GULATI J. - This is a reference under section 256(1) of the Income-tax Act, 1961, at the instance of the Commissioner of Income-tax, U.P., Lucknow.
The assessee is L. Lakshmipati Singhania, assessed as an individual. The assessment years are 1958-59 and 1959-60. During the previous years relevant to these assessment years, the assessee acted as a financial adviser to a limited company by the name of J. K. Jute Mills Ltd. He was previously a director of that company. He resigned from the directorship. Later on he was appointed by the company as financial adviser under a resolution of the board of directors. He was allowed a rent-free residential accommodation in a house belonging to the company at Calcutta. He was not to receive any further remuneration from the company. The Income-tax Officer considered that the benefit derived by the assessee from the company of free residential accommodation at Calcutta was income of the assessee which could be assessed under section 12 of the Indian Income-tax Act, 1922, as income from other sources. He accordingly estimated the value of rent-free accommodation at Rs. 36,000 per annum and assessed this amount in the hands of the assessee for the two assessment years. On appeal, the Assistant Commissioner of Income-tax came to the conclusion that, although the value of rent-free accommodation was assessable in the hands of the assessee, yet it could be assessed under section 7 which is the provision for the assessment of tax on salaries. He reduced the quantum of assessment to Rs. 28,000. The assessee and the department both felt aggrieved with this order and went up in second appeal before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal dismissed the appeal of the department and allowed that of the assessee holding that, in the circumstances of the case, section 7 was not applicable. At the instance of the Commissioner of Income-tax the following question of law has been referred to us for decision :
'Whether the Tribunal was correct in holding that the provisions of section 7 of the Indian Income-tax Act, 1922, did not apply to the facts and circumstances of the case and in deleting the addition of Rs. 28,000 from each of the assessments made for the assessment years 1958-59 and 1959-6 ?'
Section 7 of the Indian Income-tax Act, 1922, provides that the tax shall be payable by an assessee under the head 'salaries' in respect of any salary or wages, annuity, pension or gratuity, and any fees, commissions, perquisites or profits in lieu of or in addition to, any salary or wages, which are allowed to him by or are due to him.
Now, in the instant case, the assessee was allowed no salary but only rent-free accommodation. Rent-free accommodation is undoubtedly a perquisite and it can be assessed as the assessees income, if it is received by him in lieu of salary payable to him.
No payment can fall to be taxed under section 7 unless the relationship of employer and employee exists between the payer and the payee. See Commissioner of Income-tax v. Mills Stores Co., Commissioner of Income-tax v. R. Johnstone and David Mitchell v. Commissioner of Income-tax. Whether in a given case the relationship of master and servant exists between the payer and the payee would depend on the facts and circumstances of each case. As observed by Chagla J. in Commissioner of Income-tax v. Lady Navajbai R. J. Tata :
'The fact that a person may hold an office and that he should receive a remuneration by virtue of that office does not necessarily bring about a relationship of master and servant between him and the person who pays him the remuneration or the relationship of an employer and an employee.'
A director of a company holds an office under the company, but as a director he is not a servant or an employee of the company. But there may be special terms in the articles of association or there may be an independent contract which may bring about a contractual relationship between the company and the director and constitute the director an employee of the company. In the instant case the assessee was appointed as a financial adviser of the company not under any contract but by means of a resolution by the board of directors. The resolution does not contain any terms and conditions of the engagement of the assessee as a financial adviser. Ordinarily, in the case of a master and servant, the servant works under the control of the master. The master can tell the servant what to do and how to do. Generally, a servant is not only a person who receives instructions from his master, but is also subject to the masters right to control the manner in which he carries out those instructions. Now, there is no finding in this case that the assessee was under the control of the company, while discharging his functions as the financial adviser. Indeed, what exactly were his functions is not known. It is, therefore, not possible from the resolution of the board itself to draw an inference that there existed the relationship of master and servant between the assessee and the company. Unless such a relationship is established, section 7 has no application.
We are satisfied that the Tribunal was right in its view. We accordingly answer the question in the affirmative. The assessee is entitled to the costs which we assess at Rs. 200.
Question answered in the affirmative.