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PETITIONER: M/S.  PIYARE LAL ADISHWAR LAL

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME-TAX, DELHI.

DATE OF JUDGMENT: 26/04/1960

BENCH: KAPUR, J.L. BENCH: KAPUR, J.L. DAS, S.K. HIDAYATULLAH, M.

CITATION:  1960 AIR  997            1960 SCR  (3) 669  CITATOR INFO :  R          1963 SC 683  (7,21,26,30)  R          1965 SC 360  (9)  D          1966 SC 798  (10,12)  RF         1968 SC 678  (2,4)  R          1969 SC 893  (9)  R          1971 SC1454  (9)  RF         1973 SC 637  (7)

ACT: Income      Tax-Agreement     between     Treasurer      and Bank-Construction-Treasurer,   whether  servant   of   Bank- Treasurer  furnishing  security of  joint  family  property- Emoluments  received by Treasurer, whether income  of  joint family-lndian Income-tax Act, 1922 (II of 1922), ss. 7, 10.

HEADNOTE: S was the karta of the Hindu undivided family, consisting of himself  and  his  younger brother.  Their  father  was  the Treasurer  of  a Bank till his death in  1950.   During  his father’s lifetime S was employed as an overseer in the  Bank on a salary of Rs. 400 a month, and, subsequently, after his father’s  death  he was appointed Treasurer of the  Bank  at Delhi and sixteen other branches of the Bank.  As  Treasurer he  furnished security to the Bank of certain properties  of the  Hindu undivided family.  The agreement dated  September 19,  1950,  between  him and the Bank, showed  that  he  was appointed Treasurer on a monthly salary of Rs. 1,75o and  he was  also  paid certain sums of money for  guaranteeing  the conduct  of  the  cashiers and other  members  of  the  Cash Department  Staff which he was required to employ  with  the approval  of  the Bank.  He was to carry out his  duties  as directed  by the Bank and if in the discharge of his  duties he  caused any loss to the Bank he was liable to  make  good the loss.  He was not required to serve personally, but  his services  could  be terminated by notice.  In  the  year  of account  1950-51  he  received from the Bank a  sum  of  RS. 23,286 as Treasurer.  The Income-tax authorities  considered that  this sum was not the individual income of S as  salary but was part of the income of the Hindu undivided family and taxed  if  as  such on the grounds (1)  that  the  agreement between S and the Bank showed that the relationship  between

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them  was  not  one of master and servant  but  that  of  an employer and independent contractor and that the  emoluments received  by  the  Treasurer  were  profits  and  gains   of business, (2) that S was appointed Treasurer not on  account of  any personal qualification but because his father was  a Treasurer  of  the  Bank before him, and  (3)  that  as  the security  furnished  by  S  came out  of  the  joint  family properties,  the emoluments could not be said to  have  been earned   without  detriment  to  the  family  property   and therefore were part of the Hindu undivided family: Held,  (1)  That on the true construction of  the  agreement dated September 19, 1950 the Treasurer was a servant of  the Bank. Shivanandan Sharma v. The Punjab National Bank Ltd. [1955] 1 S.C.R.  1427 and Dhayangadhara Chemical Works Ltd. v.  State Of Saurashtra, [1957] S.C.R. 52, relied on. (2)  That in view of the fact that there was nothing to show that  S had received any particular training at the  expense of the 87 670 family  funds or that his appointment as Treasurer  was  the result  of any outlay or expenditure of or detriment to  the family  property,  but  on  the  other  hand  his   previous experience  as  an overseer of the Bank  was  indicative  of personal fitness for his appointment as Treasurer, the  mere fact he had lodged joint family property by way of  security would not make his earnings as Treasurer part of the  income of the Hindu undivided family. The  use  of the words " risk of " and " detriment to  "  in Gokul  Chand  v. Firm Hukum Chand Nath Mal, (1921)  L.R.  48 I.A. 162, explained. Commissioner of Income-tax v. Kalu Babu Lal Chand, [1960]  1 S.C.R. 32o, distinguished. Accordingly, the emoluments received by S were in the nature of salary and therefore assessable under s. 7 of the  Indian Income-tax  Act,  1922, and not under s. 10 of  the  Act  as profits and gains of business, and the salary was the income of  the  individual,  S, and not the  income  of  the  Hindu undivided family.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No.123 of 1957. Appeal  from the judgment and order dated May 12,  1955,  of the Punjab High Court in Civil Reference No. 17/1953. A.   V.  Viswanatha Sastri, S. N. Andley, J. B.  Dadachanji, Rameshwar Nath and P. L. Vohra, for the appellants. C.K. Daphtary, Solicitor-General of India, R. Ganapathy Iyer and D. Gupta, for the respondent. 1960.  April 26.  The Judgment of the Court was delivered by KAPUR,  J.-This is an appeal against the judgment and  order of  the  High Court of Punjab made on a reference  under  s. 66(1)  of  the Indian Income-tax Act which was  answered  in favour of the Commissioner of Income-tax.  The appellant  is the assessee-a Hindu undivided family-with Sheel Chandra  as its Karta and the respondent is the Commissioner of  Income- tax. The  appeal  relates to the assessment  year  1951-52.   The appellant,  a  Hindu undivided family,  consisted  of  Sheel Chandra  and  his Younger brother.  Their  father,  Adishwar La], upto his death on April 16, 1950, was the Treasurer  of several branches of the Central Bank of India (which in  the judgment  will  be  referred to as the  Bank).   During  his

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father’s lifetime Sheel Chandra was employed as an  Overseer in  the Bank on a salary of Rs. 400 a month.  Sheel  Chandra was appointed Treasurer of the Bank at Delhi and sixteen 671 other  branches  of  the Bank.  As  Treasurer  he  furnished security  to  the Bank of certain properties  of  the  Hindu undivided   family,  which  consisted  of  title  deeds   of immovable properties in Chandni Chowk, Delhi, and Government of  India securities of the value of Rs. 75,000.  The  Hindu undivided  family  owns considerable property.   Its  income from  house  property alone is Rs. 50,000 per annum  and  it owns  stocks,  shares  and  Government  securities  also  of considerable value.  As Treasurer Sheel Chandra received  in the  year of account from the Bank a sum of Rs.  23,286  and the  question  for  decision  is whether  this  sum  is  the individual  income of Sheel Chandra as salary or it is  part of the income of the Hindu undivided family.  The Income-tax Authorities  held this sum to be the latter and taxed it  as such.   The Income-tax Appellate Tribunal in upholding  this view  held  that  on a proper construction  of  the  written agreement between Sheel Chandra and the Bank, the emoluments received by the Treasurer were profits and gains of business and it further held that as the security furnished by  Sheel Chandra  came  out  of the joint family  proper.  ties,  the emoluments  could  not be said to have been  earned  without detriment to the family property and therefore were part  of the  income of the Hindu undivided family.  At the  instance of  the appellant the Tribunal referred under s.  66(1)  the following two questions to the High Court:- (1)" Whether in the facts and circumstances of the case  and on a true construction of the agreement between the  Central Bank  of  India  and  Sheel Chandra  the  salary  and  other emoluments  received  by Sheel Chandra as Treasurer  of  the said Bank are assessable under the head ’ salary ’ or  under the head ’Profits and gains of business’." (2)"  Whether  in the facts and circumstances of  the  case, Sheel Chandra’s emoluments as Treasurer of the Central  Bank of  India  Ltd. were rightly assessed in the  hands  of  the Hindu  undivided  family  of which  he  is  the  Karta". Both questions were answered against the appellant. On  a consideration of the various clauses of the  agreement between Sheel Chandra and the Bank, the 672  High Court held that the relationship between them  was not one  of  master  and servant but that  of  an  employer  and independent contractor and therefore the emoluments received by  Sheel Chandra as Treasurer were not salary  but  profits and  gains of business.  As to the second question the  High Court was of the opinion that the emoluments were the income of the Hindu undivided family because Sheel Chandra was :not appointed Treasurer on account of any personal qualification but he was appointed because (a) his father was a  Treasurer of the Bank before him and (b) he had furnished  substantial security  which  was  part  of the  property  of  the  Hindu undivided  family.   Against  this judgment  and  order  the appellant has come in appeal to this Court. The  nature  of the employment of Sheel Chandra  has  to  be gathered  from  the  agreement  dated  September  19,  1950, between him and the Bank.  It shows that on his  application for  appointment as a Treasurer at Delhi and  sixteen  other branches  of the Bank, the Bank appointed him Treasurer  for those  branches  and  he could ’  by  mutual  agreement,  be appointed  at  other  branches  in the  Punjab,  U.  P.  and Rajasthan.  The appointment took effect from April 16, 1950. Sheel  Chandra  undertook  to  perform  the  duties  and  be

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responsible as Treasurer of the various branches of the Bank and  was  required to engage and  employ  subordinate  staff called  the  Cash Department Staff such  as  Head  Cashiers, Potdars, Guaranteed Peons, Godown Keepers, Assistant  Godown Keepers,  Chowkidars and Clerks and other persons  necessary for  the efficient working of the said offices.  He had  the 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. The  Treasurer and the Cash Department Staff were to do  and be responsible for all work in connection with receipts  and payments  of  monies and bad to do ouch other  work  as  was customarily done by cashiers 673 and  shroffs of Banks.  The Treasurer was  also  responsible for  the  correctness  and genuineness of  all  hundies  and cheques  bearing signatures and endorsements  in  vernacular and  for genuineness of all signatures and writings  in  any language  or  character or any  securities,  voucher  deeds, documents  and  writings  which the Treasurer  or  the  Cash Department  Staff  dealt  with and in case of  any  loss  or damage arising out of any forged signatures and endorsements on  any  document  accepted  or  dealt  with  by  the   Cash Department  Staff as correct and genuine, the Treasurer  was responsible  to make good the loss.  He was  also  required, when  asked by the Bank, to engage the necessary  staff,  to look  after  the  goods pledged with the  Bank  and  he  was responsible for the good conduct of such staff.  It was also his  duty  to make enquiries and report upon  the  identity, credit and solvency of persons dealing with the Bank and was liable   for   any   loss  arising   out   of   any   wilful misrepresentation  or  negligence in the enquiry  or  report made  by him or his representative in any matter arising  in the  course  of employment.  He or his  representative  were also  required, when asked, to give reliable information  in regard to hundi business but he was not responsible for  any damage  or loss arising therefrom.  He also  undertook  when required  by  the  Officers of the Bank to  value  and  give correct  certificate in regard to the genuineness,  fineness and weight of bullion and gold ornaments and other valuables pledged  with the Bank.  He was responsible for any loss  to the  Bank  in  case  of  any  wilful  misrepresentation   or negligence in regard to this branch of his duty.  He further undertook  to  supply to the Bank as many  persons  as  were required at the various branches of the Bank which the  Bank opened in future.  He undertook responsibility for the  safe custody of the monies and ornaments and other valuables kept with  or  pledged  with the Bank as also for  the  bills  of exchange,  promissory  notes, hundies or  other  securities. Besides  this  he was required to satisfy the Agent  or  the Manager  of the branch that all the monies of the  Bank  and other valuable securities which had not been duly 674 used  and  accounted  for were intact and  in  their  proper places. Sheel Chandra was paid a salary of Rs. 1,750 per mensem  for all  the branches he was employed in.  Besides this  he  was paid  certain sums of money for guaranteeing the conduct  of Godown  Keepers,  Assistant Godown  Keepers  and  Chowkidars supplied  by  him.   If the branches  or  out-agencies  were increased he was to receive such increase in salary as might mutually be agreed upon.  On the closing of any branch there was  to  be a corresponding reduction in  the  remuneration.

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The  members  of the Cash Department Staff were to  be  paid travelling allowance according to the rules of the Bank.  In addition  to the remuneration above mentioned the  Treasurer or  his  authorised representative when  visiting  different branches  were  to  get actual railway  fare.   The  various members  of the Cash Department Staff were to be paid  their salary  directly by the Bank but the Bank was not  bound  to pay  more  than the scale laid down by  it.   The  permanent members  of the Cash Department Staff were to get the  usual increments  and  benefit of Provident  Fund  and  travelling allowance  in  accordance with the rules of the  Bank.   The Treasurer  was required to engage members of the Cash  Staff on  salaries laid down by the Bank and if he  paid  anything more  than  the usual Bank scale he had to pay  it  himself. The  Treasurer was also entitled to nominate and  appoint  a representative  to carry on the duties undertaken by him  at the various offices of the Bank but these appointments  were Subject to the approval of the Bank. The  Treasurer was responsible for the acts of omission  and commission   and   for   neglect   and   default   of    his representatives  and for each and every member of  the  Cash Department   Staff.   There  are  various  clauses  in   the agreement  requiring the Treasurer or his representative  to perform  their duties efficiently, honestly and in a  proper manner.   The Treasurer and the Cash Department  Staff  were under  the control of the Bank.  They were required to  make entries in the books of account which were furnished by  the Bank giving full particulars of all monies received and paid 675 by  them and in such manner as the Agent of the  Bank  might from  time to time direct in writing.  The Treasurer had  to carry  out his duties faithfully and any communication  made by  the Bank to any member of the Cash Department Staff  was to  be considered as a communication made to  the  Treasurer himself  and  he  was  bound to  take  notice  of  it.   The agreement  could  be terminated by  three  calendar  months’ notice  in  writing by either side but in the event  of  any breach  of any condition of the agreement by  the  Treasurer his   services  could  be  terminated  forthwith;  but   his liability  was to continue.  There was also  an  arbitration clause. Counsel  for  the  appellant  contended  that  the   various provisions of the agreement showed that Sheel Chandra was  a servant  of the Bank and not an independent contractor.   He laid particular emphasis on the fact that he was appointed a Treasurer  on  a monthly salary and his  services  could  be terminated forthwith in certain circumstances.  Besides this he  was to carry out his duties as directed by the Bank  and was  to  discharge  his  duties faithfully  and  if  in  the discharge  of his duties he caused any loss to the  Bank  he was liable to make good the loss.  These factors,  according to him, showed that he was not an independent contractor  or an  agent  of  the Bank but was  a  salaried  servant.   The contention on behalf of the respondent on the other hand was that the agreement showed that Sheel Chandra was carrying on a  business  in  that he was supplying  cashiers  and  other members  of  the Cash Department Staff for a  monetary  con- sideration.   He  guaranteed  their fidelity  which  was  an insurance undertaken by him.  He was to get certain sums  of money  for  supplying  each member  of  certain  classes  of servants to the Bank and the agreement between the Bank  and Sheel Chandra could be terminated by notice and there was an arbitration  clause  and  he  was  not  required  to   serve personally. Undoubtedly there are some terms in the agreement which  are

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unusual as ordinary agreements of service go but in the case of an agreement between a Bank and a Treasurer they are riot so Unusual.  There was 676 an agreement with very similar clauses in Shivanandan Sharma v.  The Punjab National Bank Ltd. (1) and it was held to  be an agreement of service and not of agency. Now,  the  duties of Sheel Chandra under the  agreement  are such as are peculiar to the employment of Treasurers.  It is true that as Treasurer, Sheel Chandra had    also undertaken to indemnify the Bank not only for his own default but  also for the default of the members of the Cash Department Staff. But  Banks  have to deal with monies,  valuable  securities, gold  and  other  valuables  and  must  necessarily   employ servants whose honesty is guaranteed and it is necessary for the Bank to have some one in its employment who can  perform these  duties in a responsible manner and be  answerable  to the  Bank for negligence and default in the  performance  of this  class of work.  In the very nature of things  one  man cannot do all this work, not even at one branch, what to say of  several  branches;  other people have  therefore  to  be employed  and  although  the persons employed  in  the  Cash Department  are servants of the Bank they do the work  which Treasurers  ordinarily and customarily do  and  consequently the  Treasurer is made responsible for any damage which  the Bank suffers due to the default of the Treasurer or of those employed to do the work of the Cash Department. It is difficult to lay down any one test to distinguish  the relationship of master and servant from that of art 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 done 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    (2) 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 (1) [1955] 1 S.C.R. 1427. (2) [1951] 2 K.B. 343, 352-3. 677 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. and Henderson Ltd. (1).  Bhagwati, J.,  in  Dharangadhara  Chemical  Works  Ltd.  v.  State  of Saurashtra (2) 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. We  have  given  above the duties of the  Treasurer  in  the present  case,  his obligations and the  manner  of  control exercised  over him and the staff employed by him  to  carry out  the work of the Cash Department of the Bank.  It is  no doubt true that the Treasurer guaranteed his fidelity,  good faith  and honesty of the persons who were employed  in  the Cash Department of the Bank but that was a part of the  duty that he undertook and that is peculiar to the very nature of his  employment.  Applying the test which was laid  down  by Bhagwati, J., in Dharangadhara Chemical Works Ltd. v.  State

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of  Saurashtra (2) that having regard to the nature  of  the work  whether there was due control and supervision  of  the Bank  over the Treasurer, the Treasurer in the instant  case must  be held to be a servant of the Bank.  What we have  to see is the effect of the agreement as a whole and taking the various clauses together it must be held that Sheel Chandra, the  Treasurer, was a servant of the Bank.  In view of  this it  is not necessary to discuss in detail the various  cases that  were  cited  at  the  bar.   K.  P.  Bhargava  v.  The Commissioner  of  Income-Tax, U. P. (3) was the  case  of  a Treasurer  of the Central Bank of India at Agra.   There  he was  paid a salary of Rs. 100 and a commission for his  work as  a  Guarantee  Commission  Agent but  the  terms  of  the contract  were  different and that was clearly a case  of  a Guarantee Commission Agency. (1) 62 T L.R. 427, 429.  (2) [1957] S.C.R. 152, 160. (3)  [1954] 26 1 T.R. 489. 88 678 Lala Jeewan Lal v. Commissioner of Income-tax(1) was also  a case of commission agency and in the peculiar  circumstances of  that case it was held to be business within s.  2(5)  of the  Excess Profits Tax Act.  The assessee there was paid  a commission  of  4  annas  per cent.  on  the  value  of  the contracts  secured by him.  Subsequently the commission  was increased to Re.1 per cent. and for this extra commission he agreed to reimburse the mill in case of failure of a  person purchasing  through him to pay the price.  Counsel  for  the respondent also relied on Commissioner of Income-tax V. Kalu Babu   Lal   Chand  (2)  where   the   Managing   Director’s remuneration was held to be the income of a joint family  to be   assessed   as  such  in  its  hands.   That   case   is distinguishable.   There  the  karta of  a  Hindu  undivided family  took over a business as a going concern and  carried on  the  business till the company  was  incorporated.   The shares  in the name of karta and his brother  were  acquired with the funds of the joint family.  The company was floated with  the funds of the joint family and was financed  by  it and  the remuneration received was credited in the books  of the family.  The office of the Managing Director itself  was assignable.   The Articles of Association provided that  the karta  or his assigns or successors in business  "   whether under  his  name or any other style or firm " would  be  the Managing Director of the Company and he was to continue  for life until removed because of fraud or dishonesty.  Thus the acquisition  of business, the flotation of the  Company  and the  appointment of the Managing Director  were  inseparably linked  together.   The  facts  of  that  case  were   quite different  from that of the present case which are  akin  to the facts in Shivanandan Sharma v. Punjab National Bank Ltd. (3). The  next  question for decision is whether  the  salary  of Sheel Chandra as Treasurer of the Bank is assessable as part of  the income of Hindu undivided family of which he is  the karta  or  as  his  separate  income.   Both  the  Appellate Tribunal  and  the High Court were of the opinion  that  the emoluments  as  Treasurer  were  not  acquired  without  any detriment and risk to the (1) [1953] 24 I.T.R. 217.  (2) [1960] 1 S.C.R. 320 (3) [1955] 1 S.C.R. 1427. 679 family  property and therefore formed part of the income  of the Hindu undivided family.  Treasurership is an  employment of responsibility, trust and fidelity and personal integrity and  ability  and  mere ability  to  furnish  a  substantial

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security  is not the sole or even the main reason for  being appointed  to  such a responsible post in a  Bank  like  the Central  Bank  of  India.  On the other  hand  his  previous experience  as  an  Overseer  of  the  Bank  and  his  being appointed  on  his applying for the post are  indicative  of personal fitness for it. There is nothing to show that Sheel Chandra had received any particular  training at the expense of the family  funds  or his appointment was the result of any outlay or  expenditure of  or detriment to the family property.  But it was  argued on behalf of the respondent that because he had lodged joint family property by way of security his earnings as Treasurer became  a part of the income of the Hindu  undivided  family for the reason that the acquisition was not without risk  to the  family estate.  He relied on Gokul Chand v. Firm  Hukum Chand  Nath Mal (1) and Commissioner of Income-tax  v.  Kalu Babu  Lal  Chand (2).  In the former case a  member  of  the joint  family  entered the Civil Service and that  was  made possible  by the expenditure of family funds  which  enabled him to acquire the necessary qualifications and it was  that fact which made his earnings part of the family income.  The following   passage   in  that  judgment  at  p.   168   was emphasised:- " It may be said to be direct in the one case and remote  in the other, but if risk of or detriment to family property is the  point in both cases, there appears to be no such  merit in  "science", recognised by the sages of the Hindu law,  as would warrant the exclusion of gains of science as such from the category of partible acquisitions". Counsel  particularly  relied  on the  words  ’risk  of  and contended that by reason of the family property being  given in  security,  the  risk  as  understood  in  that  judgment hadarisen, because-it-became liable for any loss that  might be  incurred  during  the  course  of  employment  of  Sheel Chandra.  The word ’risk’ in that (1) (1921) 48 I.A. 162. (2) [1960] 1 S.C.R. 320, 680 judgment  must be read in the context in which it was  used. Family  estate  was used and expenditure  was  incurred  for equipping  one  of  its members to  join  the  Indian  Civil Service.  It was in that connection that the words ’risk of’ or  ’detriment  to’ family property were used.   The  latter case,  Kalu  Babu  Lai Chand’s  case(1),  has  already  been discussed.   The facts and circumstances of that  case  were different. The  cases  which  the Privy Council relied  upon  in  Gokul Chand’s case (2) were all cases where joint family funds had been  expended to fit a member of the joint family  for  the particular  profession or avocation the income of which  was the  subject matter of dispute but the respondents were  not able to refer to any decision in which it was held that  the mere  fact of giving joint family property in  security  for the  good  conduct of a member of the family employed  in  a post  of trust was sufficient to make the emoluments of  the post  joint  family  property because of  any  detriment  to family property or risk of loss.  It has not been shown that in this case there was any detriment to the family  property within the meaning of the term as used in decided cases. In our opinion the judgment of the High Court was  erroneous on both questions which were referred to it and they  should both have been decided in favour of the appellant. The emoluments received by Sheel Chandra were in the  nature of salary and therefore assessable under s. 7 of the Income- tax Act and not under s. 10 of the Act as profits and  gains

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of business and the salary was the income of the individual, i.e.,  Sheel  Chandra  and  not  the  income  of  the  Hindu undivided family. We  therefore allow this appeal and set aside  the  judgment and  order of the High Court.  The appellant will  have  its costs in this Court as well as in the High Court. (1) [1960] 1 S.C.R. 320.                                 Appeal allowed. (2)  (1921) 48 I.A. 162. 681