chemical Works Ltd. v. state of Saurashtra(1),  Shah,  J.  observed (at  p.  707)  that  the correct  method  of approach would be  to  consider  whether having  regard  to  the nature of the work,  there  was  due control  and  supervision by the employer.   In  Piyare  Lal Adishwar Lal v. Commr. of Income-tax(2), Kapur, J. said  (at p. 24) that :               "It  is difficult to lay down any one test  to               distinguish  tile relationship of  master  and               servant   from   that  of  an   employer   and               independent  contractor.   In many  cases  the               test  laid down is that in the case of  master               and  servant, the master can order or  require               what  is to be done and how it is to  be  done               but  in the case of an independent  contractor               an  employer can only say what is to  be  done               but  not how it shall be done.  But this  test               also does not apply to all cases, e.g. in  the               case  of  ship’s  master,  a  chauffeur  or  a               reporter  of  a newspaper.. . . .  In  certain               cases  it has been laid down that the  indicia               of a contract of service are (a) the  master’s               power  of  selection of the servant;  (b)  the               payment  of wages or other remunerations;  (c)               the  master’s right to control the  method  of               doing the work; and (d) the master’s right  to               suspension or dismissal." Learned advocate for the appellant relies on the decision of Qamar Shaffi Tyabji v. Commissioner of E.P.T., Hyderabad("). That was a case which turned upon the nature of the contract entered  into  between  the industrial trust  fund  and  the assessee  which  in  turn was  governed  by  the  agreements between  the  company and the trustees.   Under  the  latter agreements,  the  trustees were given  general  conduct  and management of the business and affairs of the mills and were entitled to appoint employees and delegate to other  persons all or any of the powers etc. under the agreement subject to the  approval  of  the  Board  of  Directors.   By  separate agreements  made  at the same time the  trustees  were  also

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 10  

appointed   selling   agents  of  the  mills  and   by   two supplemental  agreements they were given power  to  delegate all  or any of their powers to other persons on  such  terms and conditions as they may think fit subject to the approval of  the  Board of Directors of the  company.   The  trustees appointed the assessee under these terms as their  delegate. In  those circumstances, it was held that the appellant  was neither a servant nor a mere sub-agent.  He was an agent  of the  principal for such part of the business of  the  agency a:, was entrusted to him inasmuch as the trustees as  agents had express authority to name another person to act for the (1) [957] S.C.R. 152,157.    (2) 40 I.T.R. 17. (3)  39 I.T.R. 611. 992 principal  in the business of the agency and they named  the appellant with the approval of the Board of Directors. A  similar view was taken by this Court  in,  Lakshminarayan Ram  Gopal v. Govt. of Hyderabad(1).  Bhagwati, J.  speaking for  the  Court held that the assessee  under  the  managing agency   agreement   having  regard   to   certain   indicia discernible  from that agreement was an agency.  At  p.  458 the  functions of the assessee which were inconsistent  with his being a servant were specified.  They were :- 1.The power to assign the agreement and the rights of the appellant thereunder; 2.The  right to continue in employment as the agents of  the company  for  a period of 30 years until the  appellants  of their own will resign; 3.The remuneration by way of commission of 2-1/2 per cent of the  amount of sale proceeds of the produce of the  company; and 4.The  power of sub-delegation of functions given to  the agent tinder Art. 118. All   these  circumstances  went  to  establish   that   the appellants were the agents of the company and not merely the servants remunerated by wages or salary. In Commissioner of Income-tax Bombay v. Armstrong Smith  (2) Stone,  C.J. and Kania, J. had held that under the terms  of an  agreement  the Managing Director was a  servant  of  the company.   There  they  had to consider  a  case  where  the articles  of  association of the company provided  that  the assessee was to be the Chairman and Managing Director of the Company  until he resigned office or died or ceased to  hold at  least one share in the capital of the company; that  all the  other directors were to be under his control  and  were bound  to  conform  to  his  directions  in  regard  to  the company’s business; that his remuneration was to be voted by the  company at its annual general meeting and that the  sum received  by him for managing the company’s  business  which arose  from  out of the, contractual relationship  with  the company provided by the articles for performing the services of managing the company’s business.  In these  circumstances it was held that the remuneration was taxable under s. 7 and not under s. 12 of the Act.  It appears that a large  number of English cases were cited but these were not referred  to. Stone, C.J. observed (at pp. 609-610):- "We  have been referred to quite a large number  of  English cases the effect of which, I think, be sum- (1) 25 I.T.R. 449     (2) 15 I.T.R. 606. 993 marised  by saying that a director of a company as  such  is not  a servant of the company and that the fees he  receives are by way of gratuity, but that does not prevent a director or  a  managing director from entering  into  a  contractual relationship,  with the company, so that, quite  apart  from

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 10  

his  office of director he becomes entitled to  remuneration as an employee of the company. Further that relationship may be created either by, a service agreement or by the articles themselves.   Now, in this case there is no question of  any service  agreement outside the articles and, therefore,  the relationship  between  the  company and  the  assessee,  Mr. Smith, depends upon the articles." (emphasis ours) In  Commissioner- of Income-tax v. Nagi Reddy(1) the  Madras High  Court was considering the case of a Managing  Director of  a  film company who was also the  Managing  Director  of another  film  company on similar  terms  and  remuneration, namely,  that  he was to get a monthly remuneration  of  Rs. 500/-  and  in addition a commission of  net  profits.   The question there was, whether the remuneration received by him as  Managing  Director from these two companies  was  income from  business assessable under s. 10 of the Act.   In  that case  a reference was made to the Bombay decision in  Commr. of I.T. v. Armstrong Smith (supra). A  detailed  consideration of all the cases  cited  and  the passages  from  text books referred to before  us  does  not assist  us  in coming to the conclusion that  the  test  for determining  whether the person employed by a company  is  a servant  or  agent  is solely dependent  on  the  extent  of supervision and control exercised on him.  The real question in  this  case  is one of construction of  the  articles  of association  and  the relevant agreement which  was  entered into  between the company and the assessee.  If the  company is  itself carrying on the business and the assessee is  em- ployed  to manage its affairs in terms of its  articles  and the  agreement, he could be dismissed or his employment  can be   terminated   by  the  company  if  his  work   is   not satisfactory,  it  could  hardly be said that he  is  not  a servant  of  the  company.   Art. 109  of  the  articles  of association before its amendment and relevant for the period which  we  are  considering provided that he  shall  be  the Managing  Director of the company for 20 years on terms  and conditions embodied in the agreement.  Art. 136 states  that subject  to the aforesaid agreement, the general  management of the business of the company shall be in the hands of  the Managing  Director of the company who shall have  power  and authority on behalf of the company to do the several  things specified therein which are usually necessary and  desirable for the management of (1)  51 I.T.R. 178. 4--L172Sup.  CI/73 994 the  affairs  of the company.  Art. 137  provided  that  the receipts  signed by the Managing Director or on  his  behalf for  any moneys or goods or property received in  the  usual course  of  business  of  the  company  shall  be  effectual discharge  on behalf of and against the company for  moneys, funds  etc.  It further provides that the Managing  Director shall  also  have  power to sign cheques on  behalf  of  the company.  Under Art. 138 he is authorised to subdelegate all or any of the powers.  Art. 139 enjoins that notwithstanding anything  contained in those articles the Managing  Director is expressly allowed generally to work for and contract with the company and specifically to do the work of agent to  and Manager  of  and also to do any other work for  the  company upon  such terms and conditions and on such remuneration  as may  from  time to time be agreed upon between him  and  the Directors  of  the Company.  Art. 140  specifies  powers  in addition  to  the powers conferred on him  as  the  Managing Director.   Under Art. 141 the Managing Director shall  have charge  and custody of all the property, books  of  account,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 10  

papers, documents and effects belonging to the said  company wheresoever  situate.  Art. 142 provides that  the  Managing Director shall work for the execution of the decisions  that may  be arrived at by the Board from time to time and  shall be  empowered  to  do  all that  may  be  necessary  in  the execution of the decisions of the management of the  company and shall do all things usual, necessary or desirable in the management of the affairs of the company or carrying out its objects.    Cl.  (k)  of  the  agreement  dated   29-11-1955 stipulates :-               "That the said Ram Pershad shall be at liberty               to  resign the said office upon  giving  three               months’ notice to the company of his desire to               do so.  If the said Managing Director is found               to be acting otherwise than in. the  interests               of the company or is found to be not  diligent               to his duties as a Managing Director, the com-               pany  in  General Meeting  may  terminate  his               services before the expiry of the said  period               of 20 years." The  other terms of the agreement enumerate the  powers  and duties given to him under the articles of association. A  perusal of the articles and terms and conditions  of  the agreement   definitely  indicate  that  the   assessee   was appointed to manage the business of the company in terms  of the articles of association and within the powers prescribed therein.   Reference may particularly be made to  Arts.  139 and  142 to ascertain the nature of the control  imposed  by the  company upon the Managing Director.  Under  the  former the  additional work which he can do as an agent or  manager of the company can be done on terms 995 and  conditions  and on such remuneration as can  be  agreed upon between him and the Directors of the Company and  under the  latter  he  had to execute the decisions  that  may  be arrived  at by the Board from time to time.  The  very  fact that  apart from his being a Managing Director he  is  given the  liberty  to  work  for  the  company  as  an  agent  is indicative  of  his employment as a  Managing  Director  not ’being that of an agent.  Several of the clauses of Art. 140 as  pointed out by the High Court specifically  empower  the Board  of  Directors to exercise control over  the  Managing Director,  such,  for instance to accept the  title  of  the property  to  be  sold by the  company,  providing  for  the welfare of the employees, the power to appoint attorneys  as the  Directors think fit etc.  As pointed out earlier  under the  terms  of the agreement he can be  removed  within  the period  of 20 years for not discharging the work  diligently or  if he is found not to be acting in the interest  of  the company as Managing Director.  These terms are  inconsistent with  the plea that he is an agent of the company and not  a servant.   The control which the company exercises over  the assessee need not necessarily be one which tells him what to do from day to day.  That would be a too narrow view of  the test to determine the character of the employment.  Nor does supervision imply that it should be a continuous exercise of the  power to oversee or superintend the work to  be  crone. 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 Regulation No. 71 of Table  A

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 10  

which  enjoins  that the business of the  company  shall  be managed  by the directors is deemed to be continued  in  the articles of association of the company in identical term  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 996 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. We would therefore hold that the remuneration payable to him is  salary.  In this view, the other questions need  not  be considered, and the appeal is dismissed with costs. V.P.S.                 Appeal dismissed. 997