Income Tax Ordinance (XXXI of 1979)---

----Ss.16(2)(a)(iii) & 15(d)---Salary income---Income from profession -- Agreement/contract---Assessee was a doctor and employee of a hospital--- Assessee, according to agreement, was also entitled to see/check outdoor patients of the hospital anal try receive 50% share from such fee in addition to salary---Fee received by the assessee/doctor in addition to salary was included in salary income under S.16(2)(a)(iii) of Income. Tax Ordinance, 1979 on the ground that assessee was an employee of hospital and all his receipts were salary for all intents and purposes ---Validity-- Agreement/contract gave right to assessee/doctor to check the private patients and did not bind him for the same---Word "entitled" gave the assessee/doctor option which he may or may not exercise---Collection of fee by hospital made the hospital an "agent" of assessee/ doctor and assessee had upper hand in the matter---Relationship, therefore, was that of employer and agent and not of employer and servant---Hospital was agent of the doctor, therefore, fee received by the assessee was an earning income from profession and was not considered as salary in circumstances.

Simmons v. Heath Laudary Co. (1910) 1 KB 343, 549; L. Jeewanlal v. CIT (1953) 24 ITR 217, 223 (All); K.P. Bhargava v. CIT (1954) 26 ITR 489, 495-6 (All.); Ram Prashad v. CIT (1972) 86 ITR 122 (SC); Dharangadhra Chemical Works Ltd. v. State of Saurashsra (1957) SCR 152, 160 = AIR 1957 SC 264, 268; Piyare Lal Adishwar Lal v. CIT (1960) 40 ITR 17, 24(SC); Lakshminaravan Ram Gopal & Sors Ltd. v. Government of Hyderabad (1954) 25 ITR 449 (SC); Inderchand Hari Ram v. CIT (1952) 22 ITR 108 (.All.); CIT v. Kundan Lal Lal Chand (1961) 41 ITR 245, 255 (All.); L. Jeewanlal v. CIT (1953) 24 ITR 217, 224 (All.); Shivnandan Sharma v. Punjab National Bank Ltd. (1955) 1 SCR 1427 = AIR 1955 SC 404 and CIT v. Manmohan Das (1966) 59 ITR 699 ref.

NTR 1990 (Trib.) 302 distinguished.

Sh. Muhammad Hanif, D.R. for Appellant.

Zia Ullah Kiyani for Respondent.

Date of hearing: 28th September, 1999.

ORDER

KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).---These appeals have been filed by the Department contesting finding of the first appellate authority that the professional receipts from hospital should not be, equated with salary and expenditure: should be allowed to the assessee against such receipts. The Department' S point of view in this case is that the assessee being an employee of Fatima Memorial Hospital all his receipts are salary for all intents and purposes. Reference has been made to the definition of salary as per section 16(2)(a)(iii) which speaks as follows:---

S. 16(2) For the purposes of subsection (1);

"(a) Salary includes.

(i) Any wages;

(ii) Any annuity, pension or gratuity;

(iii) Any fees, commissions, allowances, perquisites or profit in lieu of or in addition to salary or wages;"

2. It was argued that salary includes fees, commissions etc. hence, in his opinion the share of fee received from the principal by the Doctor in addition to salary is also salary. On asking question that if a Doctor is not employee with some organization and a contract exists between the two for sharing the profits received on account of consultancy and treatment of the patients whether it still shall be covered within the definition of salary. The learned D.R. frankly admitted that it shall be taxed as a professional receipt.

3 Coming back to the facts of the case he said that the assessee is employee with the hospital at a very nominal salary which comes to Rs.63,683 per year while his consultancy receipts from hospital are at Rs.5,02,274. This, he says, speaks of the arrangement between the two parties, hence, allowance of expenditure against share income is hardly justified.

4. The learned A.R. on his turn started arguments from the contract of employment between the Doctor and the principal i.e., Fatima Memorial Hospital. The agreement between the two which was made on 1st day of January, 1987, as per clause 4 speaks as follows:--

"The 2nd Party shall pay the 1st Party (in consideration of services rendered) on the 7th day of each month (Provided it is not Friday or holiday) following the period of service. The 1st Party shall be entitled to see Private Patients registered as out--patients and admitted as in--patients by the hospital. The hospital shall collect all fees. 50% of the Doctor's fees collected by the hospital shall also be paid to the 1st Party (besides the consolidated salary mentioned above). "

5. The above clause, the learned A.R. said, clearly envisages that assessee has two separate relationships one is of master and the servant and the other relationship is of partner. The share which is to be determined by the hospital authorities is after deducting all the related expenses and it is the net profit which is to be shared by the hospital management and the assessee. To say that a person is receiving salary from another person, requires existence of the relationship of employer and the employee with an essential connection as a master and a servant. It is a question of fact and the same shall vary from case to case as to whether a relationship of master and servant exists between the management and the worker or not. The test for the same is that the right of control in respect of the manner, in which the work is to be done remains within the employers. This is where, the learned A.R. remarked, the 'contract for service, and, Contract of service' is distinguished. In these two types of contracts, he said, where complete control remains 'in the hands of an employer and there does not remain any degree of independence of the employee, is called contract for service, on the other hand, where some degree of independence is allowed the contract becomes the 'contract of service', 'The correct method of approach, therefore, would be to consider the record and nature of work. Further, there was due control and supervision by the employer or it is contract between the employer and independent contractor. The present contract, he said, is both. It is a, contract for employment, and a, contract of employment. He added that greater the degree of independence, greater the probability that the services rendered are of the nature of professional services. Reference has been made to Simmons v. Heath Laudary Co. (1910) 1 KB 343, 549. The question whether a particular income is from "salary" or "income from business" becomes rather thin and question has to be determined on such material as may be available, The relationship of servant and master between the contracting party requires separate several tests:---

"(see L. Jeewanlal v. CIT (1953) 24 ITR 217, 223 (All). In a contract for service there are three basic concepts which must be borne in mind. A servant does the work for his master and the work done by him is, therefore, not his own. The control and supervision must necessarily be of the master, and the servant is bound to work according to his directions. The servant works for remuneration which may be paid in lump sum or on a commission basis or partly the other. The relationship of master and servant being, however, the result of a contract, it is possible to vary any or all the terms mentioned above by agreement. But the basic idea of servant doing the work of the master for remuneration and under the supervision or control of the master is always there. On the other hand, a person carrying on a business cannot be said to be doing the work of another; he has an interest in the business and can be said to be doing own word. He is entitled to the profits and is liable for the losses, and he also has a discretion to do his work in his own way. Even in the case of a business agreement, it is possible to vary all or any of these terms by contract and then the question whether it is a business activity or a contract of service becomes more difficult a question to be decided by taking into account all the facts and the totality of circumstances) K.P. Bhargava v. CIT, (1954) 26 ITR 489, 495-6 (All). Also see, L. Jeewanlal v. CIT, (1953) 24 ITR 217, 223-4(All); Ram Prashad v. CIT, (1972) 86 ITR 122 (S.C). The circumstance whether a person works whole time or only part time also gives some indication and if it is found that an assessee undertakes to do similar work for a number of persons, it indicates that the assessee is carrying on a business activity, though from the fact that he is doing the work only for one person it does not necessarily follow that the relationship between them is that of a master and servant. "

The abovementioned para. is self-explanatory. It requires adjudication on the basis of facts and circumstances of each case separately, hence, matter cannot be decided as a blank chit applicable on all. In the present case, the learned A.R. argued, it is clearly indicated that the assessee is entitled to see private patients registered as out, patients and the hospital, after collecting all fees, shall

pay 50% of the Doctor's fee to the first party Le, our assessee. This payment shall be in addition of the consolidated salary paid. It was, therefore, urged that the hospital share is a business income for all intents and purposes.

We have gone through the arguments of the two parties. Before giving our finding it will be more appropriate to go through NTR 1990 (Trib.) 302, the judgement referred by the I.T.O. It is true that the learned Tribunal in the said judgment has held the fee and commission to be taxable in spite of the fact that these are paid in addition to or in lieu of salary but the facts of the case are different. The assessee in the referred judgment was an employee of Lady Willingdon Hospital (a Government Hospital) and was receiving salary. In addition, being a Superintendent/Surgeon at the said Government Hospital, he was getting share fee for surgery etc. performed by him at the same Hospital as a part of his service contract. He was also receiving income from Private practice from private hospital which was not disputed and was not considered as income from salary. In that case the assessee had shown his income to be a part of salary but the Department had treated it to be a professional income. When the issue came for consideration before the learned ITAT, the Tribunal gave the following finding:---

"In the case in hand it is admitted by both sides that the 'share of hospital fee' was paid to the Appellant-employee by his employer Le, the Government of the Punjab (through Lady Willingdon Hospital). Therefore, what the Appellant received is to be treated as, 'salary' on which tax at source was to be deducted by- the employer in adherence to the provisions of section 18(2) of the repealed Act and 50(1) of the Ordinance. The default of the employer in not effecting a deducting cannot be an excuse to penalise the employee more so when the law has specifically provided under section 18(7) of the repealed Act and section 52 (read with section 86) of the Ordinance that failure by the payer to deduct the tax would result his being treated as an 'assessee in default' in addition to levy of additional tax on him. Therefore, the present Appellant could not be burdened with penalty in the form of additional tax as was charged by the Assessing Officer and confirmed by the learned Commissioner. It is true that the recipient s responsibility to deposit tax did arise when he filed the return in which 'hare from hospital "fee' was included in the Total income. At this point of Time, it was the responsibility of the Appellant to make payment to the extent of admitted liability under section 22A of the repealed Act which is equivalent to section 5.1 of the Ordinance. The failure to pay this admitted amount of tax attracts the provisions of section 45A(b) of the repealed Act or section 88 of the Ordinance, but no such charge seems to have been inflicted or contemplated. Therefore, we are of the view that the Assessing Officer clearly fell in error in invoking the provisions of section 18A of the repealed Act and section 87 of the Ordinance for charging additional tax and not pressing into service the provisions relating to default of non-payment (or short payment) of tax with the return. We consequently UNDO the treatment by the two officer below. "

The test basically is that the relationship between employer and employee or master and servant has got to be determined. For this purpose uniformly applied principle is determination of relationship the existence of right of control in respect of the manner in which the work is to be done and to draw a distinction between a 'contract for service' and a 'contract of service'. In a large number of cases, the nature or extent of control is considered as requisite to establish the relationship of employer and employee. It is true that it necessarily varies from business to business and is by its very nature incapable of precise definition. It is not necessary for holding that a person is an employee, that the employer should be proved to have exercised control over his work. The test of control is not one of universal application and there may be many contracts in which the master could not control the manner in which the work was done. In our view the correct method of approach, therefore, would be to consider whether having regard to the nature of work there was due control and supervision by the employer (see Dharangadhra Chemical Works Ltd., v. State of Saurashtra (1957) SCR 152, 160 = AIR 1957 SC 264, 268). Also see Piyare Lal Adishwar Lal v. CIT (1960) 40 ITR 17, 24(SC) which gives the tests and also states how to distinguish the relationship of master and servant from that of an employer and independent contractor. In fact the greater the amount of control exercised over the person rendering the services by the contracting for them the stronger the grounds for holding it to be a contract for service and similarly the greater the degree of independence of such control the greater probability that the services rendered are of the nature of professional services and the contract is not one of service (Simmons v Health Laundry Co. (1960) 1 KB 543, 549. Further, a master is one who not only directs what and when a thing is to be done and also how it would be done. (Lakshminarayan Ram Gopal & Sons Ltd. v. Government of Hyderabad (1954) 25 ITR 449 (SC).

After going through the above detailed definition of an employer and employee, we now distinguish between the status of an employee and that of an agent. The status of a person appointed vis-a-vis nature of appointment has elaborately been discussed in the following judgments:

"Status of the person appointed vis-a-vis nature of appointment---- The status of the person appointed is a relevant consideration when interpreting the nature of that appointment (see, Inderchand Hari Ram v. CrT, (1952) 22 ITR 108 (All); CIT v. Kundan Lal Lal Chand, (1.'361) 41 1TR 24z, 255 (All); L. Jeewanlal v.-CIT, (1953) 24 ITR 217, 224 (All). In Inderchand Hari Ram's case (22 ITR 108), the question for consideration vas, whether a partnership firm acting as managing agents was working in tile capacity of a servant or was carrying on its business'. It was observed, thus, at page 121 that 'the work of managing agents of a company can be carried on by a servant, as well as business by a person working as managing agent. If the managing agent happens to be an individual, he can. take up the work of a managing agent in either of the two capacities of a servant or as a personal business of his own. In the case of a firm, which can be constituted only for the purpose of sharing profits of a business, the work of managing agency must be held to be the business of the firm and, therefore,, it was held that the work of managing agent was being carried on by the-partnership firm as a business and the appointment as such was not appointment of a servant to a post. The principle laid down in Inderehand Hari Ram's case (supra) has been approved by the Supreme Court in Lakshminarayan Ram Gopal & Sons Ltd. v. The Government of Hyderabad (1954) 25 ITR 449, 460). The Supreme Court laid down the principle in the following words:

'When a partnership firm comes into existence it can be predicated of it that it carries on a business, because partnership according to section 4 of the Indian Partnership Act is the relation between persons who have agreed to share the profits of business carried on by all or any of them acting for all'.

Illustrations-- Bank treasurers.---(1) A was appointed treasurer of a branch of the Punjab Nation Bank Ltd. The agreement disclosed that the treasurer agreed to serve the bank and to obey and observe all lawful orders and instructions of the bank and. to carry out such duties and discharge such responsibilities as usually devolve upon a treasurer and to obey all the orders, rules and regulations prescribed by the bank. The bank had, in certain circumstances, the power to dispense with his service. The treasurer could not engage any assistant or peon if the bank had objection to such appointment: Held, the treasurer's relation with the Bank was that of servant and the master (Shivnandan Sharma v. Punjab National Bank Ltd. (1955) 1 SCR 1427 = AIR 1955 SC 404).

(2) S was appointed as treasurer of the Central Bank for running branches on a monthly salary. Under the agreement, S had to engage and employ all subordinate staff, with power to control, dismiss and change the staff at his pleasure. Engagement or transfer of. the staff was with the approval of the bank and he had to dismiss a member of the staff if so required by the higher authorities of the bank. He was responsible for the acts and omissions of his staff and had agreed to indemnify the bank against any loss arising from am neglect or omission on their part. But the treasurer and his staff were under the direct control of the bank: Held. the treasurer was an employee of the bank and emoluments received by him were assessable as `salary' (Piyare Lal Adishwar Lal. v CIT, (1960) 40; ITR 17 (SC). Also see,. K.P. Bhargava v. CIT, (1954) 26 ITR 489 (All).

(3) M was appointed treasurer of the Allahabad Bank for its branches, sub-agencies and pay offices. He had to provide staff for cash section, with power to suspend, transfer or dismiss and to appoint any other man in his place. He was responsible -for all acts of the staff so appointed which resulted in loss or damage to the bank. He was also responsible for the receipt of any bad money or base- money, or coin or bullion or any forged or fraudulently altered currency notes. There was no covenant which expressly or impliedly conferred on the bank control and supervision over the work of the treasurer. Entitled to a monthly allowance of Rs.2,250 and additional Rs.350 for travelling allowance, the assessee suffered a net loss of Rs.38,027 in the performance of his duties: Held, the treasurer was not an employee but was following a vocation (CIT v. Manmohan Das (1966) 59 ITR 699 (SC).

Other treasurers.---K was Karta of a H.U.F., and was appointed Government treasurer, Ajmer-Merwara. He was to take over charge of the 'post' and was to receive a 'pay'. K gave security and also furnished a bond. K was to maintain accounts and submit them as and when called for by his superior officer. K could appoint his subordinates after himself taking security with the approval of the District Officer who was also empowered to take disciplinary action including dismissal of the staff appointed by K. K was not required to render any personal service. Held, K was not an employee but an independent contractor (CIT v. Kundan Lal Lal Chand, (1961), 41 ITR 245 (All)."

The above distinction explained through the arguments is very exhaustive.

Coming to the impugned case following the above discussion the assessee has made two contracts. The first one is as an employee wherein the relationship of master and servant fully exists. The doctor is supposed to perform his duty within a prescribed time against the salary agreed by him. He is bound to work those hours under the prescribed rules and regulation of the hospital. His work is not independent and is subject to the contract between the hospital and himself so far as this part of contract is concerned. So, the doctor is an employee and his income is salary and this is not disputed. Coming to the hospital share, the same is under clause (4) of the same contract and we have mentioned the same supra. It speaks that on 7th day of each month the first party shall be entitled to (underlined for emphasis) see private patients. Through this contract the management gives a right to the doctor of checking the private patients and does not bound him for the same. The relationship, therefore, is obvious. The usage of word 'entitled' gives her the option which the doctor may or may not, exercise. The other part of the clause speaks that the hospital shall collect fee and 50% of the share shall be paid to the doctor in addition to the consolidated salary mentioned above. These lines make the hospital an "Agent" of doctor for collection of fee etc. and the upper hand apparently is that of the doctor. Unlike the contract for employment, there is, therefore, no relationship of master and servant between the two. In this clause the relationship is that of employer and agent and the employer here is doctor while the hospital is an agent. Needless to repeat that the doctor's option is independent. He may and may not exercise the option of checking the outdoor patients of the hospital. This is where we need to revert back to the judgment of the ITAT wherein fee and commission from the same hospital were held to be salary. The facts of the said judgments have already been narrated by us in detail. In the said judgment which was referred as NTR 1990 (Trib.) 302 the assessee was salaried employee of the provincial government wherein under the rules and regulation no private consultancy or practice was to be allowed. The amount which was considered as a part of salary was from surgery which is a part of contract of employment being a Government servant. The doctor under the rules of the hospital is legally bound to operate the patients in the prescribed time. He does not have the option to -say that he cannot perform the duty in the operation after and his relationship even to this extent was that of a master and servant, the master being Provincial Government and the servant the then doctor. He, however, was entitled to a part of the fee from the surgery which was definitely in lieu of his salary, hence, was very well-covered within the said definition. This judgment, therefore, is fully distinguishable from the facts of the present case.

From the above discussion we hardly have any doubt in our mind in holding that the assessee impugned in earning income from his profession and, therefore, this type of fee is not to be considered as salary. The departmental appeal, therefore, is considered without any merit and is, therefore, dismissed.

C.M.A./M.A.K./109/Tax(Trib.) Appeal dismissed.