Page 177 - DCOM301_INCOME_TAX_LAWS_I

Income Tax Laws – I

Notes particular income received by a person under this head, care must be taken to ensure that there
exists such a relationship of employer and employee between the recipient and the payer of the
income. The payments chargeable under the head salaries must be made between the persons
who are in the relationship of employer and employee. Therefore, the amount received by an
individual shall be treated as salary only if the relationship between payer and payee is of an
employer and employee or master and servant. Employer may be an individual, firm, and
association of persons, company, corporation, Central Government, State Government, public
body or a local authority. Likewise, employer may be operating in India or abroad. The employee
may be full time employee or part-time employee.
The question whether a particular person receives the income in his capacity as an employee or
not has to be decided from the facts of each case.

Let’s examine the following cases, whether payments are chargeable under head salaries;
1. The professor of university would be receiving income by way of monthly salary from
the university which is chargeable to tax under this head. But this does not mean that
every item of income received by the employee from his employer would be taxable
under this head. Thus, income by way of examinership fees received by a professor from
the same university in which he is employed would not be chargeable to tax under this
head but must be taxed as Income from other sources under Section 56. This is because of
the fact that the essential condition that the income in question must be received for
services rendered in the ordinary course of employment would not be fulfilled in the case
of examinership fees.
2. A director of a company may, in some cases, be an employee of a company where there is
a specific contract of employment between him and the company. The fact that the same
person has dual capacity in his relationship with the company does not mean that he
cannot be taxed under this head. Every item of income arising to such a director who is
also an employee of the company (e.g. a managing director or other whole-time director)
by virtue of his employment would be taxable as his income from salary. Thus, income by
way of remuneration received by a managing director would be taxable as his salary
income whereas the income received by him as director’s fees in his capacity as director
for attending the meetings of the Board would be assessable under the head “Income from
other sources”.
3. An official liquidator appointed by the Court or by the Central Government would also
become an employee of the Central Government under Section 448 of the Companies Act,
1956 and consequently the remuneration due to him would also be assessable under the
head ‘Salaries’.

4. Remuneration received by a manager of a company even if he is wrongly designated as a
director or by any other name would be chargeable to tax under this head regardless of the
fact that the amount is payable to him monthly or is calculated at a certain percentage of
the company’s profits.
5. Salary paid to a partner by a firm is nothing but appropriation of profits. Any salary,
bonus, commission, or remuneration by whatever name called due to or received by
partner of a firm shall not be regarded as salary but has to be charged as income from
business. It is because of the fact that the relationship between the firm and its partner is
not of employer and employee.

6. According to a circular of the Board dated 22-5-1967, the salary received by a person as
Member of Parliament will not be chargeable to income-tax under the head “Salaries” but
as “Income from other sources” because a Member of Parliament is not an employee of the
Government but only an elected representative of the people.

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