1. This is an appeal by the assessee in respect of the assessment year 1976-77. The only question that arises is whether a sum of Rs. 48,639 received by the assessee from R. Ratilal & Co. is taxable under the head 'Salaries' or as business income of the assessee. The ITO treated it as business income and the learned AAC upheld his decision.
2. We have heard the learned Counsel for the appellant and the learned departmental representative. The relationship between the assessee and the said firm of R. Ratilal, & Co. is governed by an agreement dated 17-11-1972, which for facility of reference we consider it proper to reproduce here.
Articles of agreement made at Bombay on the 17th day of November, 1972, between R. Ratilal and Company, a Partnership at 111, Mahatma Gandhi Road, Bombay-1 (hereinafter called 'the principals') of the one part and Shri Khimji Vijpar Chheda, Hindu inhabitant of Bombay (hereinafter called the joint manager), of the second part and Shri Kishore Khimji Chheda, Hindu inhabitant of Bombay (hereinafter called the joint manager) of the third part: Whereas the principals have been carrying on business at Bombay as merchants, commission agents and brokers; And whereas the joint managers have been appointed as joint managers of the commission agency department of cotton of the principals at Bombay as and from Kartak Sud 1st Samvat year 2029.
And whereas the parties have agreed to record the terms and conditions on which the joint managers have been acting as such joint managers of the principals, now it is hereby agreed by and between the parties hereto as follows: 1. The joint managers shall act as the joint managers of the principals for the commission agency department of the principals and shall perform the duties and exercise the powers which from time to time may be assigned to or vested in them by the principals.
2. Subject as aforesaid, the joint managers shall conduct and manage the said commission agency department of the principals in Bombay and also at any up-country place or places, as the case may be, and shall supervise and manage the said department and the maintenance of accounts of such department.
3. The joint managers, unless prevented by ill-health, shall, during the term of the agreement devote their whole time, attention and abilities to the said commission agency department of the principals. The joint managers shall attend to the maintenance of the books of account, the correspondences and contracts and the other works of the commission agency department. The joint managers shall carry out the orders of the principals from time to time and shall well and faithfully serve the principals and use their utmost endeavours to promote the interest of the principals.
4. The joint managers shall not be directly or indirectly interested in any other business or occupation without the prior permission of the principals. If, however, the joint managers are found to be so interested without the prior permission of the principals, they shall be personally responsible for the losses, if any, in such business and the principals shall not be responsible therefor. But, if the joint managers make any profits in any such dealings, the principals shall be entitled thereto.
5. The joint manager, Shri Khimji Vijpar Chheda, shall during his term of office, be entitled to a commission at the rate of 16 per cent of the net profits, and the joint manager, Shri Kishore Khimji Chheda, during his term of office shall be entitled to a commission at the rate of 9 per cent of the net profits earned by the principals in the said commission agency department. For the purpose of this clause, the net profits mean the profits of the principals in the said commission agency department calculated after making the following deductions: (b) Bonus or commission paid to any member of the principals, staff or employee, (f) Any compensation or damage to be paid by virtue of any legal liability including the liability arising out of breach of contracts, (g) With regard to the net profits, the certificate of the auditors of the company shall be final and binding on both the parties, (h) Any bad debts arising in the course of the business. The joint managers shall have nothing whatsoever to do with any other business of the principals except the said commission agency department.
6. It is agreed by and between the parties hereto that the joint manager, Shri Khimji Vijpar Chheda, shall receive a minimum remuneration of Rs. 12,000 per year and if his share of commission in any one year is less than Rs. 12,000, the principals will make good the difference. The joint manager, Shri Kishore Khimji Chheda, shall receive a minimum remuneration of Rs. 6,000 per year and if his share of commission in any one year is less than Rs. 6,000, the principals will make good the difference.
7. The joint managers have nothing whatsoever to do with or any interest in any of the assets of the principals.
8. The joint managers shall be at liberty to resign the said office at any time after giving to the principals three months' notice in writing of their intention to do so. The principals shall also be entitled to terminate this agreement at any time upon giving to the joint managers three months' notice in writing of their desire to do so.
9. The principals shall be at liberty from time to time to appoint any other person or persons to attend to the management of the said business of commission agency department jointly with the joint managers or to appoint any such other manager as they think fit.
10. The joint managers shall not, after the termination of the agreement, solicit any of the customers of the principals or deal with them and shall not divulge or make known any trusts, secrets or dealings of the principals and represent themselves as in the employ of or having interest in the business of the principals.
11. Any disputes arising between the parties hereto in relation to this agreement or anything to be done by virtue of these presents, shall be referred to arbitration under the provisions of the Indian Arbitration Act, 1940, or any other statutory modification or re-enactment thereof for the time being in force. The award made by the arbitrator or the umpire, as the case may be, shall" be final and binding between the parties hereto.
In witness whereof, we Kirit Ratilal Gandhi, partner R. Ratilal & Company and Shri Khimji Vijpar Chheda and Shri Kishore Khimji Chheda have here up to signed our respective names at Bombay on the 17th day of November, One Thousand Nine Hundred Seventy Two.
3. The contention of the learned Counsel for the assessee was that the assessee was not an independent contractor and his working was being closely supervised by the so-called principals R. Ratilal & Co. and, therefore, the relationship between the assessee and the said firm was that of an employer and an employee and any amount paid by the said firm to the assessee as remuneration for the services rendered would be in the nature of salary and has to be assessed as such. He placed reliance on a judgment in the case of Vr. C.Rm. Adaikkappa Chettiar v.CIT  78 ITR 285 (Mad.) in which the assessee was entitled to a fixed salary of Rs. 1,000 per month from M + one-fourth share of the profit earned by M from a partnership business in which he was a partner. It was held that this income was salary income of the assessee. Another case relied upon is CIT v. I.D. Varshani  24 ITR 328 (All.) in which it was held that the remuneration received by the assessee as managing agent was taxable as income from salaries.
In Ram Prashad v. CIT  86 ITR 122, the Supreme Court of India held that whether or not the managing director is the servant of the company apart from his being a director can only be determined by articles of association and the terms of his employment. It was observed that for the relationship of an employer and employee 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. The Hon'ble Court observed that an agent on the other hand in exercise of working is not subject to direct control of supervision of the principals that 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. With these observations, the managing director of a limited company was held to be an employee. In another case Satya Paul v. CIT  116 ITR 335, the Calcutta High Court held that where the assessee as the managing director of a limited company had the power to appoint an additional director and also to remove him, the irresistible conclusion was that the assessee was not a servant of that company. Thus, in determining whether a person is an employee or not, we have to see the exact relationship between the so-called employer and the employee and their conduct. The terms of the agreement between the assessee and R. Ratilal & Co. have been quoted above. The agreement itself shows that it is not the type of an agreement between an employee and an employer. The employer has been described as the 'principals' which itself means that the so-called employees are the agents.
4. It is a queer agreement as two persons have been appointed joint managers of the commission agency department of the so-called principals without in any manner specifying how they shall function and who shall be the superior of the two of them and what would happen if there is some difference of opinion between the two.
5. The nature of the business of the so-called principals is commission agency of cotton and although the functions of the so-called joint managers are not specified in the agreement, it appears that their only function was to procure commission business for R. Ratilal & Co.
Otherwise the agreement should have specified their duties as well as their financial powers.
6. Although the agreement states that remuneration would be paid to the joint managers, the remuneration is not payable from month to month.
There is no fixed salary although the minimum remuneration has been specified at Rs. 12,000 per year. If a manager has actually to manage some business on behalf of his employer, the services would normally be terminable with immediate effect because otherwise a person who has lost the confidence of his employer can create havoc for the employer, if even after losing the confidence of the employer he is allowed to work as manager. In this case, the assessee along with the joint manager can be removed from so-called employment only after three months' notice. This is against the usual practice of employment in business in responsible capacity. Further, not only the assessee but his so-called Joint Manager, Shri Kishore Khemji, have to stay or go together. It is not possible for one of them to resign nor is it possible for the so-called employer to terminate the services of one of them.
7. Further, any dispute arising between the parties is to be referred to arbitration. This too is against the usual contracts of employment.
8. As already stated, the conduct of the parties is also to be seen in determining the true nature of the relationship. The learned Counsel for the assessee conceded before us that in the earlier years, the assessee was declaring the receipts from R. Ratilal & Co. as his business income. It is only in the year, in question, that for the first time he changed his stand to claim it as salary for the purpose of claiming the benefit of standard deduction for expenses incidental to employment. This conduct of the assessee in treating this income as business income goes a long way against the assessee and reflects to what he himself thought about this relationship. We also find that the assessee is a regular trader in cotton. He is sole proprietor of the firm General Cotton Co. He is also the partner in Asian Cotton Company.
R. Ratilal & Co. is also a trader in cotton and it is merely probable that this assessee would have some business dealings with R. Ratilal & Co. then being an employee of the said company solely devoted to its business.
9. Clause (4) of the agreement prohibits the assessee from carrying on any business without the permission of R. Ratilal & Co. As the assessment order shows, the assessee has other business interests as well.
10. Apart from the agreement, the assessee has not placed any material before the authorities below or before us to reflect on the nature of relationship between him and R. Ratilal & Co. The assessee could have produced a lot of material from the records of R. Ratilal & Co. to show that he was in fact functioning as a manager and not merely working as an agent for procuring business on commission agency basis.
11. For the above reasons, we agree with the authorities below that the relationship between the assessee and R. Ratilal & Co. is that of a business associate and not that of an employer and employee and, therefore, the income that accrued to the assessee from this relationship was income from business and not income from salary.
12. The appeal, therefore, deserves to be dismissed and is hereby dismissed.