Directors of a company are not automatically considered employees entitled to deduction u/s 16(i) of the Income Tax Act, 1961. They must establish the relationship of master and servant with the company, which requires evidence of actual services rendered and the ability of the company to dismiss or terminate the director's employment.

JUDGMENT :

J.M. Mahapatra, J. - The question referred at the instance of the Revenue u/s 256(1) of the Income Tax Act, 1961, for our decision is :

" Whether, on the facts and in the circumstances of the case, the relationship between the assessees and the company in which he/she acted as a director can be said to be that of an employee and employer so that the assessees would be entitled to deduction u/s 16(i) of the Income Tax Act, 1961?"

2. The assessees in the different cases are all directors of Messrs, Kapoor Motor Engineering Private Ltd., a company registered under the Companies Act, 1956. The different cases involve a common question of law, though they pertain to different assessment years and to different assessees. These references have, therefore, been heard analogously and are being disposed of by this common judgment. For the relevant years, the assessees were all assessed as individuals and they claimed their remuneration as "salaries" and claimed standard deduction thereon u/s 16(i) of the Income Tax Act, 1961 (for short, "the Act"). The assessing authority, namely, the Income Tax Officer, did not accept the contention of the assessees that the remuneration received by them were salaries and, accordingly, did not allow the standard deduction. On appeal, the Appellate Assistant Commissioner confirmed the order of the Income Tax Officer. The Tribunal, however, accepted the contention of the assessees and said that the assessees were entitled to standard deduction treating the remuneration as salaries on the basis that the assessees received the remuneration as employees of the company. This has led to the filing of the references by the Department.

3. We have heard Mr. A. K. Ray, learned counsel appearing for the Revenue, as also Mr. N. Paikray, learned counsel appearing for the assessees. Mr. Ray took us through the provisions of the Act dealing with the method of computation of total income subject to tax under different heads of income as are provided u/s 14 of the Act. He laid emphasis on the fact that the income under the head "Salaries" ( Chapter IV-- Sub-head 'A') is only entitled to general deductions as is envisaged u/s 16(i) of the Act, He made a reference to the Companies Act, 1956, to explain the situation of a managing director or a director who, as such, enjoys dual capacity as a director and also as an employee of the company. But, when such a situation arises, the obligation remains with the person who claims entitlement to receive from the company as salary, to establish the relationship of master and servant or an employer and employee. This has to be established as a fact and subject to the agreement as might have been in their option between the present concern and the company, where he is a director or managing director. According to Mr. Ray, in the present batch of cases, the assessees have failed to establish the master and servant relationship, and as such their claim for deduction has justifiably been disallowed by the Income Tax Officer.

4. On the other hand, Mr. Paikray, learned counsel for the assessees, has put emphasis on the fact that the memorandum of association adopted by the company in its different articles proved that a director may be called upon to perform extra services for the company and, in such an event, the company would remunerate such director. He has put emphasis on Article 57 which is extracted hereunder :

" If any director is called upon to perform services or to make any special exertion for any of the purposes of the company, the company shall remunerate such director either by a fixed sum or otherwise, as will be determined by the board of directors and such remuneration may be either in addition to or in substitution of his remuneration for attending meetings subject to the provisions of Section 315 of the Companies Act, 1956, and in addition to the provision made in point 56. Such director shall also be entitled to be paid for travelling, hotel and other expenses