Full Judgment Text
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PETITIONER:
S. RM. CT. PL. PALANI APPA CHETTIAR
Vs.
RESPONDENT:
THE COMMISSIONER OF INCOME-TAX, MADRAS
DATE OF JUDGMENT:
26/10/1967
BENCH:
RAMASWAMI, V.
BENCH:
RAMASWAMI, V.
WANCHOO, K.N. (CJ)
BACHAWAT, R.S.
MITTER, G.K.
HEGDE, K.S.
CITATION:
1968 AIR 678 1968 SCR (2) 55
CITATOR INFO :
R 1968 SC 683 (21,26)
R 1969 SC 893 (9,11)
F 1969 SC 927 (4,7)
R 1971 SC1454 (10,12,16)
RF 1986 SC 79 (16)
ACT:
Indian Income-tax Act (11 of 1922)-Hindu undivided family,
shares acquired from funds of--Remuneration of karta as
Managing Director Whether income of the family.
HEADNOTE:
Out of the funds of a Hindu undivided family, 90 shares out
of 300 shares of a company were purchased. After a few
years the Karta of the family became a director of the
company and was later appointed its Managing Director. The
Income-tax Officer added the remuneration of the karta. for
the assessment of the Hindu undivided family and on the
basis of the decision of this Court in The C.I.T. West
Bengal v. Kalu Babu Lai held that the remuneration was to be
treated as income of the family. The assessee appealed
unsuccessfully to the Appellate Assistant Commissioner, but
the Tribunal accepted the assessee’s plea. On reference,
the High Court answered in favour of the Revenue holding
that its decision in C.I.T. Madras v. S. N. N. Sankaralinga
Iyer was not authoritative this Court has subsequently
impliedly overruled that decision in The C.1.T. West Bengal
v. Kalu Babu Lal Chand and the later decision of this Court
in M/s. Piyari Lal Adishwar Lal v. The C.I.T. Delhi was
distingushable. In appeal, this Court-
HELD : The remuneration of the Managing Director could not
be treated as an accretion to the income of the joint family
and taxed in its hands. The shares, in this case, were
purchased by the joint family not with the object that the
karta should become the Managing Director but in the
ordinary course of investment. There was no real connection
between the investment of joint family funds in the purchase
of the shares and the appointment of karta as managing
director of the company. Applying the doctrine of Hindu
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Law, the remuneration of the managing director was not
earned by any detriment to the joint family assets [59H-60B.
F]
The present case did not fall within the principle of this
Court’s decision in C.I.T. West Bengal v. Kalu Babu Lal
Chand but bore analogy to this Court’s decision in M/s
Piyare Lal Adishwar Lal v. The C.I.T. Delhi. The decision
of the Madras High Court in C.I.T. Madras v. S. N. N.
Sankaralinga Iyer w‘s not implicitly over-ruled by this
Court in C.I.T. West Bengal v. Kalu Babu Lal Chand but was
distinguished. The facts in the present case are almost
parallel to those in C.I.T. Madras v. S. N. N. Sankaralinga
lyer. [60D-F]
M/s. Piyare Lal Chand Adhishwar Lal v. The C.I.T., Delhi
[1960] 3 S.C.R. 669, followed.
The C.I.T. West Bengal v. Kalu Babu Lal chand [1960] 1
S.C.R. 320, distinguished.
C.I.T. Madras v. S. N. N. Sankaralinga Iyer, 18 I.T.R, 194
referred 10.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1055 of
1966.
56
Appeal from the judgment and order dated October 17, 1963 of
the Madras High Court in T.C. No. 151 of 1962.
R. Gopalakrishnan, for the appellant.
T. A. Rainachandran and R. N. Sachthey, for the
respondent.
The Judgment of the Court was delivered by
Ramaswami, J. This appeal is brought, by certificate, from
the judgment of the Madras High Court in T.C. No 151 of 1962
dated October 17, 1963.
The appellant (hereinafter referred to as the ’assessee’) is
a Hindu Undivided Family consisting of the father and four
major sons. The assessee became a share-holder in the
Trichy-Sri Rangam Transport Company Ltd. (hereinafter
referred to as the company.’) in 1934 and owned 90 shares
out of the 300 shares of the company. The shares were
acquired with the funds of the Hindu Undivided family of the
father and his four major sons. There were initially four
shareholders including the assessee, two of whom were
directors. On the death of one of the Directors, the
assessee became a director in 1941 and on the death of
another director who was managing the business the assessee
became the Managing Director with effect from 1942. By a
resolution dated April 16, 1.944 the company granted him an
honorarium of Rs. 3,000 for the year 1943-44 and
subsequently raised it gradually till it became Rs. 1,000
per month with 12-1/2% commission on the net profits of the
company. The Managing Director had control over the
financial and administrative affair,, of the company and the
only qualification required was set out under Art. 19 of the
Articles of Association of the company which was to the
following effect :
"The qualification of a Director including the
first Director shall be the holding in his own
right alone and not jointly with any other
person of not less than 25 shares and the
qualification shall be acquired within two
months of appointment."
From 1938-39 to 1959-60 the assessee had been submitting re-
turns in the status of Hindu undivided family and upto 1949-
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50 the assessments were completed in that status. For the
assessment years 1950-51 to 1955-56, the assessments were
completed in the status of individual, though returns were
submitted in the status of Hindu undivided family and the
remuneration was included in those assessments. For the
assessment year 1956-57, the assessee submitted the return
in the status of Hindu undivided family but claimed for the
first time that the remuneration and sitting fees from the
company should be assessed separately in the karta’s hands.
The claim was accepted and a separate assessment made
57
on him as an individual in respect of the remuneration and
commission received from the company. This continued till
the assessment for the year 1958-59. For. the year ended
April 13, 1959 which was the previous year for the
assessment year 195960, the assessee family returned an
income of Rs. 26,780 which did not include the Salary,
Commission and Sitting fees received by the karta which
amounted to Rs. 18,683. The Income-tax Officer added the
remuneration of the karta for the assessment of the Hindu
undivided family and on the basis of the decision of this
Court in The C.I.T., West Bengal v. Kalu Babu Lal Chand(1)
held that the commission was to be treated as income of the
family. The assessee appealed to the Appellate Assistant
Commissioner but the appeal was dismissed. The asssee took
the matter in further appeal to the Income-tax Appellate
Tribunal, Madras Bench. The Tribunal held that the case was
governed by the decision of the Madras High Court in C.1.T.
Madras v. S. N. N. Sankaraling Iyer(2) and that the
remuneration of the Managing Director ought nor to be
treated as income of the family. The Tribunal came to the
conclusion that the judgment in C.I.T., Madras v. S. N. N
Sankaralinga Iyer(1) was not affected by the decision of
this Court in The C.I.T. West Bengal v. Kalu Babu Lal
Chand(1). At the instance of the assessee the Appellate
Tribunal stated a case to the Madras Court on the following
question of law:
"Whether sums of Rs. 9,000, Rs. 8,133 and Rs.
1,550 received by, the assessee as Managing
Director’s remuneration, commission and
sitting fees are asses sable as the income of
the Hindu undivided family of which Palaniappa
Chettiar is the Karta ?"
The High Court took the view that the decision in C.I.T.,
Madras v. S. N. N. Sankaralinga Iyer(1) was not
authoritative as this Court had subsequently impliedly
overruled that decision in the C.I.T., West Bengal v. Kalu
Babu Lal Chand(1) and the later decision of this Court in
M/s. Piyare Lal Adishwar Lal v. The C.I.T., Delhi(3) was
distinguishable. The High Court held that the case was
governed by the ruling of this Court in The C.I.T., West
Bengal v. Kalu Babu Lal Chand (1) and accordingly decided
the, question of law against the assessee and in favour of
the Income-tax Department.
On behalf of the assessee Mr. Gopalakrishnan put forward the
argument that the High Court was in error in holding that
the present case was governed by the decision of this Court
in The C.I.T., West Bengal v. Kalu Babu Lal Chand(1), that
the remuneration earned by the Managing Director was not
earned as a
(1) [1960] 1 S.C.R. 320.
(3) [1960] 3 S.C. R. 669.
(2) 18 I.T.R. 194.
L 10 SUP,(C),68-- 5
58
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result of the utilisation of the joint family funds in the
business and there was no detriment to the joint family
assets or the use of the joint family assets in the
business. It was not therefore a right proposition to state
that under the principle of Hindu Law the remuneration of
the Managing Director in the present law was directly an
accretion from the utilisation of the joint family funds and
therefore constituted the income of the Hindu joint family.
It was pointed out that in C.I.T., West Bengal v. Kalu Babu
Lal Chand(1) the income of the Managing Director arose
directly from the use of joint family funds, but the
material facts in the present case are different. In our
opinion, the argument of the appellant is well-founded and
must be accepted as correct.
In The C.I.T., West Bengal v. Kalu Babu Lal Chand(1), one
Rohatgi, mananager of a Hindu undivided family, who took
over a business its a going concern, promoted a company
which was to take over the business. The articles of
association of the company provided that Rohatgi would be
the first managing director at a remuneration specified in
the articles. The shares which stood in the name of Rohatgi
and his brother were acquired with funds belonging to the
joint family and the joint family was in enjoyment of the
dividends paid on those shares, and the company was floated
with funds provided by the family, and was at all material
times financed by the family. In proceedings for assessment
of the Hindu undivided family, it was claimed that the
managing director’s remuneration constituted the personal
earnings of Rohatgi and could not be added to the income of
the Hindu undivided family. The claim was rejected by this
Court and it was held that the managing director’s
remuneration received Rohatgi was, its between him and the
Hindu undivided family, the income of the family and should
be assessed in its hands. In other words, the Court that
there was a real and sufficient connection between the
investment of the joint family funds and the appointment of
Rohatgi as the managing director and hence the managing
Director’s remuneration was, as between him and the Hindu
undivided family, ’the income of the family and was taxable
in its hands. That is the true ratio decidendi or the
principle upon which the case was decided. At pages 331-332
of lie Report S. R. Das, C.J. speaking for the Court set out
the basis of the decision in the following passage
"The Karta was one of the promoters of the
Company which he floated with a view to take
over the India Electric Works as a going
concern. In anticipation of the incorporation
of that Company the karta of the family took
over the concern, carried it on and supplied
the finance at all stages out of the joint
family
(1) [1960] 1 S.C.R. 320.
59
funds and the finding is that he never
contributed any-thing out of his separate
property, if he had any. The Articles of
Association of the Company provided for the
appointment as managing director of the very
person who, as the karta of the family, had
promoted the Company. The acquisition of the
business, the floatation of the Company and
appointment of the managing, director appear
to us to be inseparably linked together The
joint family assets were used for acquiring
the concern and for financing it and in lieu
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of all that detriment 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.......... The
recitals in the agreement also clearly point
to the fact of B. K. Rohatgi having been
appointed managing director because of his
being a promoter of the company and having
actually taken over the concern of India
Electric Works from Milkhi Ram and others.
The finding in this case is that the promotion
of the Company and the taking over of the
concern and the financing of it were all done
with the help of the joint family funds and
the said B. K. Rohatgi did not contribute
anything out of his personal funds if any. In
the circumstances, we are clearly of opinion
that the managing director’s remuneration
received by B. K. Rohatgi was, as between him
and the Hindu undivided family, the income of
the latter and should be assessed in its
hands."
Now, what are the facts found by the Appellate Tribunal in
the present case ? In 1934, the joint family had acquired 90
shares cut of the 300 shares of the company. The shares
were acquired with the funds of the Hindu undivided family
of which the father was the karta. On the demise of one of
the directors the assessee became a director in 1941 and on
the death of another director who was managing the business
the assessee became the Managing Director with effect from
1942. It is apparent therefore that the joint family had
control only of 90 out of 300 shares and the shares were
purchased in the ordinary course of business and not for the
purpose of qualification of the karta to become a director.
The shares were purchased in 1934, about 8 years before the
karta was appointed as the managing director. It is
apparent that the shares were purchased by the joint family
not with the object that the karta should become the
managing director but in the ordinary course of investment.
To put it differently, there was no real connection between
the investment of joint family funds in the
60
purchase of the shares and the appointment of the karta as
managing director of the company. Applying the doctrine of
Hindu law, the remuneration of the managing director was not
earned by any detriment to the joint family assets. We are
therefore of the opinion that the High Court was in error in
holding that the present case falls within the principle of
the decision of this Court in The C.I.T. West Bengal v. Kalu
Babu Lal Chand(1) On, the contrary, we are of the opinion
that the present case bears analogy to the decision of this
Court in Mills. Piyare Lal Adishwar Lal v. The C.I.T.,
Delhi(2). In that case, a member of a Hindu undivided
family had 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 claim was
rejected by this Court on the ,,round that there was no
detriment and risk to the joint family property and the
emoluments of the treasurer could not be treated as an
accretion to the income of the Hindu undivided family. We
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consider it also necessary to state that the decision of
Madras High Court in C.1.T. Madras v. S. N. N.
Sankaralingaly Iyer was not impliedly overruled by this
Court in C.I.T., West Bengal v. Kalu Babu Lal Chand(1). It
was merely pointed out that the material facts of that case
were different from those of Kalu Babu Lal Chand v case(1).
It was, for instance, found in C.I.T. Madras v. S. N. N.
Sankaralinga Iyer(3) that the remuneration of the managing
director was earned by rendering services to the bank and no
part of the family funds were utilised except that the
necessary shares to acquire the qualification of a managing
director were purchased out of joint family funds. It was
held that there was no detriment to the family property in
any manner or to any extent. In view or this finding it
follows that the remuneration of themanaging director
could not be treated as an accretion to the income of the
joint family and taxed in its hands. The process of
reasoning of the Madras High Court in. C.I.T., Madras v. S.
N N. Sankaraliyiga Iyer(3) may be open to criticism and may
not be Sound but, in our opinion, the actual decision in
that case is correct and is supported by the principle that
there is no detriment to the family property and no part of
the family funds had been spent or utilised for acquiring
the remuneration of the managing director. The facts in the
present case are almost parallel to those in C.I.T. Madras
v. S. N. N. Sankaralinga lyer(3) and there is no detriment
to the joint family assets and no part of the joint family
property was spent in earning the remuneration or making the
acquisition. It therefore follows that the principle of the
decision
(1) [1960] 1 S.C.R. 320.
(3) 18 I.T.R. 194..
(2) [1960] 3 S.C. P,. 669.
61
in The C.I.T., West Bengal v. Kalu Babu Lal Chand(1) cannot
be applied for deciding the question presented for
determination in this case.
For these reasons we hold that amounts of Rs. 9,000, Rs.
8,133 and Rs. 1,550 received by the assessee as managing in
director’s Remuneration commission and sitting fee,-,
respectively are not assessable as income of the Hindu
undivided family of which Palniappa Chettiar is the karta.
We accordingly allow this appeal, set aside the judgment of
the High Court and answer the question infavour of the
assessee and against the Income-tax Department. The
appellant is entitled to costs here and in the
High Court-
Y.P. Appeal allowed
(1) [1960] 1 S.C.R. 320.
62