TMI Blog1977 (7) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... esaid, one of his sons to be selected by agreement between his sons or if he shall leave only one son, then such one son, shall be appointed as a permanent director in his place, and if his sons shall not agree upon selecting one of themselves to take office in his place, then such one of his sons as may be selected by the remaining permanent directors shall be appointed a permanent director in his place. (b) If any of the said Narottamdas Maganlal Shah, Sumatilal Maganlal Shah, Kantilal Maganlal Shah and Panalal Maganlal Shah shall die whilst holding not less than ten shares in the company as aforesaid without a son but leaving a widow, then his widow shall be appointed a permanent director in his place, and if he shall leave no widow, then his eldest daughter (if any) shall be appointed a permanent director in his place, and if he shall leave neither any son, nor any widow nor any daughter then such person as he shall by deed or will or other testamentary writing appoint to succeed his office, shall be appointed as a permanent director in his place. (c) Where any person entitled to succeed to any of the above four permanent directors shall be under the age of 18 years his or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res of the company and, therefore, he is interested in the resolution." The explanatory statement makes it clear that Dineshchandra held a bachelor's degree in science, that he had many years' experience in the art silk industry; that he had travelled abroad and acquired useful knowledge in the technique of manufacturing art silk fabrics, that he had good experience in the processing work of art silk fabrics and that in view of his wide experience and knowledge with regard to the industry, the board of directors had approved the payment of Rs. 1,000 per month as remuneration to him. In the course of proceedings for assessment to income-tax of the Hindu undivided family the question arose as to whether the remuneration received by Dineshchandra for the services rendered to the mill-company was liable to be taxed in the hands of the Hindu undivided family. It was contended on behalf of the assessee that the remuneration received by Dineshchandra was in consideration of the services rendered by him to the mill-company and that it was his individual income with which the Hindu undivided family had no concern. The Income-tax Officer rejected this contention holding that: (1) Dinesh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f article 99 of the articles of association of the mill-company but because of his personal qualifications ; (2) his appointment as permanent director did not adversely affect the Hindu undivided family interest in the company; in fact, such appointment benefited the Hindu undivided family because it could result in better earning capacity of the mill-company in which the Hindu undivided family had shareholding ; and (3) the fact that he became a director of the mill-company by virtue of the provision made in article 99 and with the aid of the Hindu undivided family shareholding in the said company could not make the slightest difference regarding the assessability of the remuneration received by him in his own hands, having regard to its having been received by him on account of his personal qualifications. The decision of the Appellate Assistant Commissioner was thus confirmed by the Tribunal. At the instance of the revenue, the Tribunal has referred the following question of law for the opinion of this court : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the remuneration received by Shri Dineshchandra from M/s. P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4) whether the income was received with the aid and assistance of the family funds." The Supreme Court then culled out of the aforesaid subsidiary tests the broader principle and stated it thus at pages 43 and 44 : "...... the broader principle that emerges is whether the remuneration received by the coparcener in substance though not in form was but one of the modes of return made to the family because of the investment of the family funds in the business or whether it was a compensation made for the services rendered by the individual coparcener. If it is the former, it is an income of the Hindu undivided family but if it is the latter then it is the income of the individual coparcener. If the income was essentially earned as a result of the funds invested the fact that a coparcener has rendered some service would not change the character of the receipt. But if on the other hand it is essentially a remuneration for the services rendered by a coparcener, the circumstance that his services were availed of because of the reason that he was a member of the family which had invested funds in that business or that he had obtained the qualification shares from out of the family fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares to M and 225 shares to each of the four sons of J. Under article 18 of the company, K, V, P and M were appointed an alternate director of P. K was appointed as managing director and V as joint managing director and the remuneration of V was fixed at Rs. 1,560 per month. P, though he was appointed a permanent director, did not receive any remuneration at the time of the incorporation of the company other than what he was entitled to for attending the meeting of the board of directors. After some time, however, he joined the company after pursuing degree course in engineering for some time and without obtaining a degree. He started looking after the mechanical and electrical side of the factory of the company as an engineer and technical director and for the services so rendered by him, it was agreed that he should be given the pay scale of Rs. 750-75-1,500 per month. It is the amount of these remuneration received by the two kartas, one of whom was the managing director and the other technical directors which was sought to be taxed in the hands of the respective Hindu undivided family and the matter ultimately reached up to this court. The Division Bench applied the tests lai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany as an engineer and technical director and not by way of return for utilisation of his joint family property in the shape of share in the business. The very fact that the company did not pay him when he was appointed a permanent director and sanctioned payment of remuneration only when he started serving the company as an engineer and technical director showed that the remuneration was paid to him primarily and essentially for the services rendered by him to the company. The possibility that the services of P were availed of in preference to any other qualified person because of the reason that his Hindu undivided family had contributed its share in the business of the company did not necessarily lead to the conclusion that the remuneration paid to him was on account of utilisation of joint family property. The resolution which sanctioned remuneration was clear and explicit and it clearly showed that he was being remunerated for the services rendered by him to the company. The revenue had to discharge the burden of showing that what was apparent on the face of the resolution was not real and that the remuneration was paid to him by reason of utilisation of his joint family prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus remains beyond dispute is that Dineschandra became a permanent director of the mill-company on the strength of the shareholding which was the asset of the Hindu undivided family. Against this background, let us proceed to consider further whether the remuneration which is received by him could be said to be the income of the Hindu undivided family and not his personal income. Now, the Tribunal, as earlier stated, has found as a matter of fact that the remuneration paid to Dineshchandra was not because of the right which flowed out of article 99, that is to say, the right of being appointed a permanent director but because of his personal qualifications. Apart from the fact that this is particularly a finding on a question of fact, there is no manner of doubt that the Tribunal rightly reached the aforesaid conclusion. Article 99 provides merely for the appointment of a permanent director. It does not prescribe that any remuneration shall be paid to such permanent director. Any remuneration other than that payable for attending the meetings of the board of directors, which is paid to a permanent director, cannot, therefore, necessarily be linked up with his right to hold the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iate how, in the circumstances aforesaid, what was earned by Dineshchandra by contribution of his own time, labour, attention, skill and experience in the management of the company could ever be said to be referable to the utilisation of the joint family property in the shape of the shares in the mill-company and how the income earned by him in that manner could be taxed in the hands of the Hindu undivided family. It is true, as contended on behalf of the revenue, that Dineshchandra did not hold any shares in his private capacity and that he obtained the qualification shares for becoming the permanent director out of the family funds. However, as observed in Raj Kumar Singh Hukam Chandji's case [1970] 78 ITR 33 (SC), the fact that he obtained the qualification shares from out of the family funds would not make the receipt the income of the Hindu undivided family if the income was essentially earned as a result of the services rendered by him to the company. It is also true that the occasion to give such services was presumably provided because he was the karta of the Hindu undivided family which had invested funds in the company and he had thereby become a permanent director of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the true legal position, but it would also lead to the denial to the family business of the human capital which the coparcener would contribute with greater sincerity than an outsider. In our opinion, the present case stands very much close to the case of the karta, P, in V. J. Patel and P. J. Patel's case [1973] 91 ITR 353 (Guj) decided by this court. There also P had become a permanent director of the company in his capacity as the karta and as result of the investment of the joint family funds in the company. He later came to render services to the company and for the services so rendered he was paid remuneration. This court took the view in the said circumstances that the remuneration was paid to P not on account of utilisation of the joint family property in the shape of share in the business but because he rendered technical services to the company. In the present case also, Dineshchandra undoubtedly became a permanent director of the company under article 99 of the company representing his Hindu undivided family and on the strength of the shareholding of the said Hindu undivided family in the mill-company. However, as earlier pointed out, there is no direct nexus bet ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
