I am the managing director of my own company. I draw a monthly amount, a car allowance and a percentage of gross profits. Is the percentage salary, or can I show it as my own business income?
On an agreement of this kind it is salary. The Supreme Court held that ten per cent of gross profits payable to a managing director under his appointment agreement was chargeable under section 7 of the 1922 Act as salary, not under section 10 as business income. There is no single test. A servant acts under the direct control and supervision of his master and an agent does not, but that is only a rough and ready test, and the answer turns on the nature of the business and the nature of the duties. A managing director has a dual capacity - director and employee - and which he is depends on the articles of association and the terms of his employment. Here the company itself carried on the business, he could be dismissed if his work was unsatisfactory, and he exercised his powers within the limits the articles set and subject to the control of the board whose decisions he carried out.
Decided by the Supreme Court (Supreme Court of India - K.S. Hegde, P. Jaganmohan Reddy and H.R. Khanna, JJ. (judgment by Jaganmohan Reddy, J.), Civil Appeal No. 1946 of 1968) on 1972-08-24, reported as (1972) 2 SCC 696; Civil Appeal No. 1946 of 1968. It bears on section 7 of the Indian Income-tax Act, 1922, section 10 of the Indian Income-tax Act, 1922, section 66(1) of the Indian Income-tax Act, 1922, section 15, section 17, section 192, section 392 (Act of 2025) of the Income Tax Act 1961, in Salary & Perquisites and How Tax Law Is Read matters.
The characterisation decides the head, the deduction provision and half the disputes that follow. If a managing director's remuneration is salary, the company deducts under section 192 on the earlier of the event of credit or payment, the director gets the salary deductions and nothing else, and no expense of his own comes off it. If it is business income, section 194J is in play instead and he claims his own expenditure. Assessing officers reach for this decision whenever a whole-time or managing director is paid a commission or a percentage and the company has treated it as professional or business receipt, and the answer it gives is structural: look at the articles and the agreement, ask who carries on the business and who can end the arrangement. The same reasoning is what defeats the argument that a director cannot be a servant because nobody supervises him day to day.
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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 Article 109 of the articles of association of the company he became its first managing director on terms and conditions agreed to and embodied in an agreement dated 20 November 1955 between himself and the company, under which he was to receive Rs. 2,000 per month, a fixed sum of Rs. 500 per month as car allowance, free board and lodging, and ten per cent of the gross profits. The assessment year was 1956-57, for which the accounting year was the year ending 30 September 1955. He was assessed in respect of Rs. 53,913 payable to him as ten per cent 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 reason being that the company would not be making net profits if the stipulated commission were paid to him. The Income-tax Officer, the Appellate Assistant Commissioner, the Tribunal and, on a reference under section 66(1), the High Court all held the amount taxable as salary under section 7. Three questions had been referred: whether the sum of Rs. 53,913 was a revenue receipt of the assessee of the previous year; whether the amount was chargeable under section 7 or section 10; and, if chargeable under section 10, whether the assessee was entitled to a deduction under section 10(1) or section 10(2). The High Court answered the first in the affirmative and in favour of the Revenue and on the second held the commission chargeable under section 7 as salary. The appeal came by special leave from the judgment and order of the Delhi High Court dated 29 September 1967 in Income-tax Reference No. 46-D of 1962.
The appeal was dismissed with costs. The remuneration payable to the assessee, including the ten per cent of gross profits, is salary. Whether a managing director is a servant of the company apart from being a director can only be determined by the articles of association and the terms of his employment; on these articles and this agreement the company was itself carrying on the business, the assessee was employed to manage its affairs in terms of the articles and the agreement, he could be dismissed or his employment terminated if his work was not satisfactory, and the control and supervision was exercised by the board of directors whose collective decisions he had to carry out. His powers had to be exercised within the terms and limitations prescribed by the articles and subject to the control and supervision of the directors, which the Court held indicative of his being employed as a servant of the company. Having reached that conclusion the Court said in terms that the other questions need not be considered.
The Court refused to reduce the question to a formula. It is not possible, it said, to lay down any precise rule of law to distinguish one kind of employment from the other, and the nature of the particular business and the nature of the duties of the employee have to be considered. 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, while an agent in the exercise of his work is not subject to the direct control or supervision of the principal. But the two categories are not sealed off from each other - though an agent as such is not a servant, a servant is generally for some purposes his master's implied agent, the extent of the agency depending upon the duties or position of the servant. On a managing director specifically, the Court held that he may have a dual capacity, being both a director and an employee, and that which of the two he is in any case depends upon the articles of association of the company and the agreement, if any. It took from Anderson v James Sutherland (Peterhead) Ltd the observation of Lord Normand that the managing director has two functions and two capacities, and that his contract is a contract of service and not a contract for service. Applying that, the Court rejected the narrow control test the assessee needed. The control which the company exercises over the assessee, it said, need not necessarily be one which tells him what to do from day to day. What told against him was the structure of the arrangement: the company was carrying on the business, not he; he was employed to manage its affairs in terms of the articles and the agreement; he could be dismissed or his employment terminated if his work was not satisfactory; and the control and supervision was exercised by the board of directors, whose collective decisions he had to carry out. His powers were exercisable only within the terms and limitations the articles prescribed and subject to the directors' control and supervision, and that the Court treated as indicative of his being employed as a servant of the company. Salary under section 7 includes commission, wages and perquisites, so the characterisation carried the ten per cent with it.
We would therefore hold that the remuneration payable to him is salary.
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Handle my notice → Ask a CA on WhatsAppOn an agreement of this kind it is salary. The Supreme Court held that ten per cent of gross profits payable to a managing director under his appointment agreement was chargeable under section 7 of the 1922 Act as salary, not under section 10 as business income. There is no single test. A servant acts under the direct control and supervision of his master and an agent does not, but that is only a rough and ready test, and the answer turns on the nature of the business and the nature of the duties. A managing director has a dual capacity - director and employee - and which he is depends on the articles of association and the terms of his employment. Here the company itself carried on the business, he could be dismissed if his work was unsatisfactory, and he exercised his powers within the limits the articles set and subject to the control of the board whose decisions he carried out. This was decided by the Supreme Court (Supreme Court of India - K.S. Hegde, P. Jaganmohan Reddy and H.R. Khanna, JJ. (judgment by Jaganmohan Reddy, J.), Civil Appeal No. 1946 of 1968) and bears on section 7 of the Indian Income-tax Act, 1922, section 10 of the Indian Income-tax Act, 1922, section 66(1) of the Indian Income-tax Act, 1922, section 15, section 17, section 192, section 392 (Act of 2025) of the Income Tax Act 1961. It is reported as (1972) 2 SCC 696; Civil Appeal No. 1946 of 1968. The characterisation decides the head, the deduction provision and half the disputes that follow. If a managing director's remuneration is salary, the company deducts under section 192 on the earlier of the event of credit or payment, the director gets the salary deductions and nothing else, and no expense of his own comes off it. If it is business income, section 194J is in play instead and he claims his own expenditure. Assessing officers reach for this decision whenever a whole-time or managing director is paid a commission or a percentage and the company has treated it as professional or business receipt, and the answer it gives is structural: look at the articles and the agreement, ask who carries on the business and who can end the arrangement. The same reasoning is what defeats the argument that a director cannot be a servant because nobody supervises him day to day. If it applies to you, the first step is this: Put the articles of association and the appointment agreement on the table first. That is where the Court looked, and it is where the answer is. A managing director who derives his powers from the articles and exercises them subject to the board is a servant of the company whatever the remuneration is called.
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 Article 109 of the articles of association of the company he became its first managing director on terms and conditions agreed to and embodied in an agreement dated 20 November 1955 between himself and the company, under which he was to receive Rs. 2,000 per month, a fixed sum of Rs. 500 per month as car allowance, free board and lodging, and ten per cent of the gross profits. The assessment year was 1956-57, for which the accounting year was the year ending 30 September 1955. He was assessed in respect of Rs. 53,913 payable to him as ten per cent 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 reason being that the company would not be making net profits if the stipulated commission were paid to him. The Income-tax Officer, the Appellate Assistant Commissioner, the Tribunal and, on a reference under section 66(1), the High Court all held the amount taxable as salary under section 7. Three questions had been referred: whether the sum of Rs. 53,913 was a revenue receipt of the assessee of the previous year; whether the amount was chargeable under section 7 or section 10; and, if chargeable under section 10, whether the assessee was entitled to a deduction under section 10(1) or section 10(2). The High Court answered the first in the affirmative and in favour of the Revenue and on the second held the commission chargeable under section 7 as salary. The appeal came by special leave from the judgment and order of the Delhi High Court dated 29 September 1967 in Income-tax Reference No. 46-D of 1962. The matter was decided on 1972-08-24 by the Supreme Court (Supreme Court of India - K.S. Hegde, P. Jaganmohan Reddy and H.R. Khanna, JJ. (judgment by Jaganmohan Reddy, J.), Civil Appeal No. 1946 of 1968). On those facts the Supreme Court held as follows. The appeal was dismissed with costs. The remuneration payable to the assessee, including the ten per cent of gross profits, is salary. Whether a managing director is a servant of the company apart from being a director can only be determined by the articles of association and the terms of his employment; on these articles and this agreement the company was itself carrying on the business, the assessee was employed to manage its affairs in terms of the articles and the agreement, he could be dismissed or his employment terminated if his work was not satisfactory, and the control and supervision was exercised by the board of directors whose collective decisions he had to carry out. His powers had to be exercised within the terms and limitations prescribed by the articles and subject to the control and supervision of the directors, which the Court held indicative of his being employed as a servant of the company. Having reached that conclusion the Court said in terms that the other questions need not be considered.
The Court refused to reduce the question to a formula. It is not possible, it said, to lay down any precise rule of law to distinguish one kind of employment from the other, and the nature of the particular business and the nature of the duties of the employee have to be considered. 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, while an agent in the exercise of his work is not subject to the direct control or supervision of the principal. But the two categories are not sealed off from each other - though an agent as such is not a servant, a servant is generally for some purposes his master's implied agent, the extent of the agency depending upon the duties or position of the servant. On a managing director specifically, the Court held that he may have a dual capacity, being both a director and an employee, and that which of the two he is in any case depends upon the articles of association of the company and the agreement, if any. It took from Anderson v James Sutherland (Peterhead) Ltd the observation of Lord Normand that the managing director has two functions and two capacities, and that his contract is a contract of service and not a contract for service. Applying that, the Court rejected the narrow control test the assessee needed. The control which the company exercises over the assessee, it said, need not necessarily be one which tells him what to do from day to day. What told against him was the structure of the arrangement: the company was carrying on the business, not he; he was employed to manage its affairs in terms of the articles and the agreement; he could be dismissed or his employment terminated if his work was not satisfactory; and the control and supervision was exercised by the board of directors, whose collective decisions he had to carry out. His powers were exercisable only within the terms and limitations the articles prescribed and subject to the directors' control and supervision, and that the Court treated as indicative of his being employed as a servant of the company. Salary under section 7 includes commission, wages and perquisites, so the characterisation carried the ten per cent with it. In the words reproduced by the source cited on this page: "We would therefore hold that the remuneration payable to him is salary." The decision followed or applied Anderson v. James Sutherland (Peterhead) Ltd. - relied on for Lord Normand's observation that a managing director has two functions and two capacities and that his contract is a contract of service; Judgment of the Delhi High Court dated 29 September 1967 in Income-tax Reference No. 46-D of 1962 - the decision under appeal, affirmed.
It was decided by the Supreme Court on 1972-08-24 and is reported as (1972) 2 SCC 696; Civil Appeal No. 1946 of 1968. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 7 of the Indian Income-tax Act, 1922, section 10 of the Indian Income-tax Act, 1922, section 66(1) of the Indian Income-tax Act, 1922, section 15, section 17, section 192, section 392 (Act of 2025), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed with costs. The remuneration payable to the assessee, including the ten per cent of gross profits, is salary. Whether a managing director is a servant of the company apart from being a director can only be determined by the articles of association and the terms of his employment; on these articles and this agreement the company was itself carrying on the business, the assessee was employed to manage its affairs in terms of the articles and the agreement, he could be dismissed or his employment terminated if his work was not satisfactory, and the control and supervision was exercised by the board of directors whose collective decisions he had to carry out. His powers had to be exercised within the terms and limitations prescribed by the articles and subject to the control and supervision of the directors, which the Court held indicative of his being employed as a servant of the company. Having reached that conclusion the Court said in terms that the other questions need not be considered. It arises in Salary & Perquisites and How Tax Law Is Read matters, on section 7 of the Indian Income-tax Act, 1922, section 10 of the Indian Income-tax Act, 1922, section 66(1) of the Indian Income-tax Act, 1922, section 15, section 17, section 192, section 392 (Act of 2025) of the Income Tax Act 1961, and was decided by Supreme Court of India - K.S. Hegde, P. Jaganmohan Reddy and H.R. Khanna, JJ. (judgment by Jaganmohan Reddy, J.), Civil Appeal No. 1946 of 1968. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Stop arguing about day-to-day supervision. The Court said in terms that the control a company exercises need not be one that tells him what to do from day to day, so the absence of someone standing over him proves nothing. Look for the power to dismiss or to terminate for unsatisfactory work. The Court treated it as a strong marker of service, and if your agreement carries such a clause you should expect the salary characterisation to hold. Do not try to split the package. The monthly amount, the allowance and the profit percentage were one remuneration under one agreement, and the percentage went the same way as the rest of it. If you are on the other side of this - arguing that a director is an agent or an independent professional - build the case on the articles and the agreement, not on the label. Ask what powers the person holds in his own right, who can end the arrangement, and whether he carries the company's business or his own. Where this matters for deduction, treat the remuneration as salary and deduct under section 192, and for a credit or payment on or after 1 April 2026 under section 392 of the Income-tax Act, 2025. Getting the head right decides which deduction provision you are in.
Still good law. No later decision was found that overrules, doubts or narrows this one, and no citator service was consulted. It continues to be treated as the governing statement on the point by the Supreme Court itself. In Comed Chemicals Ltd v C.N. Ramchand, decided 6 November 2008, the Court set this decision out at length, printing the citation (1972) 2 SCC 696, and took from it that a managing director may have a dual capacity, being both a director and an employee, and that whether he is the one or the other has to be determined from the articles of association and the agreement. That later judgment is also the independent check on the text relied on here, because it reproduces the dual-capacity passage in the course of deciding a different question. What has changed is the statute, not the test. The decision is on section 7 of the Indian Income-tax Act, 1922, and the corresponding charge is now section 15 read with the definition in section 17, which likewise brings in commission, fees, perquisites and profits in lieu of or in addition to salary. Nothing in the reasoning depends on the repealed text: the question the Court answered was whether the relationship was one of master and servant or of principal and agent, and that question is the same under either Act. On the years now in play. The Income-tax Act, 1961 was repealed on 1 April 2026 by section 536(1) of the Income-tax Act, 2025, and section 536(2)(c) continues it for proceedings pending, and proceedings initiated on or after that date, in respect of any tax year beginning before 1 April 2026, so assessments and deduction proceedings for those years are still decided on the 1961 Act with this case behind them. For a credit or payment on or after 1 April 2026 the deduction provision for salary is section 392 of the 2025 Act. The characterisation question this case answers is what determines which provision you are in, and it does not change with the repeal. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment is not divided into numbered paragraphs, so the quoted sentence is located by its place in the reasoning rather than by a paragraph number. Its passages on the distinction between a servant and an agent, on a managing director's dual capacity and on the irrelevance of day-to-day supervision are set out at length in later decisions, among them the Supreme Court's own judgment in Comed Chemicals Ltd v C.N. Ramchand of 6 November 2008, which prints the citation (1972) 2 SCC 696. Spelling and identity. The appellant is Ram Pershad; some sources spell it Ram Prashad, and a search under that spelling will miss the case. The respondent is the Commissioner of Income-Tax, New Delhi. The bench was K.S. Hegde, P. Jaganmohan Reddy and H.R. Khanna, JJ., the judgment was delivered by Jaganmohan Reddy, J. on 24 August 1972, and the appeal was Civil Appeal No. 1946 of 1968, brought by special leave from the Delhi High Court's judgment of 29 September 1967 in Income-tax Reference No. 46-D of 1962. One detail in the report reads oddly until the opening sentence is read closely. The agreement appointing the assessee as managing director is dated 20 November 1955, while the accounting year for the assessment year 1956-57 is the year ending 30 September 1955. The two sit together because the appointment did not come from the agreement. The assessee became the first managing director by virtue of Article 109 of the articles of association, on terms and conditions agreed to and embodied in the agreement of 20 November 1955; the written agreement recorded terms already agreed, and it is the articles and those terms that governed the commission for the year that had already closed. The company itself is never named - it is described only as a private limited company engaged in the business of running hotels in which the assessee and his wife owned a large number of shares. On how to use the case. Its strength is not the proposition that a managing director is an employee, which it does not lay down as a rule. Its strength is the method: the Court refused a single test, said the nature of the business and the duties have to be examined, and then read the articles and the agreement. An argument built on the label the parties used, or on the absence of day-to-day supervision, is the argument this judgment rejects. The passage from Anderson v James Sutherland (Peterhead) Ltd is quoted by the Court and is part of its reasoning rather than a stray reference. The Court decided the second referred question and no more. Having held the remuneration to be salary it said the other questions need not be considered, so it does not decide whether the sum was a revenue receipt of that previous year, and it does not decide anything about the assessee having given up the Rs. 53,913 after the accounts were finalised but before the shareholders passed them - a reader looking for authority on relinquishment before receipt will not find it here. It does not decide what happens on differently drawn articles, where a managing director holds powers in his own right rather than under the board, and it expressly disclaims any precise rule capable of being applied without looking at the business and the duties. The company is not named in the judgment. The case is about the head of charge, not about deduction at source; no deduction question was before the Court. It says nothing about a non-executive director's sitting fees, about a partner's remuneration, or about the treatment of a managing director under any statute other than the income-tax Act. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed with costs. The remuneration payable to the assessee, including the ten per cent of gross profits, is salary. Whether a managing director is a servant of the company apart from being a director can only be determined by the articles of association and the terms of his employment; on these articles and this agreement the company was itself carrying on the business, the assessee was employed to manage its affairs in terms of the articles and the agreement, he could be dismissed or his employment terminated if his work was not satisfactory, and the control and supervision was exercised by the board of directors whose collective decisions he had to carry out. His powers had to be exercised within the terms and limitations prescribed by the articles and subject to the control and supervision of the directors, which the Court held indicative of his being employed as a servant of the company. Having reached that conclusion the Court said in terms that the other questions need not be considered.
TaxSphere, “Ram Pershad v CIT”, https://taxnotice.vittsphere.com/caselaw/case/ram-pershad-v-cit-managing-director-remuneration-is-salary/ (validity last checked 2026-09-23)
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