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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