"Income received by a member of a Hindu undivided family from a firm or company in which the funds of the Hindu undivided family are invested, even though the income may be partially traceable to personal exertion of the member, is taxable as the income of the Hindu undivided family if it is earned by determined to the family funds or with the aid or assistance of those funds; otherwise it is taxable as the member's separate income".
16. The above principle was reiterated by the Supreme Court in CIT v. D. C. Shah [1969] 73 ITR 692, where on the facts of the case Ramaswami J. speaking for the Bench, held that there was no real or sufficient connection between the investment of the joint family funds and the remuneration paid to the managing partner and that the remuneration was not earned on account of any detriment to joint family assets.
17. From the above decisions the principle that emerges is that if the remuneration or income that is received by a coparcener or the karta of an HUF is being received with the aid and assistance of the joint family funds and to the detriment or at the expense of the joint family assets, then it would be the income of the HUF. That will be so, notwithstanding the fact that the karta or the co-parcener renders by the coparcener or the karta and if it is not received because of the investment of the joint family funds in the business or to the detriment or at the expense of the joint family assets, then it would be his individual income.
Madras High Court
Commissioner Of Income-Tax, ... vs K.S. Subbiah Pillai (Huf) on 11 March, 1982
Equivalent citations: 1984 147 ITR 87 Mad
Bench: N Balasubramanian, S Padmanabhan
1. Nine tax cases are being disposed of by this common judgment. The relevant assessment years are 1959-60 to 1965-66, 1969-70 and 1970-71. One K. S. Sankaran Pillai was carrying on business in tobacco at Guntur and at Whitefield in Bangalore. Apart from the tobacco business, Sankaran Pillai possessed some barns and agricultural lands. He died in 1947 leaving behind his only son, Subbiah Pillai, the assessee herein. The assessee admittedly sold the barns and the agricultural lands left behind by his father and invested the proceeds in the family business. The assessee admittedly sold the barns and the agricultural lands left behind by his father and invested the process in the family business. The assessee got married, the name of his wife being Kamala Subbiah Pillai. On June 6, 1957, the tobacco business which the assessee inherited from his father and in which he had invested the sale proceeds of the barns and agricultural land which also he had inherited from his father was converted into a private limited company called K. S. Subbiah Pillai Co. Ltd. It is not disputed that the assessee inherited the business as well as the barns and agricultural lands as joint family properties. The authorised capital of the company was Rs. 1,00,000 divided into 1,000 shares of Rs. 100 each. The assessee and his wife, Kamala Subbiah Pillai, held 500 shares each. Initially the shares in the name of the assessee were paid up to the extend of Rs. 50 per share and the shares in the name of Kamala Pillai were unpaid for. In 1962 the capital of the company was increased by another one lakh rupees and the increased 1,000 shares of Rs. 100 each were allotted to Kamala Pillai. The shares were fully paid for Kamala Pillai. Subsequently, she transferred the 500 shares which were originally allotted to her back to the undivided family of which the assessee was the karta. The resultant position was that as on March 1, 1964, the capital of K. S. Subbiah Pillai and Co. Ltd., was made up of 2,000 shares of which 1,000 shares were owned by the HUF of which the assessee was the karta and 1,000 shares owned by the assessee's wife, Kamala Pillai. Accordingly, they were the two shareholders of the company. Originally, the assessee was being assessed to income-tax in the status of an individual and the income which was chargeable to tax in the hands of the HUF for the year 1964-65 was assessed to tax in the hands of the assessee and his wife separately. However, during the assessment proceedings for the year 1966-67, it was discovered that the income of the HUF had escaped assessment. Consequently, for the assessment year 1964-65, the ITO issued notice under s. 148 of the I.T. Act, 1961, and reopened the assessment proceedings under s. 147 of the Act. In response to the notice, the assessee filed a "nil" return. The assessee claimed that the assessment from the tobacco business had already been made in the names of the assessee and his wife individually and that the said assessments had become final and consequently the income from the business could not be assessed in the hands of the HUF. It was further claimed that the assessee had received remuneration as managing director, sitting fees and commission and that his wife, Kamala had also received sitting fees and commission and, therefore, in any event the remuneration sittings fees and commission received by the assessee and his wife should be exempted. The ITO held that the assessee and his wife acquired shares in the company with the aid of the assessee's ancestral funds and the consequently the income derived from the company would be liable to be assessed in the hands of the HUF. The ITO also completed the assessment on the same basis for the assessment years 1965-66, 1969-70 and 1970-71. For the assessment years 1959-60 to 1963-64 also, the ITO reopened the assessment proceedings under s. 147 of the I.T. Act and passed orders on the same lines. Against the orders of the ITO for the assessments year 1964-65, 1965-66, 1969-70 and 1970-71, the assessee filed Appeals Nos. 115-G, 116-G, 57-G and 254-G of 1970-71 before the AAC, Guntur Range. For the assessment years 1959-60 to 1963-64, the assessee filed Appeals Nos. 125-G to 129-G of 1973-74. The first set of four appeals were disposed of by the AAC by his order dated October 22, 1975. In both the sets of appeals the AAC assessed only the sitting fees and dividends received by the assessee from the business in the income of the HUF and found that the remuneration and commission received by him as managing director could not be included in the assessment of the HUF. He further found that the income received by the assessee's wife should be treated as her own separate income. In arriving at this conclusion, the AAC relied upon the orders of the assessment passed for the years 1966-67, 1967-68 and 1968-69. For those years the assessee admitted that the interest, dividends and sitting fees received by him, from the business, constituted the income of the HUF, but claimed that the salary and commission received by him as managing director formed part of his individual income. The ITO, however, rejected the assessee's claim and held that the remuneration received by him as managing director as well as the commission and sitting fee received by him and his wife were to be treated as income of the HUF along with the dividend. Ultiamtely the assessee took up the matter to the Appellate Tribunal, Hyderabad, in I.T.A. Nos. 747, 748 ands 749 of 1969-70. The Appellate Tribunal, Hyderabad, found that the sitting fees received by the assessee should be treated as the income of HUF along with the income from the house property, dividends and interest from the business. The Tribunal, however, found that the remuneration and commission received by the assessee constituted his separate earning and could not be assessed in the hands of the HUF. The Tribunal also held that the income received by the assessee's wife should be treated separately.
2. Against the order of the AAC, the ITO, Guntur, preferred two sets of appeals before the Income-tax Appellate Tribunal, Hyderabad. I.T.A. Nos. 348 to 351 (Hyd) of 1971-72 related to the assessment years 1964-65, 1965-66, 1969-70 and 1970-71 and I.T.A. Nos. 1240 to 1244 of 1973-74 related to assessment years 1959-60 to 1963-64. Those appeals were transferred to the Madras Bench. The Madras Bench dispossed of I.T.A. Nos. 1240 to 1244 (Hyd) of 1973-74 by its order dated March 31', 1971, and I.T.A. Nos. 348 to 351 (Hyd) of 1971-72 by its order dated August 30, 1975. The Tribunal by its order dated March 31, 1971, for the assessment years 1959-60 to 1963-64 held that the shares acquired by the assessee's wife, Kamala Subbiah Pillai, were her exclusive acquisitions, that they were not acquired by her to the detriment of the HUF and that consequently the remuneration interest and sitting fees received by her should not be treated as income accruing to the HUF. As regards the assessee, the Tribunal held that the remuneration and commission received by the assessee were earned by the assessee on account of his personal qualifications and exertions and not on account of the investment of the family funds and, therefore, could not be treated as income of the HUF. The Tribunal opined that the investment of the family in the tobacco business was only Rs. 25,000 and that for the relevant years the profits from the business had been appreciating to a large extent from year to year and that this appreciation in profits must be attributed to the personal exertions of the assessee. In this view, the Tribunal held that barring the sitting fees earned by the assessee, the remuneration and commissioner earned by him could not be treated as income in the hands of the HUF. The Tribunal arrived at the said conclusion in its order dated August 30, 1975. we may stated that the Revenue has not challenged the findings of the Appellate Tribunal that the income received by the assessee's wife by the way of remuneration, interest and commission did not form part of the income of the HUF and that has become final. However, at the instance of the Revenue, the Tribunal has referred for out opinion the following question of law in both sets of appeals. The question of law referred for our opinion reads as follows :
"Whether, on the facts and in the circumstance of the case, the remuneration and commission received by Sri. K. S. Subbiah Pillai was assessable in the hands of the assessee-Hindu undivided family ?"
3. In this context, it is necessary to observe that against the order passed by the Appellate Tribunal, Hyderabad, for the assessment years 1966-67 to 1968-69, an identical question was referred by the Tribunal Hyderabad Bench, for the opinion of the Andhra Pradesh High Court and the Andhra Pradesh High Court answered the question in the negative and against the Revenue. The decision of the Andhra Pradesh High Court is reported in CIT v. K. S. Subbiah Pillai [1981] 127 ITR 505.
4. The undisputed facts in these tax cases are that the tobacco business was inherited by the assessee from his father, Sankaran Pillai, and that he also invested in the business the sale proceeds of the barns and agricultural lands inherited by him from his father and that the said business is the business of the HUF consisting of the assessee, his wife, Kamala Subbiah Pillai, and their children of which the assessee is the karta. It is also admitted that the sitting fees receiving by the assessee as managing director as well as the dividend on the shares held by him in the business from part of the income of the HUF. Therefore, as the question of law framed for the opinion shows, the dispute is whether the remuneration received by the assessee as the managing director and the commission received by him could be treated as income of the HUF.
5. It is one of the fundamental principles of Hindu law that the property acquired by a karta or a coparcener with the aid or assistance of joint family assets is impressed with the character of joint family property. To constitute self-acquired property in the hands of the karta or the coparcener it should have been acquired without the assistance or aid of the joint family property. In other words, the test of self-acquisition by the karta or the coparcener is that it should be without detriment to the ancestral estate. This principle is based on the original text of Yanjavalkya who, while dealing with the property not liable to partition, states :
"Whatever else is acquired by the coparcener himself, without detriment to the father's estate, as a present from a friend or a gift at nuptials, does not appertain to co-heirs. Nor shall he, who received hereditary property which had been taken away, give it up to coparceners; not what has been gained by science" (Yajnavalkaya 2, verses 119-120). The author of Mitakashra has explained the above text of Yajnavalkya thus :
What may not be divided : Whatever else is acquired by the coparcener himself, without detriment to the father's estate, as a present from a friend or a gift at nuptials, does not appertain to the co-heirs. Nor shall he who recovers hereditary property which had been taken away give it up to the coparceners; not what has been gained by science. Dealing with property not liable to Whatever else is acquired by the coparncer himself without detriment to the fathers estate. The meaning of this passage is made clear by Manu thus : "What one brother may acquire by his labour without prejudice to the fathers estate". In both texts, the use of the words "father" signifies jointness. By labour means by agriculture and the like requiring labour. "Without prejudice" means "without detriment". It may also be stated that the texts on Hindu law have explained "without assistance" as meaning without deriving assistance for the purpose of gaining and the word "father" as meaning an undivided co-heir.
6. The above proposition of law came to be settled by the Privy Council as early as in 1920 in Gokul Chands case : Amar Nath v. Hukam Chand Nathu Mal [1921] LR 48 IA 162; AIR 1921 PC 35, where the Privy Council held that the salary obtained by a member of the Indian Civil Service was partible property of the joint family since it resulted from a special educational training given to the member at the instance of patrimony. This decision, it may be observed, resulted in the enactment of the Hindu Gains of Learning Act (Act No. 30 of 1930) by which it was stated that no gains of learning shall be held to be exclusive and separate property of the acquire merely by reason of his learning having been in whole or in part imparted to him by any member living or deceased of his family, or with the aid of the joint funds of his family or with the aid of the funds of any member thereof, or himself or his family having while he was acquiring learning been maintained or supported wholly or in part by the joint funds of the family or by the funds of any member thereof. The same principle has been reiterated by the Supreme Court in the following decisions.
7. In Haridas Purshottam, In re [1947] 15 ITR 124 (Bom), the assessee, who was the karta of a joint Hindu family was a partner in a mill and he held shares in his capacity as the karta of the family. Subsequently the partnership promoted a company which took over the mills in the capacity as its managing agents. The question arose whether the income from the managing agency business could be treated as the income of the family of which the assessee was the karta. On an appreciation of the facts of the case, Stone C.J. who spoke for the court, came to the conclusion that the opportunity of becoming and being actually appointed managing agents, arose from the asset which was sold to the company viz., the mills which in part was joint family property. In the light of this finding, the learned Chief Justice held that the income from the managing agency business was the income of the joint family of which the assessee was the karta.
8. In CIT v. Kalu Babu Lal Chand [1959] 37 ITR 123, the Supreme Court had occasion to consider a similar question. At all material times. Rohatgi was the karta of a Hindu undivided family. He was one of the promoters of a company called India Electric Works Ltd. In anticipation of the incorporation of the company, he took over a concern called India Electric Works and expended the funds of the family to finance that business. The articles of association of the company provided for the appointment of Rohatgi, who promoted the company, as the managing director. In the accounting year relevant to the assessment year 1943-44, Rohatgi received Rs. 61, 282 by way of managing director's remuneration. During 1943-44 assessment proceedings, it was claimed that the remuneration received by Rohatgi as managing director constituted his personal savings and should not be added to the HUF. In this situation, the Supreme Court was called upon to answer the question whether the assessment of the sum of Rs. 61,282 should be on Rohatgi personally or on the assessment HUF. The Calcutta High Court, against whose decision the matter had been taken to the Supreme Court had held that the sum of Rs. 61,282 should be treated as the personal income of Rohatgi. The Supreme Court however, set aside the decision of the Calcutta High Court and held that the remuneration received by Rohatgi as managing director was not his personal income but income of the family of which he was the karta. Das C.J. who spoke for the Supreme Court, stated thus (p. 128) :
"If for the purpose of contribution of his share of the capital in the firm, the karta brought in monies out of the till of the Hindu undivided family, then he must be regarded as having entered into the partnership for the benefit of the Hindu undivided family and as between him and the other members of his family he would be accountable for all profits received by him as his share out of the partnership profits and such profits would be assessable as income in the hands of the Hindu undivided family. Reference may be made to the cases of Kaniram Hazarimull v. Commissioner of Income-tax [1955] 27 ITR 294 (Cal) and V. D. Dhanwatay v. Commissioner of Income-tax [1957] 32 ITR 682 (Bom), in support of this view. The same principle has been applied to the case of a karta appointed as a treasurer of a bank and the remuneration received by him for services rendered as such treasurer has been treated as the income of the Hindu undivided family of which he was the karta and was assessed in its hand. The same principles has been extended to the remuneration received by a karta as the managing agent of a company with limited liability see Haridas Purshottam In re [1947] 15 ITR 124 (Bom). Stone C.J. with whom Chagla J. agreed, held that as the managing agency was derived from or acquired with the assistance of the joint family property, that is the mills in which the assessee as karta was beneficially interested the income from the managing agency received by the assessee must be treated as the income of the family of which he was the karta."
9. The learned Chief Justice further observed as follows (p. 129 of 37 ITR) :
"Vis-a-vis the company the managing director is undoubtedly the individual person who is appointed as such. The company is not concerned with the managing director Hindu undivided family or the member thereof, just as the outside partners know only the karta in his individual capacity as their partner and are not concerned with his Hindu undivided capacity as their partner and are not concerned with his Hindu undivided family or its members. The question whether the amount received by the karta by way of the managing director remuneration in the case or as his share of profits in the partnership business in the order case is his personal income or is the income of his Hindu undivided family cannot arise as between the company and the karta as the managing director or between the outside partners and the karta as a partner. Neither the company nor the outside partners, as the case may be is or are interested in such a question. Such question can arise only as between the karta and the members of his family and the answer to the question will depend on whether the remuneration or profit was earned with the help of joint family assets."
10. Ultimately to hold that the income from the managing agency business was in income of the joint family, the learned chief Justice relied upon the fact that the joint family assets were used for acquiring the concern for financing it and in lieu of all that determinant to the joint family properties, the joint family got not only the shares standing in the names of two members of the family but also, as part and parcel of the same scheme, the managing directorship of the company when incorporated.
11. In Mathura Prasad v. CIT one Mathura Prasad had become a partner in the firm M/s. Badri Prasad Jagan Prasad, with the funds of the HUF and a partner of the firm he was entrusted with the management of Agarwal Iron Works and he earned an allowance which was claimed to be salary. The Income-tax Appellate Tribunal held that the right to draw the allowance was made possible by the use of the family funds and consequently the allowance must be treated as the income in the hands of the family. The High Court upheld the finding of the Tribunal on the basis of the decision of the Supreme Court in CIT v. Kalu Babu Lal Chand [1959] 37 ITR 123. The High Court having refused to direct a reference under s. 66(2) of the 1922 Act, the assessee went up in appeal to the Supreme Court. The Supreme Court held that the matter was concluded by the judgment in CIT v. Kalu Babu Lal Chand and that the High Court was right in refusing to direct a case to be stated under s. 66(2) of the 1922 Act.
12. In R. V. Manicka Mudaliar v. Thangavelu, ,
Jagadisan J. had observed as follows :
"... where members of a joint family acquire shares in a company and they unite and form themselves into a partnership to obtain the managing agency of the company, under a scheme of integrated transaction it would be a proper inference to draw that the contract of agency was a result of the holding of the shares. But, as stated already, no general rule can be deduced in matters of this description as the question of the nature of the managing agency would depend upon the background of the facts and circumstances in which the agency was created if in any given case it can be postulated that the managing agency was given to the member of a family in view of their predominant share position in the company and that the shares were acquired from and out of the family funds, it would seem to follow inevitably that the managing agency itself was a product of the investment of the family funds in shares."
13. In V. D. Dhanwatey v. CIT the facts were as
follows : One Dhanwatey was the karta of a Hindu undivided family. A partnership was formed for the purpose of carrying on business in lithography and art printing under the name and style of Shivraj Fine Art Litho Works. Dhanwatey had contributed capital to the firm from and out of the family funds. Under the deed of partnership the general management and supervision of the business was to be in the hands of Dhanwatey and he was to be paid a monthly remuneration out of the gross earnings of the business. The question arose whether the remuneration received by Dhanwatey was assessable in the hands of the HUF. Ramaswami J. speaking for the majority held that before an acquisition by the karta of a family could be claimed to be his separate property it should be shown that it was made without any aid or assistance from the ancestral or joint family property. The learned judge further held that the remuneration paid by the firm to Dhanwatey was directly related to the investment in the partnership business from the assets of the family there was real and sufficient connection between the investment from the joint family funds and the remuneration paid to Dhanwatey and that consequently the salary paid to Dhanwatey was assessable as the income of the HUF. The learned judge followed the earlier decision of the Supreme Court in CIT v. Kalu Babu Lal Chand [1959] 37 ITR 123 and Mathura Prasad v. CIT [1966] 60 ITR 428.
14. In M. D. Dhanwatey v. CIT , one M. D. Dhanwatey
was the karta of a joint Hindu family. He was also a partner in the partnership firm carrying on business under the name and style of M/s. Shivraj Fine Act Litho Works, the share capital of which was contributed by the HUF of which he was the karta. It may be remembered that this is the same firm with which the supreme court was concerned in V. D. Dhanwatey v. CIT [1968] 68 ITR 365. Under a deed of partnership it was provided that M. D. Dhanwatey should be paid Rs. 1,250 per month. For the assessment year 1954-55 he received a sum of Rs. 7,500. The question, therefore, arose whether this sum of Rs. 7,500 should be treated as the individual income of M. D. Dahanwatey or it should be included in the total income of the HUF. The Supreme Court following the ratio in V. D. Dhanwatey v. CIT by a majority, Hedge J. dissenting held that the income received by M. D. Dhanwatey should be treated as the income of the HUF.
15. The same principle was reiterated by the supreme court in P. N. Kriwshna Iyer v. CIT [1969] 73 ITR 539, where Shah J stated the ratio thus (p. 545) :
"Income received by a member of a Hindu undivided family from a firm or company in which the funds of the Hindu undivided family are invested, even though the income may be partially traceable to personal exertion of the member, is taxable as the income of the Hindu undivided family if it is earned by determined to the family funds or with the aid or assistance of those funds; otherwise it is taxable as the member's separate income".
16. The above principle was reiterated by the Supreme Court in CIT v. D. C. Shah [1969] 73 ITR 692, where on the facts of the case Ramaswami J. speaking for the Bench, held that there was no real or sufficient connection between the investment of the joint family funds and the remuneration paid to the managing partner and that the remuneration was not earned on account of any detriment to joint family assets.
17. From the above decisions the principle that emerges is that if the remuneration or income that is received by a coparcener or the karta of an HUF is being received with the aid and assistance of the joint family funds and to the detriment or at the expense of the joint family assets, then it would be the income of the HUF. That will be so, notwithstanding the fact that the karta or the co-parcener renders by the coparcener or the karta and if it is not received because of the investment of the joint family funds in the business or to the detriment or at the expense of the joint family assets, then it would be his individual income.
18. Mr. Uttam Reddi, the learned counsel for the assessee, contended that even though the shares in the name of the assessee were acquire with the joint family funds, the assessee has improved the business on account of his personal experience and exertions. He referred to the fact that while the initial investment of the family was only Rs. 25,000 the firm had considerably increased its profits from year to year and such increase in profits was mainly due to the personal exertion of the assessee. The learned counsel further laid stress upon the fact that there was no connection between the remuneration which the assessee received as managing director and the investment of the joint family funds in the business. In this connection, the learned counsel apart from the relying upon the decision of the Andhra Pradesh High Court which was in favour of the assessee for the years 1966-67, 1967-68 and 1968-69 referred to four decisions.
19. The first case referred to by the learned counsel was a Bench decision of this court in CIT v. S. N. N. Sankaralinga Iyer [1950] 18 ITR 194. There, Sankaralinga Iyer who was the karta of a Hindu joint family and who was receiving remuneration as managing director of the Indo-Commercial Bank claimed that the remuneration as well as the sitting fees received by him as managing director were his individual property. The claim was not accepted by the Revenue, this court came to the conclusion that the income received by Sankaralinga Iyer as managing director's remuneration and directors fees was his own individual income. The actual basis on which this court came to the conclusion can be discerned from the judgment of Viswanatha Sastri J., who observed as follows (p. 199) :
"By virtue of his position as the holder of a large number of shares, Mr. Sankaralinga Iyer became eligible for appointment as the managing director of the Indo-Commercial Bank. But his actual appointment and his remuneration were the result of a contract of service entered into between him and the bank and not of the holding of shares by him. He was entitled to be paid and was paid remuneration for service rendered by him to the Indo-Commercial Bank under a specific contract entered into by him with the bank. The mere fact that he held a particular quantity of shares as manager of a joint family did not ipso facto enable him to function as the managing director. His personal qualifications were mainly responsible, in addition to the holding of shares, for his selection and appointment as the managing director of the bank. The remuneration was really the quid pro quo for the work which he did under the contract of service with the bank".
20. It will, therefore, be seen that the facts in Sankaralinga Iyer's case [1950] 18 ITR 194 (Mad), are clearly distinguishable. The ratio in Sankaralinga Iyer's case does not in any way run counter to the ratio laid down by the Supreme Court in CIT v. Kalu Babu Lal Chand [1959] 37 ITR 123. Referring to Sankasralinga Iyer's case Das C.J. observed as follows :
"The case of Commissioner of Income-tax v. S. N. N. Sankaralinga Iyer [1950] 18 ITR 194 (Mad), does not help the respondent because of the facts found in that case. In that case it was found that the remuneration of the managing director was earned by him in consideration of the services which he rendered to the bank and no part of the family funds had been spent or utilised for acquring that remuneration except that the necessary shares to acquire the qualification of a managing director were purchased out of the joint family funds. It was said that there was no detriment to the family property in any manner or to any extent as admittedly the shares earned dividends which were included in the income of the family".
21. Notwithstanding the fact the decision in Sankaralinga Iyer's case [1950] 18 ITR 194 (Mad) was cited before the Supreme Court in V. D. Dhanwatey v. CIT [1968] 68 ITR 365, the majority followed the principle laid down in CIT v, Kalu Babu Lal Chand and Mathura Prasad v. CIT , even though Hegde J., in his
dissenting judgment applied the ratio in Sankaralinga Iyer's case. We are, therefore, of the view that in view of the fact that Sankaralinga Iyer's case has been distinguished on its facts by the Supreme Court in CIT v. Kalu Babu Lal Chand [1959] 37 ITR 123, which was in turn followed by the Supreme Court itself in V. D. Dhanwatey v. CIT , M. D. Dhanewatey v. CIT P. N.
Krishna Iyer v. CIT CIT v. D. C. Shah
and Raj Kumar Singh Hukam Chandji v. CIT
, the ratio in Sankaralinga Iyer's case cannot in any way help Mr. Uttam Reddi.
22. The next case relied upon by Mr. Uttam Reddi is Piyare Lal Adishwar Lal v. CIT . The said decision does not render any
assistance to the learned counsel for the assessee as the facts in that case have to be and have been distinguished from the facts in CIT v. Kalu Babu Lal Chand. Reffering to the judgment in Piyare Lal's case Shah J. in Mathura Prasad v. [1966] 60 ITR (SC), has observed as follows (p. 433) :
"The decision in Piyare Lal Adishwar Lal v. CIT ,
on which reliance was sought to be placed, has no bearing on the question sought to be raised in this appeal. That was a case in which a member of Hindu undivided family has furnished as security the properties of the family under an agreement whereby he was appointed treasurer of a bank. Remuneration received by the manager of the family for working as a treasurer was claimed to be income of the Hindu undivided family, because the properties of the family were furnished as security, but this court rejected that claim. We see no analogy between a case in which the property of the Hindu undivided family is sought to be encumbered for obtaining a benefit which is essentially personal to the manager and a case in which with the aid of the family funds the manager of the family is able to enter into a partnership and to turn allowance, which he would not otherwise have been entitled to receive".
23. The third of the cases cited by the learned counsel for the assessee is yet another decision of the Supreme Court in Palaniappa Chettiar v. CIT [1968] 68 ITR 221. There, the karta of an HUF acquired 90 out of 300 shares in a transport company with the funds of the family. There were initially four shareholders including the karta and two of them were directors. On the death of one of the directors who was managing the business of the company, the karta became the director of the company. Thereby he became entitled to a salary and commission on the net profits of the company. The articles of association prescribed that a person should hold 25 shares to enable him to become a director. The question arose whether the managing director's remuneration and commission and sitting fees received by the karta were assessable as the income of the family. The Supreme Court, speaking through Ramaswami J., held that the shares were acquired by the family not with the object that the karta should become the managing director but in the ordinary course of investment and there was no real connection between the investment of joint family funds for the purchase of the shares and the appointment of the karta as the managing director of the company. The remuneration of the managing director was not earned by him to the detriment of the joint family assets and, therefore, the amounts received by the karta as remuneration, commission and sitting fees were not assessable as the income of the HUF. This decision too was cited before the Supreme Court in V. D. Dhanwatey v. CIT [1968] 68 ITR 365. Yet, the majority followed the decision in CIT v. Kalu Babu Lal Chand . In P. N.
Krishna Iyer v. CIT , the Supreme Court referred to
Palaniappa Chettiar case , and still held that the
income received by a member of an HUF from a firm or an company in which the funds of the HUF were invested, even though the income might be partially traceable to personal exertion of the member was taxable as the income of the HUF if it was earned by detriment to the family funds or with the aid or assistance of those funds and otherwise it would be taxable as members separate income. In this connection, it is necessary to refer to the decision of the Supreme Court in Raj Kumar Singh Hukam Chandji v. CIT [1970] 7 ITR 33 (SC). This judgment of the court was delivered by Hegde J. who had dissented from the majority in CIT v. Kalu Babu Lal Chand. After referring to the earlier cases of the Supreme Court on the subject the learned judge has observed as follows (p. 43) :
"At first sight there appears to be conflict between the two lines of decisions, namely, Kalu Babu case , Mathura
Prasad case , the two Dhanwatey cases (V. D.
Dhanwatey and M. D. Dhanwatey )
and Krishna Iyer's case , on the one hand and
Palaniappa Chettiar's case , Dhakappa's case
and D. C. Shah's case , on the
other. The line that demarcates these two lines of decisions is not very distinct but on a closer examination that line can be located. In order to find out whether a given or that of his family, several tests have been enmuerated in the aforementioned decisions but none of them excepting Kalu Babu's case , makes
reference to the observations of Lord summer in Gokul Chand's case [1921] LR 48 IA 162; AIR 1921 PC 35, that in considering whether gains are paretible there is no valid distinction between the direct use of the joint family funds and a use which qualifies the member to make the gains by his own efforts. We think that the principle is no more valid. The other teste enumerated are :
(1) Whether the income received by a coparcener of a Hindu undivided family as remuneration had any real connection with the investment of the joint family funds;
(2) Whether the income received was directly related to any utilisation of family assets;
(3) Whether the family had suffered any detriment in the process of realisation of the income; and
(4) Whether the income was received with the aid and assistance of the family funds;
In our opinion from these subsidiary the broader principle that emerges is whether the remuneration received by the coparacener in substance though not in form was but one of the modes of return made to the family because of the investment of the family funds in the business or whether it was a compensation made for the services rendered by the individual coparcener. If it is the former, it is an income of the Hindu undivided family but if it is the latter then it is the income of the individual coparcener. If the income was essentially earned as a result of the funds invested, the fact that a coparcener has rendered some service would not change the character of the receipt. But if, on the other hand, it is essentially a remuneration for the services rendered by a coparcener, the circumstances that his services were availed of because of the reason that he was a member of the family which had invested funds in that business or that he had obtained the qualification shares from out of the family funds would not make the receipt, the income of the Hindu undivided family".
24. The last of the cases cited by the learned counsel for the assessee is that of a Bench decision of this court in T.C. Nos. 345 to 348 of 1977 (CIT v. V. S. Thyagaraja Mudaliar [1983] 140 ITR 128), to which one of us was a party. The question that arose for decision in the said case was whether the remuneration received by the assessee as managing director from M/s. Trichy Distilleries and Chemicals Ltd., M/s. Venkatesa Thyagaraja Ltd., and M/s. Arooran Sugars Ltd., constituted separate income or the income of the HUF. This court came to the conclusion that the income was separate income of the assessee. In arriving at the said conclusion, this court laid emphasis on the special experience which the assessee had in the sugar industry and also his particular experience in the field of banking, insurance and other financial institution. The fact that the assessee in that case had been nominated as director by the Government in various co-operative factories and that the Industrial Developement Bank of India and also director of the United India Fire and General Insurance Co. Ltd., and the fact that the Central Government had nominated him as a member of the Organic Chemicals Industry Panel of the Development Wing, was also taken note of. To borrow the language of the learned judges, "the assessee was possessed of the stature in public life and had also acquired experience in running several industries and business". This court also took note of the fact that the shareholding of the assessee did not play a part in making him the managing director. The ultimate decision thus turned on the special facts of that case which are clearly distinguished from the facts of the present case.
25. In the circumstances, the four decisions cited by Mr. Uttam Reddi are distinguishable on their own facts and are not contrary to the principles laid down in CIT v. Kalu Chand Mathura
Prasad v. CIT , V. D. Dhanwatey v. CIT
and M. D. Dhanwatey v. CIT .
26. On the facts of this case, we have not to consider how far the principles of law laid down by the Supreme Court can be applied to the facts of this case. Admittedly, the tobacco business was started by Sankaran Pillai and on his death the business devolved on the assessee, K. S. Subbiah Pillai. The business became joint family business of the HUF consisting of the assessee, his wife and children. It is also admitted that the amount received by the assessee by the sale of the barns and agricultural lands which belonged to Sankaran Pillai were also invested in the business. M/s. Subbiah Pillai and Company was formed admittedly with the sum of Rs. 25,000 which belonged to the joint family. One thousand shares alloted to the assessee were actually the assets of the joint family having been obtained with the funds of the family. We cannot also lose sight of the fact that there have been only two shareholders and two directors in the company, viz., the assessee and his wife. Between the two, 1,000 shares were allotted to the assessee and 1,000 shares to the wife of the assessee. It is, therefore, clear that the but for the investment of the sum of Rs. 25,000 in the business at the expense of the family funds, the assessee would not have been able to get 1,000 shares in the company. It is equally clear that but for the fact that the assessee was allotted 1,000 shares, the amount for which had been paid from and out of the family funds and to the detriment of the family estate, the assessee would not have become the managing director. There is absolutely no evidence to support the contention of the learned counsel for the assessee that the development of the business was due to any peculiar qualification or experience on the part of the assessee. We are not impressed with the argument of the learned counsel that the assessee developed the same by virtue of any particular qualification in him in tobacco business, in the absence of relevant material to that effect. The argument that the fact that the original investment was only Rs. 25,000 and the business earned large profits progressively from year to year would show the personal exertions of the assessee and, therefore, the remuneration and commission received by the assessee should be treated as his separate income, does not carry any conviction. Even in a case where the joint family had invested some moneys in the business and the business is expected to put in his best efforts to see that the family derives the maximum advantage from the investment. In the circumstances, as the karta of the HUF, the assessee must only be deemed to have been acting fairly on behalf of the family when he put in his best efforts to see that the business brought in a large amount of income to the family. On the facts of this case, we are satisfied that the instant case falls squarely within the principles laid down by the Supreme Court in CIT v. Kalu Babu Lal Chand [1959] 37 ITR 123, Mathura Prasad v. CIT [1966] 60 ITR 428 V. D. Dhanwatey v. CIT [1968] 68 ITR 365, M. D. Dhnawatey v. CIT [1968] 68 ITR 385, P. N. Krishna Iyer v. CIT [1969] 73 ITR 539, CIT v. D. C. Shah [1969] 73 ITR 693 and the test laid down by Hegde J. in Raj Kumar Singh Hukam Chandji v. CIT [1970] 78 ITR 33. The shares have been obtained in the name of the assessee with the aid and assistance of the joint family funds and to the detriment of the joint family funds. The managing directorship held by the assessee was acquired, as already stated, from and out of the funds of the joint family. In the circumstances, there is a real connection between the investment of the joint family funds in the tobacco business of Subbiah Pillai and Co. and the remuneration and commission received by the assessee in his capacity as managing director.
27. We have now to consider the decision of the Andhra Pradesh High Court in the CIT v. K. S. Subbiah Pillai (1981) 127 ITR 505. The case related to the very same assessee and the question was whether the income received by the assessee by way of managing director's remuneration and commission from Subbiah Pillai and Co., could be treated as his separate income or as the income of the HUF of which he was the karta. The relevant assessment years were 1966-67, 1967-68 and 1968-69. The Bench of the Andhra Pradesh High Court, speaking through the learned Chief Justice Kondaiah, answered the question in favour of the assessee. With great respect to the learned Judges, we regret we are unable to accept the decision. The learned judges have referred to the earlier decision of the Supreme Court and also the test laid down by Hegde J. in Raj Kumar Singh Hukam Chandji v. CIT (1970) 78 ITR 33. There is absolutely no warrant for the observation of the learned judges, if we may say so with respect that the remuneration and commission was received by the assessee for the services rendered by him and not on account of the investment made by the HUF. The learned judges have not given due weight to the fact that but for the investment of the family funds in the tobacco business and in the acquisition of 1,000 shares in the name the assessee, he would not have been in a position to earn the remuneration and commission as managing director. When once we come to the conclusion that on the facts of this case, there is clear nexus between the investment of the funds of the HUF and the remuneration and commission received by the karta from the business we are bound to apply the ratio laid down by the Supreme Court in the various decisions already referred to. In the present case, the Tribunal has observed as follows :
"We find that K. S. Subbiah Pillai and Co. Pvt. Ltd., was started in the year 1957 with a subscribed capital of Rs. 25,000 only. For the first year, the company's profits was barely Rs. 5,000. Therefore, from the next year, its profit began to rise : Rs. 46,137 in 1958; Rs. 75,259 in 1959; Rs. 1,83,687 in 1960; Rs. 3,48,202 in 1961; Rs. 31,01,584 in 1962; Rs. 2,29,174 in 1963, by which time some further capital has been subscribed. In this way, the company's profit went on rising. Obviously so much of profit cannot be attributed to the investment of the paltry sum of Rs. 25,000 by the family. The extent of the company's prosperity clearly indicates an expert handling of its affairs. Such expert handling is an individual attribute".
28. We are unable to accept this reasoning of the Tribunal. As already stated, it is one of the impertative duties of the assessee in his capacity as the karta of the HUF to see that the family obtains the maximum benefit out of the investments made in the business from and out of the family funds. The fact that the business had yielded large profits from year to year cannot in any way detract from the joint family character of the business. If so, any remuneration and commission received by the karta from such business can only be attributed to the investment of the joint family funds. In the absence of any evidence which would clearly point to the fact that the income was derived by reason of any particular qualification in the particular line of business, we cannot arrive at the conclusion that the receipt of such profits was due to his personal attributes. In this case, there is absolutely no material to arrive at a finding that the income was by way of compensation made for the services rendered by the assessee. That being the case, the fact that the assessee had rendered some service for the conduct of the business could not change the character of the receipt as joint family income as held by Hegde J. in Raj Kumar Singh Hukam Chandji v. CIT .
29. We are conscious of the fact that even though the principle of res judicata has no application to proceedings under the I.T. Act and the findings reached for one particular assessment year cannot be held to be a finding in the assessment proceedings for subsequent years, yet this general rule is subject to the qualification that a finding reached in the assessment proceedings for an earlier year, after due enquiry, would not be reopened in a subsequent year if it is not arbitrary or perverse, and if no fresh facts are found in the subsequent assessment year, on the principle that there should be a finality and certainty in all litigations including litigations arising out of the I.T. Act. Notwithstanding this salutary principle of law, we are reluctantly constrained to respectfully dissent from the decision of the Andhra Pradesh High Court in CIT v. K. S. Subbiah Pillai (1981) 127 ITR 505, for the reason that the we are bound to apply the principles laid down by the Supreme Court in the decisions already cited by us to the facts of this case.
30. Mr. Uttam Reddi then argued that in the assessment of the company the remuneration and commission paid to Subbiah Pillai, the assessee, was allowed without any objection that it was unreasonable. In this connection the learned counsel referred to s. 40(c) of the I.T. Act which confers power on the ITO to disallow any remuneration paid to a director on the ground that the amount is excessive or unreasonable. We are of the opinion that this argument based on s. 40(c) has no relevance at all in considering the question whether the remuneration and commission received by the assessee as managing director constituted the income of the HUF. This is because in considering the question of assessment of the tobacco business and in exercising his powers under s. 40(c) the ITO is not called upon to decide the question nor is he concerned with the question, whether the remuneration received by the director was his individual income or income of the HUF of which he was the karta or the coparcener. Under s. 40(c), the ITO is only called upon to consider whether the remuneration or the commission paid by the assessee company to a director or to a person who has a substantial interest in the company or to a relative of the director or of such person, as the case may be, is excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived by or accrued to it therefrom. In the circumstances, the fact that in the instant case the ITO did not disallow the remuneration and commission received by the assessee as unreasonable or excessive in the assessment proceedings as against the company, cannot alter the character of the remuneration and commission received by the assessee into his separate income, if otherwise, it can only be treated as the income of the HUF. Even now the Revenue has not put forward any plea that the quantum of remuneration and commission payable to the assessee by the company is excessive and unreasonable in relation to the business. We, therefore, over rule the argument of Mr. Uttam Reddi on the basis of s. 40(c) of the Act.
31. In the result, we answer the question in the affirmative and in favour of the Revenue. The Revenue will be entitled to its costs. Counsel's fee is fixed at Rs. 500 one set.
No comments:
Post a Comment