WHO EARNS SALARY INCOME?

CHARGEABILITY OF SALARIES

Salaries.
15. The following income shall be chargeable to income-tax under the head
"Salaries"—
(a) any salary due from an employer or a former employer to an assessee in the
previous year, whether paid or not;
(b) any salary paid or allowed to him in the previous year by or on behalf of an
employer or a former employer though not due or before it became due to him;
(c) any arrears of salary paid or allowed to him in the previous year by or on behalf
of an employer or a former employer, if not charged to income-tax for any
earlier previous year.
Explanation 1.—For the removal of doubts, it is hereby declared that where any
salary paid in advance is included in the total income of any person for any previous
year it shall not be included again in the total income of the person when the salary
becomes due.
Explanation 2.—Any salary, bonus, commission or remuneration, by whatever name
called, due to, or received by, a partner of a firm from the firm shall not be regarded
as "salary" for the purposes of this section.

ESSENTIAL FEATURES OF SALARY INCOME:

Employer-employee relationship
 Factors distinguishing servant from agent - The distinction between a servant
or an agent can be summarised as follows : (i) generally a master can tell his
servant what to do and how to do it; (ii) generally a principal cannot tell his
agent how to carry out his instructions; (iii) a servant is under more complete
control than an agent; (iv) generally, a servant is a person who not only
receives instructions from his master but is subject to his master’s right to
control the manner in which he carried out those instructions; an agent
receives his principal’s instructions but is generally free to carry out those
instructions according to his own discretion; (v) generally a servant qua
servant has no authority to make contracts on behalf of his master; generally,
the purpose of employing an agent is to authorise him to make contracts on
behalf of his principal; (vi) generally an agent is paid commission upon
effecting the result which he has been instructed by his principal to achieve;
(vii) generally a servant is paid wages or salary - Lakshminarayan Ram Gopal
& Son Ltd. v. Govt. of Hyderabad [1954] 25 ITR 449 (SC).
For ascertaining whether a person is a servant or an agent, 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 that person. A servant
acts under the direct control and supervision of his master. An agent on the
other hand, in the exercise of his work, is not subject to the direct control or
supervision of the principal, though 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. But this test is not universal in its
application and does not determine in every case, having regard to the nature
of employment, that he is a servant. A person who is engaged to manage a
 business may be a servant or an agent according to the nature of his service
and the authority of his employment. Generally it may be possible to say that
the greater the amount of direct control over the person employed, the stronger
is the conclusion in favour of his being a servant. Similarly, the greater the
degree of independence the greater the possibility of the services rendered
being in the nature of principal and agent. It is not possible to lay down any
precise rule of law to distinguish one kind of employment from the other. The
nature of the particular business and the nature of the duties of the employee
will require to be considered in each case in order to arrive at a conclusion as
to whether the person employed is a servant or an agent. In each case the
principle for ascertaining remains the same - Ram Prashad v. CIT [1972] 86
ITR 122 (SC).
 Control and supervision are relevant factors - It is difficult to lay down any
one test to distinguish the relationship of master and servant from that of an
employer and independent contractor. In many cases the test laid down is that
in the case of master and servant, the master can order or require what is to be
done and how it is to be done but in the case of an independent contractor an
employer can only indicate what is to be done but not how it shall be done.
But this test also does not apply to all cases, e.g., in the case of ship’s master, a
chauffeur or a reporter of a newspaper. In Dhrangadhra Chemical Works Ltd.
v. State of Saurashtra [1957] SCR 152, it was said that in all cases the correct
method of approach is whether having regard to the nature of work there was
due control and supervision by the employer - Piyare Lal Adishwar Lal v. CIT
[1960] 40 ITR 17 (SC).

Arrears of salary
Salary due but not paid or taxed in earlier year is taxable as ‘arrears of salary’ in
year of payment - Salary due to an assessee in the earlier years, which was neither
paid nor was charged to tax in those years, will have to be treated as ‘arrears of salary’
within clause (c), and will have to be brought to tax in the year(s) in which it was
paid. The said clause (c), broadly put, is intended to catch such salary as has escaped
the charge of income-tax in earlier years - CIT v. Sardar Arjun Singh Ahluwalia
(Decd.) [1999] 240 ITR 693/107 Taxman 246 (SC).

Retirement payments
Voluntary retirement payments received in instalments accrue in the initial year -
Where the assessee took up voluntary retirement from a bank under a scheme which
provided for payment of only 50 per cent of the ex gratia payment in the year of
retirement and the balance 50 per cent in annual instalments over the succeeding
years, the entire ex gratia amount must be treated as ‘salary’ which has accrued to the
assessee in the year of retirement - Y.S.C. Babu v. Chairman and Managing Director,
Syndicate Bank [2002] 253 ITR 1 (AP).

Directors – are they employees?

Company director is not a servant - A director of a company is not a servant but an
agent inasmuch as the company cannot act in its own person but has only to act
through directors who qua the company have relationship of an agent with the
company - Ram Prashad v. CIT (supra).
Company director can have dual capacity - There is no controversy that a director of
a company enjoys dual capacity. He might be a director as well as an employee, but
that he is an employee must not be a paper work, rather it should be proved and
established on record as a fact - CIT v. Smt. Shanti Devi [1992] 64 Taxman
251/[1993] 199 ITR 800 (Ori.).
Managing director can be a servant - Whether or not a managing director is a servant
of the company apart from his being a director can only be determined by the articles
of association and the terms of his employment. If the company is itself carrying on
the business and the managing director is employed to manage its affairs in terms of
its articles and under the agreement, he could be dismissed or his employment could
be terminated by the company if his work is not satisfactory, it could hardly be said
that he is not a servant of the company - Ram Prashad v. CIT (supra).

Professionals – they are not employees

Professionals rendering incidental services are not servants - Where an assessee,
deriving income from profession as a musician, incidentally rendered services to a
college of music, it could not be said that there was a master and servant relationship -
CIT v. Jnan Prakash Ghosh [1992] 62 Taxman 151 (Cal.).