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PETITIONER: THE COMMISSIONER OF INCOME-TAX, WEST BENGAL

       Vs.

RESPONDENT: KALU BABU LAL CHAND

DATE OF JUDGMENT: 15/05/1959

BENCH: DAS, SUDHI RANJAN (CJ) BENCH: DAS, SUDHI RANJAN (CJ) BHAGWATI, NATWARLAL H. HIDAYATULLAH, M.

CITATION:  1959 AIR 1289            1960 SCR  (1) 320

ACT:        Income-tax-Income  of the Hindu undivided family-Manager  of        the  joint family using family funds for  Promoting  company        and  subsequent becoming managing  director-Remuneration  of        the  managing  director-Whether  taxable as  income  of  the        undivided family.

HEADNOTE:        R  was the karta of the Hindu undivided family which  became        interested  in  a  business concern  which  was  then  being        carried  on by others.  With a view to taking over the  said        business as a going concern, a company was floated with R as        one  of  the promoters.  Pursuant to an agreement  with  the        vendors.  of  the  business  and  in  anticipation  of   the        incorporation  of the company, R on behalf of  the  company,        took  over  the  concern, carried it  on  and  supplied  the        finance  at  all stages out of the joint family  funds.   On        December 19, 1930 the contemplated company was  incorporated        under the Indian Companies Act as        321’        a  private company with limited liability, in which  of  the        total 950 ordinary shares, R had 326 shares and his  brother        356  shares.   The Articles of Association  of  the  company        provided  for  the appointment of R as  the  first  managing        director  of  the  company.  Prior to  the  accounting  year        relevant to the assessment year I943-44 the amount  received        by R as managing director’s remuneration was credited in the        books of the Hindu undivided family just as the dividends on        the  shares held in the names of R and his brother had  been        done.   For the assessment year I943-44 it was claimed  that        the  amount  which  R received as  the  managing  director’s        remuneration  in  the  relevant  accounting  year  was   his        personal  earnings  and that it should not be added  to  the        income  of  the Hindu undivided family, but  the  Income-tax        Officer  rejected  this  claim.  It was  contended  for  the        assessee  that  under  the  Indian  Companies  Act  a  Hindu        undivided  family cannot, by reason of the definition  given        in  s. 2(9-A) be appointed a managing agent of  company  and        that  the  office of managing director involves  a  personal        element  and  the appointment of a  managing  director  must        necessarily be of a particular person for his personal skill

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      and other qualities and therefore the remuneration  received        by him must be his personal earnings.        Held,  that  though  vis-a-vis  the  company  the   managing        director  was  undoubtedly  the individual  person  who  was        appointed as such and the company was not concerned with the        managing  director’s Hindu undivided family or  the  members        thereof,  the  question whether the amount received  by  the        karta  by  way of managing director’s remuneration  was  his        personal  income  or was the income of the  Hindu  undivided        family  arises as between the karta and the members  of  his        family  and would depend on whether it was earned  with  the        help of joint family assets.        In  the present case, on the facts found that the  promotion        of  the  company,  the taking over of the  concern  and  the        financing  of  it were all done with the help of  the  joint        family  funds and that R did not contribute anything out  of        his  personal  funds,  held  that  the  managing  director’s        remuneration received by R was, as between him and the Hindu        undivided  family,  the income of the latter and  should  be        assessed in its hands.        Kaniram  Hazarimal  v.  Commissioner  of   Income-tax,  West        Bengal,   (1955)   27  I.T.R.  294;  V.  D.   Dhanwatay   v.        Commissioner of        Income-tax, Madhya Pradesh and Bhopal, (1957) 32 I.T.R.  682        In  re  Haridas Purshottam, (1947) 15 I.T.R. I24  and  Gokul        Chand v.  Humam  Chand Nath Mal, (192I) 48 I.A. 162,  relied        on.        Commissioner of Income-tax, Madras v. S. N. N.  Sankaralinga        IYer,l   (1950)   18  I.T.R.  194;   Murugappa   Chetty   v.        Commissioner  of Income-tax, Madras, (1952) 21  I.T.R.  311;        Sardar  Bahadur Indra Singh v. Commissioner  of  Incomc-tax,        Bihar and Orissa,        41        322        (1943)  11 I.T.R. 16 and Commissioner of  Income-tax,  Bihar        and   Orissa   v.-   Darsaram,   (1945)   13   I.T.R.   419,        distinguished.

JUDGMENT:        Civil APPELLATE JURISDICTION: Civil Appeal No. 431 of 1957.        Appeal  by special leave from the judgment and  order  dated        the September 8, 1955, of /the Calcutta High Court        in        Income-tax Reference No. 77 of 1951.        C.   K. Daphtary, Solicitor-General of India, R. Ganapathy     Iye r        and D. Gupta, for the appellant.        N.   C.  Chatterjee, B. Sen Gupta and D. N.  Mukherjee,  for        the respondent.        1959.  May 15.  The Judgment of the Court was delivered by        DAS  C.J.-This appeal by special leave is  directed  against        the order of -the High Court of Calcutta passed or September        8,  1955,  on a reference made by the Income  Tax  Appellate        Tribunal under s. 66(1) of the Indian Income-tax Act whereby        the High Court answered the first question referred to it in        the  negative  and  the second question  in  favour  of  the        respondent  assessee.  The facts leading up to  the  present        appeal are briefly as hereinafter narrated.        The  respondent was at all material times a Hindu  undivided        family of which one B. K. Rohatgi was the eldest male member        and as such its karta.  It appears that in 1930 the said  B.        K.  Rohatgi became interested in a concern called the  India        Electric  Works carried on by Milkhi Ram and  other  persons        none of whom was a member of the assessee family.  Evidently

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      it was decided that a Company would be floated, inter  alia,        for the purpose of acquiring and taking over the said  India        Electric  Works as a going concern.  The said B. K.  Rohatgi        was  one of the promoters of that Company.  Pursuant  to  an        agreement with the vendors of the business of India Electric        Works the said B. K. Rohatgi, as such promoter as  aforesaid        and  on behalf of the said Company then to be  formed,  took        over the said business as a going concern on and from  March        1,  1930, and carried on the same since then until  December        19, 1930, when the contemplated        323        Company   was  eventually  incorporated  under  the   Indian        Companies  Act as a private company with  limited  liability        under  the  name of India Electric Works  Ltd.  (hereinafter        called " the said Company ").        Article  132  of  the Articles of Association  of  the  said        Company  provided that the first Managing Director would  be        the  said  B. K. Rohatgi or " his assigns or  successors  in        business whether under his name or any other style or firm "        and  that  the said B. K. Rohatgi would continue to  be  the        Managing  Director until he would resign or be found  guilty        of  any  act  of fraud or dishonesty or be  removed  in  the        manner  thereinafter  provided.  Article 133 laid  down  the        circumstances  in  which  and the conditions  on  which  the        Managing  Director might be removed.  Article  135  provided        for  the  remuneration of the Managing  Director  which  was        fixed at Rs. 6,000 per annum or a commission of 15 per cent.        on  the  net profits of the Company to be  computed  in  the        manner  therein  mentioned.   The  powers  of  the  Managing        Director were enumerated in Art. 136 under twenty sub-heads.        Article  138  provided that the Company should  "  forthwith        enter  into  an  agreement under the  seal  with  Mr.  Benoy        Krishna  Rohatgi  in  terms  of the  draft  which  has  been        approved  on  behalf of the Company.  " For some  reason  or        other,  not apparent on the record, it was not till  January        31,  1934,  that  an agreement  was  actually  entered  into        between  the said Company and the said B. K.  Rohatgi.   The        terms  and  conditions contained in the  agreement  and  the        powers  and authorities conferred thereby on B.  K.  Rohatgi        were  in  substance  the  same as  those  mentioned  in  the        Articles of Association referred to above.        Of the total 950 ordinary shares of Rs. 500 each issued  and        subscribed,  326 shares stood in the name of the said B.  K.        Rohatgi, 356 shares in the name of his brother R. K. Rohatgi        and  10 shares in the name of one Laxminarain said to be  an        employee  of the assessee family.  There is no dispute  that        prior to the accounting year relevant to the assessment year        1943-44 the Managing Director’s remuneration received by the        said B. K. Rohatgi was credited in the books of the        324        Hindu  undivided family just as the dividends on the  shares        held  in  the names of his brother and of himself  had  been        done.   In  para.  6  of the Statement of  the  Case  it  is        stated:-        "It was not denied by the Assessee that India Electric Works        Limited  was floated mainly with the funds provided  by  the        Assessee  and  Mr.  Rohatgi made  no  contribution  in  this        respect.  Further, all along its career India Electric Works        Limited was financed from time to time by the Assessee Hindu        Undivided Family.  It was further found that it was for  the        first  time  in  the year of assessment  that  the  Assessee        claimed  that  the  remuneration  belonged  to  Mr.  Rohatgi        personally.   Up  to 1942-43 assessment all along  both  Mr.        Rohatgi  and  the Hindu Undivided Family Assessee  in  their        accounts  treated the whole of the remuneration paid to  Mr.

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      Rohatgi as the income of the Hindu Undivided Family.  "        In  the  accounting year relevant to  the  assessment.  year        1943-44 the Managing Director’s remuneration received by  B.        K.  Rohatgi  amounted to Rs. 61,282 and during  the  1943-44        assessment  proceedings it was claimed that the whole of  it        was  the  personal earnings of the said B.  K.  Rohatgi  and        should  not  be added to the income of the  Hindu  undivided        family which is the respondent before us.        The  Income-tax Officer rejected this claim.  On  appeal  to        the  Appellate Assistant Commissioner, the latter  concurred        with the view of the Income-tax Officer.  The assessee  went        up  on further appeal to the Income-tax Appellate  Tribunal.        The  Tribunal  struck  a middle course.  It  held  that  Rs.        61,282 was made up of two kinds of remuneration, namely, (1)        remuneration for services rendered by the assessee family in        the  floatation  and financing of the said Company  and  (2)        remuneration  for  the personal services of the said  B.  K.        Rohatgi.   The Tribunal, therefore, apportioned  the  amount        received  between  the two categories  of  remuneration  and        allocated  Rs. 30,000 computed at the rate of Rs. 2,500  per        month to the personal services of the said B. K. Rohatgi and        the        325        rest to the remuneration due to the services of the assessee        family.        On  the application of the respondent-assessee the  Tribunal        made a reference under s. 66(1) of the Indian Income-tax Act        and the questions referred were as follows :-        " (1) Whether on the facts and in the circumstances of  this        case,  the  Income-tax Appellate Tribunal was  justified  in        apportioning the sum of Rs. 61,282 into two parts  assessing        one in the hands of the Assessee Hindu undivided family  and        the other in the hands of Mr. B. K. Rohatgi?        (2)  If the answer to the above question be in the negative,        whether the assessment of the said sum of Rs. 61,282  should        be  on  Mr.  Rohatgi personally or  on  the  Assessee  Hindu        undivided family?"        When  the  reference  came  up before  the  High  Court  for        hearing, the learned judges felt that the statement of  case        submitted by the Tribunal was inadequate and that it,  would        not be possible for the Court to answer the questions unless        certain  other  facts were clearly stated.  The  High  Court        accordingly  directed  the  Tribunal  to  submit  a  further        statement  of  case and to include therein  answers  to  the        following questions:-        "  (a) With whose funds were the shares, on the strength  of        which  Mr.  Rohatgi has been and is the  Managing  Director,        purchased and to whom do they really belong ?        (b)  Who has been in enjoyment of the dividend paid on those        shares ?        (c)  In  what capacity was Mr. Rohatgi originally  appointed        to and was holding, at the relevant time, the office of  the        Managing Director of the India Electric Works Ltd.,  namely,        whether   in  his  personal  and  individual   capacity   or        otherwise?        (d)  Besides  the qualifying shares, are there  any  further        shares  of the Company standing in the name of  Mr.  Rohatgi        and  if there, are such shares, with whose funds  were  such        shares acquired and to whom do they really belong ?        326        A further statement of case was accordingly submitted by the        Tribunal.  The Tribunal concluded its findings and expressed        its opinion on the questions  specifically as follows:-        Questions  (a),  (b) and (d).-All the shares  in  the  India        Electric  Works  Limited standing In the name of Mr.  B.  K.

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      Rohatgi (326 shares) and Mr. R. K. Rohatgi (356 shares) were        acquired  with  funds belonging to the assessee  family  and        they  belong  to  the  family and the  family  has  been  in        enjoyment  of the dividends paid on those  shares.   Besides        the  10 qualifying shares there are 316 more shares  in  the        Company  standing in the name of Mr. B.K. Rohatgi and  those        shares also belong to the assessee family.        Question  (c)-The answer is a matter of inference  from  the        facts above stated.  The Tribunal’s conclusion was that  Mr.        B.  K.  Rohatgi was originally appointed to and was  at  the        relevant time holding the office of the Managing Director of        the India Electric Works Limited in his capacity as a member        and karta of the assessee family."        Learned counsel appearing before the High Court did not make        any  attempt  to support the Tribunal in its choice  of  the        middle  path  but conceded that the income  was  either  the        income  of the family or the personal income of the said  B.        K.  Rohatgi  and that there could be  no  justification  for        ascribing a portion of it to the remuneration of the said B.        K.  Rohatgi as an officer of the Company and  ascribing  the        other portion to a return made by the Company to the  family        for benefits received.  The High Court accordingly  answered        the  first question in the negative.  As regards the  second        question,  the High Court thought that the case was  covered        by  the decision in the case of Commissioner of  Income-tax,        Madras  v.  S.N.N. Sankaralinga Iyar (1) and  expressed  the        opinion  that the assessment of the said sum of  Rs.  61,282        should  be on, Mr. Rohatgi personally.        Feeling aggrieved by the aforesaid answer, the  Commissioner        of  Income-tax  applied  for and obtained  from  this  Court        special leave to appeal to this Court        (1)  [1950] 18 I.T.R. 194.                                    327        against the order of the High Court.  The learned Solicitor-        General  appearing before us in support of this  appeal  has        not  challenged the correctness of the answer given  by  the        High Court to the first question and; therefore, we are  now        concerned only with the correctness of the. answer given  by        the High Court to the second question.        It is now well settled that a Hindu undivided family  cannot        as  such enter into a contract of partnership  with  another        person or persons.  The karta of the Hindu undivided family,        however, may and frequently does enter into partnership with        outsiders on behalf and for the benefit of his joint family.        But when he does so, the other members of the family do not,        vis-a-vis the outsiders, become partners in the firm.   They        cannot interfere in the management of the firm or claim  any        account  of the partnership business or exercise any of  the        rights of a partner.  So far as the outsiders are concerned,        it  is the karta who alone is and is in law  recognised  as,        the  partner.  Whether in entering into a  partnership  with        outsiders,  the karta acted in his individual  capacity  and        for  his own benefit or he did so as representing his  joint        family  and for its benefit is a question of fact.  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,  West        Bengal(’)  and Dhanwatay V. -D. v. Commissioner  of  Income-

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      tax, Madhya Pradesh and Bhopal (2) 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        (1) [1955] 27 I.T.R. 294.        (2) [1957] 32 I.T.R. 682,        328        as the income of the Hindu undivided family of which he  was        the karta and was assessed in its hands.  The same principle        has been extended to the remuneration received by a karta as        the managing agent of a Company with limited liability. (See        In  re  Haridas  Purshottam (1)).   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.        Reference is, however, made to certain decisions in  support        of the contrary view; but those decisions appear to turn  on        the facts found to be established in those particular cases.        Thus,  in  Murugappa Chetty v. Commissioner  of  Income-tax,        Madras  (2)  it  had not been established  either  that  the        managing agency agreement had, in fact, been obtained by the        karta  for and on behalf of’ the Hindu undivided  family  or        that  the  income was earned by utilising the  joint  family        property  or utilising it to its detriment.  The case of  R.        Hanumanthappa  v.  Commissioner  of  Income-tax,   Madras(’)        simply follows Murugappa Chetty’s case(’) and does not carry        the  matter any further.  As will be seen hereafter, to  the        facts  established  in  the case now  before  us  these  two        decisions can have no application.        It  is then stated that the position of a Managing  Director        stands  on a footing different from that of a partner  or  a        managing agent and, therefore, the principles applicable  to        the income derived by a karta as a partner or managing agent        cannot  apply to the remuneration received by the  karta  as        the  Managing Director of a Company.  In the first place  it        is  said  that  under  the Indian  Companies  Act,  a  Hindu        undivided family cannot by reason of the definition given in        s. 2 (9-A) be, appointed a managing agent of a Company.   In        the  next  place, the office of a managing director,  it  is        urged, involves a personal element and the appointment of a        (1)  [1947] 15 I.T.R. 124.        (2)  [1952] 21 I.T.R 311        (3)[1952] 22 1,T.R. 364.        329        managing director must necessarily be of a particular person        for  his personal skill and other qualities  and  therefore,        the  remuneration  received  by him  must  be  his  personal        earnings.  Neither of these two considerations appears to us        to  be tenable. 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 direc-        tor’s Hindu undivided family or the members 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 family or its members.  The question whether        the  amount  received  by  the  karta  by  way  of  managing        director’s  remuneration in the one case or as his share  of        profits in the partnership business in the other 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

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      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.  The case  of  Sardar        Bahaditr  Indra Singh v. Commissioner of  Income-tax,  Bihar        and  Orissa  (1) is clearly distinguishable in that  it  was        expressly  provided  in the Articles of Association  of  the        Company  in that case that the remuneration of the  managing        director  would be his personal income.  In Commissioner  of        Income-tax, Bihar and Orissa v. Darsanram (2) the finding of        fact  was that the joint family property had not been  spent        in  earning the managing director’s remuneration which  was,        therefore, held to be the personal earnings of the karta who        had  been appointed as the managing director.  The  case  of        Commissioner of Income-tax, Madras v. S. N. N.  Sankaralinga        Iyer  (3) does not help the respondent because of the  facts        found in that case.        (1) [1943] 11 I.T.R. 16.          (2) [1945] 13 I.T.R. 419.        (3)  [1950] 18 I.T.R. 194.        42        330        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 acquiring  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.   Satyanarayana  Rao,        J.,  took  the view that on the facts of that  case  it  was        impossible  to  infer  that the appointment  itself  was  on        behalf  and  for  the benefit of the family;  or,  in  other        words, that he became the managing director as  representing        the undivided family.  Viswanatha Sastri, J., in a  separate        but  concurring  judgment expressed the view that  the  mere        fact  that the assessee had a particular quantity of  shares        as a 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,  according        to  the learned Judge, was really quid pro quo for the  work        which  he did under the contract of service with  the  bank.        The  managing directorship, he held, was in fact a  contract        of service and it is not as if the family represented by the        manager  was the managing director.  It was  the  individual        that was appointed and that was functioning as the  managing        director.   With  great respect to the  learned  judges,  it        appears to us that they overlooked the principles laid  down        by the Judicial Committee in Gokul Chand v. Hukam Chand-Nath        Mal  (1)  where it was pointed out that there  could  be  no        valid distinction between the direct use of the joint family        fund  and  the use which qualified the member  to  make  the        gains  on his own efforts.  The member of the  joint  family        entered into the Indian Civil Service no doubt by reason  of        his  intelligence  and  other  attainments.   He   certainly        entered into a personal agreement with the        (1)  [1921] L.R. 48 I.A. 162.        331        Secretary of State in Council and he received his salary for        rendering  his  personal  service.  But all  that  was  made

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      possible by the use of the joint family funds which  enabled        to him to acquire the necessary qualification and that  fact        made his earnings part of the joint family properties.  That        apart,  those decisions do not clearly govern the  case  now        before us.        What  are  the facts here ?  Here was  the  Hindu  undivided        family  of  which B. K. Rohatgi was the  karta.   It  became        interested in the concern then carried on by Milkhi Ram  and        others  under the name of India Electric Works.   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 funds and the finding is  that  he  never        contributed anything 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        acquistion  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  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.  It is  also  significant  that        right  up to the accounting year relevant to the  assessment        year  1943-44  the income was treated as the income  of  the        Hindu  undivided  family.   It  is true  that  there  is  no        question of res judicata but the fact that the  remuneration        was  credited to the family is certainly a fact to be  taken        into  consideration.   It  appears to us that  the  case  is        governed by the principles laid down in Haridas Purshottam’s        case (1).  The recitals in the agreement also clearly  point        to the fact of B.K. Rohatgi        (1)  [1947] 15 I.T.B. 124.        332        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.  Ill the circumstances, we are        clearly of opinion that the managing directors  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.  We, therefore, set aside the  answer        given  by the High Court to the second question  and  answer        the  same by saying that the assessment of the whole of  the        sum of Rs. 61,282 should be on the assessee Hindu  undivided        family.   The  result is that this appeal  is  allowed  with        costs here and in the Court below.        A allowed. appeal