The sine-qua-non for chargeability under the head "salary" is that there must exist a relationship of employee and employer between the assessee and the person making the payment i.e. before the payment from one party to the other can be regarded as salary within the meaning of Sections 1 5-17 of the Income tax Act, 1961 the relationship of employer and employee or master and servant is essential.
A salary is given to an employee by the employer in lieu of a contract of service and is characterized by a master servant relationship. This project aims at culling out a standard test for establishing an employer employee relationship, the need for which arises in the absence of any provision to that effect in the Income Tax Act. This task has been made difficult by the inconsistencies in the Indian case law as well as repeated observations of the Courts that no clear cut criterion exists to establish such a relationship.
The prima facie test to determine an employee-employer relationship is the direct control test under which a greater amount of supervision over an employee and less independence or discretion to perform work implies a master servant relation. To determine control the employer should itself be carrying on the business and the assesse should have been employed to manage its affairs. The assesse could be dismissed if his work was found unsatisfactory, making him an employee of the company. In Shining Tailors v. Industrial Tribunal II, U.P , it was held that the employer’s right to reject the end product, if it does not conform to the instructions of the employer, speaks for the element of control and supervision.
However, this test should not be used as a sole criterion because the nature or extent of control mentioned in the test varies from business to business making it lack universal application. As an alternative the Courts use the organisation test, namely, whether the person concerned was a part and parcel of the organisation. Here, the fact that the workers perform services in the employer’s premises, and work on the machines belonging to him, become relevant factors. This test has been modified into the integration test which looks at whether the person performing the services is an integral part of the company or whether they conduct business similar to someone performing services as a contractor. The problem with this test is that someone can still be a contractor but also be an integral part of an organisation.
A further test is the economic control test which was applied in Hussainbhai v. Alath Factory Tozhilali Union where it was held that where a worker produces goods or services for the business of another, that other is, in fact, the employer, as he had the economic control over the workers' subsistence, skill and continued employment. In other words it is only the employer who takes the entrepreneurial risk of losing money in the employer-employee relationship but it is not so in case of a principle-agent or an independent contractor relationship.
Also, actors and actresses are generally in the nature of independent contractors and the income earned by them is not taxable under the head ‘salaries’ as they do not work for one single employer. Furthermore, partners at a firm are not in a employee-employer relationship. Afirm is not a legal person, it is a unit of assessment, by special provisions, but is not a full person. Since a contract of employment requires two distinct persons, employer and employee, there cannot be a contract of service. Payment of salary to a partner represents a special share of the profits.
A different test has been the idea of 'mutuality of obligations' as a possible factor, i.e. whether the course of dealings between the parties demonstrates sufficient such mutuality for there to be an overall employment relationship.
In tax cases a different test namely the holding of office test applies. In CIT v. Govindaswaminthan an advocate general holding an office under the State Government terminable at the will and pleasure of the Governor and who gets a retainer and fees could not be treated as employee and his income is a professional income. He is not at par with government servants though he gets TA and DA like them as he is not subject to conduct rules and does not hold a permanent position. Similarly, in Union of India v. Pratibha Bonerjea it was held that a High Court judge is not an employee of the government. Also, a Member of Parliament is not an employee of the Government and he does not receive salary.
The law relating to assessment under the head salary was thus far understood as necessitating an employee-employer relationship. However, a turning point in the tax jurisprudence however was brought by the case Justice Deoki Nandan Agarwala v. Union of India where the Supreme Court held that being constitutional functionaries like judges receive salaries just like an employee even in the absence of a strict employee-employer relationship. Thus, what became relevant were the employment and not the presence of an employer.
There are multiple tests to determine the existence of an employer-employee relationship and the Courts have used one or more as per their discretion and the facts of the case. The tax authorities have also faced with the challenge of determining such a relationship and the muddled jurisprudence in this regard is witness to the same. Tax statutes need a strict interpretation and a lacuna in clearly defining such an important aspect should indeed be corrected.
