Taxation lawDirectorSupreme Court of India

Ram Prashad v CIT

(1972) 86 ITR 122 (Supreme Court)19721 min read
The case in brief30-second read
Facts
Ram Prashad was a director and substantial shareholder in a private limited company. He received remuneration from the company for services rendered as director. He declared the income as professional/business income.
Issue
Whether director's remuneration is "salary" or "business/professional income"
Held
Where remuneration is received in the capacity of a director (employer-employee relationship with the company), it is salary.
Principle
Remuneration received by a director from a company in which substantial shares are held is taxable under 'Salary' if there is an employer-employee relationship.
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Facts

  • Ram Prashad was a director and substantial shareholder in a private limited company
  • He received remuneration from the company for services rendered as director
  • He declared the income as professional/business income
  • The CIT assessed it as "Salary" under S.15-17
  • The dispute centred on the correct head of income

Issues

  1. Whether director's remuneration is "salary" or "business/professional income"
  2. What determines the head: the capacity in which earned, or the status of the earner

Held

  • Where remuneration is received in the capacity of a director (employer-employee relationship with the company), it is salary
  • The fact that the director is also a substantial shareholder does not change the character
  • The test is the relationship and capacity, not ownership stake
  • Assessed as salary under S.15-17

Ratio decidendi

The head of income is determined by the juridical relationship under which the income is received. A director serves the company in a capacity akin to employment; remuneration for that service is salary. The shareholder's proprietary interest in the company is separate from the director's service relationship. Income wears the colour of the relationship that generates it.

Exam use

How to use it in an answer

  • Cite in Tax Law questions on heads of income and director's remuneration characterisation
  • Relevant for company law questions on the dual capacity of directors (service vs ownership)
  • Pair with S.17 (definition of salary) and deemed provisions for specified persons

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Citation

Ram Prashad v CIT (1972) 86 ITR 122 (Supreme Court)

Reported: (1972) 86 ITR 122 (Supreme Court). This is an educational summary, not the judgment itself. Cite the reported version in professional or academic work.