1990 PLP 810 (PTD)

SALEEM AKHTAR, J.‑‑‑The applicant is foreign qualified doctor. He entered into an agreement with Esso Pakistan Fertilizer Company Limited Daharki District Sukkur in terms of which he was to perform his duties. The deed of agreement was executed on 28‑1‑1975 which was followed by a deed of clarification dated 29th November, 1975. The applicant filed his return for assessment years 1975‑76 and 1976‑77 declaring his income from profession and medical practice. He also claimed exemption from tax under Notification SRO 26(K)/68 dated 19‑12‑1968. The Income Tax Officer did not accept the claim of exemption and treated the payments made to the applicant as income from salary and subjected the same to tax in both the years under section 7 of the Income Tax Act 1922. The applicant filed appeal against the assessment order which was allowed by the Appellate Assistant Commissioner. The department then filed an appeal before the Tribunal which was accepted and the order of the Income Tax Officer was maintained. The applicant filed application under section 136(1) of the Income Tax Ordinance, 1979 for reference to the High Court the following questions. "(1) Whether in the facts and circumstances of the case, the Tribunal was justified in holding that the applicant was not entitled to exemption from tax under Notification S.R.O.26(K)/C8 dated 19‑12‑1968.? (2) Whether in the facts and circumstances of the case the Tribunal was justified in holding that the applicant was not entitled to exemption from tax under the said Notification for the reason that the relationship of the Doctor and the Company was that of an employee and the employer and that the fee paid to the Doctor was income from salaries liable to be taxed under section 7 of the Income‑tax Act, 1922 ?" The learned Tribunal referred question No. 1 in the following manner: "The assessee‑applicant has proposed two questions, one of which appears to be redundant and will be covered by the question as reframed by us which is common for l0th the years ?" "Whether on the facts in the circumstances of the case the Appellate Tribunal was justified in holding that the applicant was not entitled to exemption from tax under Notification No. S.R.O. 26(K)/68 dated 19‑12 1968? Mr. Shaikh Haider has contended that the question whether the relationship of employer or employee exists cannot be agitated as the facts and circumstances of the case have been decided by the Tribunal. From the aforestated observation of the Tribunal it is clear that the second question raised by the applicant has been deemed to be covered by the first question. The intention of the Tribunal was to refer both the questions by which finding of the Tribunal was also challenged. In this background we reframe the question as follows: "Whether the Appellate Tribunal was justified in holding that the applicant was not entitled to exemption from tax under Notification No. S.R.O. 26(K)/68 dated 19‑12‑1968?" The reply to this question depends upon the interpretation of the notification which reads as follows: "SRO 26(K)/68. dated 19‑12‑1968: ‑In exercise of the powers conferred by subsection (1) of section 60 of the Income Tax Act, 1922 (XI of 1922), the Central Government is pleased to exempt from the tax payable under the said Act so much of the income of medical practitioner registered under the Medical Council Ordinance, 1962 (XXXII of 1962) as is derived by him on or after first day of July, 1968 from medical practice (including income from the dispensing and sale of medicines) but not including any income chargeable under the head `salaries' set up at any place beyond a radius of ten miles from the outer boundary of a Municipal Committee or Cantonment Board. After considering the agreement between applicant and the company the learned Tribunal observed as follows: "As far as the set up of practice is concerned no length (or force) or arguments car, persuade us to believe that any such practice was set up by the Respondent. The terms of Agreement dated 28‑1‑1975 are unambiguous that he was to `run the Company's clinic, without any fee or charges to the Company's employees, their families and such other persons as called upon by the company at the clinic or at the residence," the stock of medicines was to be maintained at the cost of the Company, the Company was to provide a clinic fully equipped with X‑Ray unit, pathological laboratory, ECG etc. for all of which not only full cost was to be borne by the Company but its replacement (repairs) were also Company's burden. Neither the Respondent provided working capital (and material) nor was he responsible for any financial liability or loss occasioned by the work on which he was engaged. Again the Respondent was to "abide by the code of discipline and rules enforced from time (to time) in the area . All these clearly show that there was just no setting up of practice but simply attending a most modern and well equipped working place owned by ,the someone else. The conclusion is thus inescapable that. no practice was set up by the Respondent." The learned Tribunal was impressed by the facts that the clinic was established by the company which provided all equipments and medicines and the applicant did not contribute any working capital and was subject to the disciplinary rules of the company. The fee fixed under the agreement was to be paid by the company and not by the patients which was pre‑determined. And that the staff employed to assist the applicant was to be paid from his own sources but it was not clear that such payment was to be made from the fee received under the agreement. In order to determine the nature of the service rendered by the applicant one has to first examine the terms and conditions of the agreement. Copies of the agreement have been supplied by the learned counsel for the applicant as the same were not incorporated in the paper book which ought to have been done. Mr. Shaikh Haider has not denied these agreements. The first agreement is dated 28‑1‑1975 which was modified and also clarified by agreement dated 29‑11‑1975. According to the terms of agreement the applicant was to independently run the company's clinic at Daharki. The applicant was to undertake and provide proper medical consultation, treatment, advice, first aid as well as guidance on preventive measures in accordance with the requirement of the company without any fee or charge from the company's employees and their families and such other persons as may be referred by the company. The clinic was to be maintained and equipped with all instruments, laboratories, medicines and X‑Ray machine by the company in order to fulfil his obligation under the agreement. The applicant was to obtain assistance of independent qualified medical and para‑medical staff with whom the company had no relationship of employer and employee. They were to be appointed by the applicant and it was his sole responsibility to pay them from his own source. In respect of such medical or para‑medical staff, the applicant was required at all times to indemnify and keep the company harmless against all claims, proceedings and costs. In this connection a list of such medical and para medical staff was to be supplied to the company who were to abide by the code of discipline and rules in force from time to time in the area. The replacement cost and maintenance of the clinic was to be borne by the company. The applicant was however responsible for any loss or damage of the company's property in his custody caused through his carelessness or negligence. It was the duty of the applicant to ensure that persons selected to assist him attend their duties in the clinic on all working days in the company. The applicant was to be paid a fee of Rs. 20,125 upto 31‑12‑1975 and thereafter Rs. 19,90() per month, and he was not entitled to any allowance or concessions or additional fee except as provided in the agreement. It was made clear by clause 15 that the relationship of employer and employee will not exist between the parties and they will purely be independent parties. The agreement could be terminated by either party by giving three months' notice or payment in lieu of notice equivalent to three months' fee. On the basis of these conditions it is to be considered whether the amount paid by the company was a salary, remuneration or fee. Salary is always paid to the employee by the employer. The definition of salary given in section 7 of the Income Tax Act ‑is inclusive and wide to cover even allowances, perquisites and other benefits conferred on the employee. Therefore the first criteria is that there should be a relationship of employer and employee. The relationship as described in the agreement is not always final for its determination and therefore one has to examine the terms of the agreement between the parties. Besides the relationship between the parties as described in the agreement there are other factors which may lead to relationship of employer and employee. One of them is the right of the master to hire and fire an employee. The power of the master to select the servant, the payment of wages and the right to control the work of the employee. Where these factors exist the relationship of employer and employee is established. The applicant is a foreign qualified doctor who had entered into an agreement to render service exclusively providing that such relationship will not constitute relationship of master and servant. This may be a secondary aspect of the case but the facts as established on record and held by the Tribunal are that the clinic was established and equipped by the company for the treatment of the employees of the company and such other persons who were referred by the company. The applicant was required to render professional service of treating such persons giving medical aids and also providing for preventive measures against health hazards. The nature of services rendered by the applicant were of such a nature and magnitude that they could not be performed by him alone therefore he was required to engage medical and para‑medical staff. Such staff was to be engaged by the applicant and he had merely to intimate their names to the company. Such staff was not to be paid by the company nor they were to be treated as employees of the company. It is specifically provided that such staff was to be paid by the applicant from his own sources. The fact whether the applicant was to pay their salary from the fee received from the company under the agreement or from his other independent sources does not materially affect the merits of the case so long it is established that such staff members were not paid by the company as their employees. They were engaged by the applicant who used to pay their salary and further the applicant was to indemnify the company against loss or damage caused by such employees. Therefore the applicant had to maintain his own staff for the purpose of rendering his duties who were responsible to him and for their negligence the applicant was to be held responsible. The applicant was thus working independently as a doctor providing medical services to the employees of the company without charging any fee from them. The service rendered and the treatment given by him were completely independent of the company's control. The company had no control over his work or performance of his professional duties. The controls which have been specified in the agreement are in the nature of disciplinary rules provided for persons residing in the working area. All such restrictions and conditions imposed by the company did not in any manner interfere or control his professional duties and services rendered by him. One of the most important considerations for determining the relationship of employer and employee is to find out the extent of control of the employer on the work performed by such person. Where the work is controlled by the employer then the person engaged becomes an employee but where such person is left to perform his duties independently without any control on the manner in which he works then subject to other terms and conditions the relationship of master and servant is not created. The company had only provided clinic, equipment, laboratory and medicines but they could be utilised for treatment on the advice of the doctor in his professional capacity and with the assistance of such medical and para‑medical staff who were employed and paid by him. The interference and control of the company in the field of applicant's professional advice, treatment and service is completely excluded. Where there is agreement "for service" the person engaged works independently and he cannot be treated as a servant. But in the "agreement of service" the manner in which the worker has to perform his duties is under the control of the master and he will be classified as a servant. In this regard reference can be made to Dharangadhra Chemical Works. Ltd. v. State of Saurashtra and others AIR 1957 S C 2fA where it was observed as follows: "The principles according to which the relationship as between employer and employee or master and servant has got to he determined are well settled. The test which is uniformly applied in order to determine the relationship is the existence of a right of control in respect of the manner in which the work is to he done. A distinction is also drawn between a contract for services and a contract of service and that distinction is put in this way; "In the one case the master can order or require what is to be done while in the other case he cannot only order or require what is to be done but how itself it shall he done." (Per Hilbery, J. in Collins v. Hertfordshire County Council, 1947 KB 598 at p.615 (A)). The test is, however not accepted as universally correct. The following observations of Denning L.J., at pp. 110, 111 in Stevenson, Jordan and Harrison Ltd. v. Macdonald and Evans, 1952‑1 TLR 101 at p.111(B) are apposite in this context: "But in Cassidy v. Ministry of Health, 1951‑1 ILR.539 at p. 543: 1951‑2 KB 343 at pp. 352‑3 (C) Somervell L.J. pointed out that test is not universally correct. There are many contracts of service where the master cannot control the manner in which the work is to be done as in the case of a captain of a ship. Lord Justice Somervell went on to say: one perhaps cannot get much beyond this was the contract as contract of service within the meaning which an ordinary man would give under the words? I respectfully agree. As my Lord has said, it is almost impossible to give a precise definition of the distinction. It is often easy to recognize contract or service when you see it, but difficult to say wherein the difference lies. A ship's master, a chauffeur, and a reporter on the staff of a newspaper arc all employed under a contract of service, but a ship's pilot, a taxi‑man, and a newspaper contributor are employed under a contract for services. One feature which seems to run through the instances is that, under a contract of service, a man is employed as part of the business, and his work is done as an integral part of the business; whereas, under a contract for service, his work, although done for the business, is not integrated into it but is only accessory to it." In this regard reference was made to Short v. J. & W. Henderson Ltd. 1946‑62 TLR 427 where House of Lords observed: "the principal requirement of a contract of service is the right of master in some reasonable sense to control the method of doing the work and this factor of superintendence and control has frequently been treated as critical and decisive of the legal quality of relationship." The Supreme Court also relied on the following observation made in Simmons v. Health Laundry Co., 1910‑1 KB 543 at 549, 550. "In my opinion it is impossible to lay down any rule of law distinguishing the one from the other. It is a question of fact to be decided by all the circumstances of the case. The greater the amount of direct control exercised over the person rendering the services by the person contracting for them the stronger the grounds for holding it to be a contract of service, and similarly the greater the degree of independence of such control the greater the probability that the services rendered arc of the nature of professional services and that the contract is not one of services." In Piyare Lai Adhishwar Lal v. Commissioner of Income‑tax, Delhi (19(0) 4) ITR 17 under an agreement with the bank the assesses was to perform his duties as treasurer of various branches of the bank and was required to engage and employ subordinate staff called the cash department, staff such as head cashiers, cashiers, potdars, peons, godown keepers, chowkidars and clerks. He had power to control, dismiss and change this staff at his pleasure but he could not engage or transfer any member of the staff except with the approval of the bank and had to dismiss any such member if so required by the managing director of the bank or agent of the office. Members of the cash department staff were to be paid their salary directly by the bank but it was not bound to pay more than the prescribed scale of the bank. The permanent members of the cash department were to get the usual increments and benefit of provident fund and travelling allowance in accordance with the rules of the bank. The assessee was responsible for the acts of omission and commission and for neglect and default of his representatives and of each and every member of the cash department staff. Agreement could be terminated by three calendar months' notice by either party but in the event of any breach of any condition of the agreement by the assessee his services could be terminated forthwith. On these facts it was held that the assessee was a servant of the bank and the following observations were made: "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 one and how it is to be done but in the case of an independent contractor an employer can only say 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. It was pointed out in Cassidy v. Ministry of Health (1951) 2 KB, 343, 352‑3 that in the case of contract of service "a man is employed as part of the business, and his work is done as an integral part of the business whereas under a contract for services the contractor is not integrated into the business but is only accessory to it." In certain cases it has been laid down that the indicia of a contract of service are (a) the master's power of selection of the servant; (b) the payment of wages or other remunerations; (c) the master's right to control the method of doing the work; and (d) the master's right of suspension or dismissal; Short v. J. & W. Henderson Ltd. 62 TLR 427, 429 Bhagwati, J., in Dharangadhara Chemical Works Ltd. v. State of Saurashtra (1957) S.C.R. 152, 160, 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." In Commissioner of Income‑tax U.P. v. Manmohan Das (deceased) (1906) 59 ITR 699 the assessee was appointed treasurer of Allahabad Bank for its branches, sub‑agencies and offices. The treasurer had provided the staff for cash section of the bank, he had the power to dismiss, suspend and transfer a member of the staff and to appoint another person in his place. He was responsible for the acts of the staff so appointed which resulted in loss or damage to the bank. There was no provision under the agreement which expressly or impliedly conferred on the bank control and supervision over the work done by the treasurer and it was open to the treasurer to appoint his own agents to supervise the work of cash section. The remuneration of the treasurer was to be a monthly allowance. The employment of the treasurer could be terminated at any time by either party giving three months' written notice to that effect. In case of death of the assessee the liabilities and obligations for the staff and other persons were to remain on his heirs, and estate. Considering the terms and conditions of the service that there being no control of the bank over the assessee in due performance of duties undertaken by him under the terms of the agreement and relying on Dharangadhre Chemical Works Ltd.'s case it was held that the agreement was not a contract of service. Piyare Lai Adhishwar Lai's case quoted above was also considered and it was observed that in that case Supreme Court founded its conclusion that the assessee was an employee upon the existence of control and prevision of the bank over the treasurer and upon the polder vested in the bank 7io summarily dismiss the treasurer in case of breach of any of the conditions of the agreement. Such provisions were not found in Manmohan Das's case and therefore the assessee was held not to be an employee. From these judgments it can be observed that the Supreme Court of India has taken the view that in order to be an employee it is necessary that the employer should have control and supervision over the work performed by the person employed by him. In the case of Manmohan Das the Court had observed that the use of the expressions serve the bank and in the service of the bank' has to be read in the setting of the other covenants. In spite of such words used in the agreement on a reading of the terms of agreement as a whole it was held to be not an agreement of employment and did not create relationship of master and servant. The Indian Supreme Court does not seem to have favourably accepted the view of the English Courts that if the work performed by the assessee is an integral part of the business of the employer he may be a servant. In the aforesaid two judgments of the Indian Supreme Court the assesses were cashiers engaged in the work which was integral part of the business of the bank but this aspect was not considered as relevant and the entire emphasis was only on the control of the work. 1n the case of Commissioner of income‑tax v. Durgakhote (1952) 21 ITR 22 the assessee a film actress entered into several contracts with various companies for serving in various Films on agreed remuneration. Under the contract she was entitled to perform for other companies by adjusting the schedule. Relying on Davies v. Braithwaite (1931) 18 Tax Cas. 198 it was held that as she was free to lend her services to any one and had not `exchanged her profession for service her income was computed under section 10 and not as a salary under section 7 of the Income -tax Act. The question whether remuneration paid to person engaged to perform work is a salary or income from profession, vocation or business depends upon the facts of the case and the terms of employment. There is a thin line of distinction which can be visibly drawn by scanning the contract. Such difficulty arises in cases of professionals like lawyers, chartered accountants, doctors, engineers, artists, directors of a company and other categories of persons who lend their intellect, specialised knowledge and expertise. Where assessee's employment is temporary and incidental to or dependent on profession without any intention to he engaged permanently anti further that he is free to lend his services to others as well the income so accrued will not fail under the. head salary. When a person joins service and surrenders his profession or `exchanges it for service' thereby permitting the employer to control the manner in which he must work, the remuneration paid to him will be classified as salary. But where there is some doubt in determining such control then if the work performed by the assessee is an integral part of the business or vocation of the employer the relationship of master and servant will be created. In the present case we find that the contract did not provide for company's control on the manner the work was to he performed by the assessee. The duties performed by the assessee were not the integral part of the business of the company. The applicant was a foreign qualified doctor who had the professional expertise and knowledge to treat the patients. He was not required to seek any direction or instruction from the company for the manner in which patients were to he treated. It was left entirely to the sole discretion of the applicant to treat in any manner he liked with the help of the medicate and para‑medical staff employed and paid by him. He was rendering professional services in the clinic provided by the company. The setting up of practice and not clinic was a condition precedent for grant of exemption. Practice can be established independently in his own clinic or in the hospital or clinic established by any one else for the treatment of the patients. We are therefore of the view that the applicant was not an employee of the company and the remuneration paid to him cannot be classified as salary. The payment was made as remuneration for professional duties discharged by him as a doctor. We therefore hold that the applicant was entitled to exemption under aforesaid Notification and answer the question in the negative. M.B.A./A‑863/K Question answered in the negative.