1973 (4) TMI 28 - HC - Income Tax

Joint family was converted into limited company with erstwhile members having equal shares. The eldest son was appointed as the managing director. Share income from company was assessed as HUF s income but the remuneration as managing director was assessed as his individual income. Subsequently decision of High Court overruling the decision on which assessment was based was received. Whether this decision can be treated as an information for reopening the assessment

Summary

Issues Involved:
1. Competency of the Income-tax Officer to reopen original assessments under section 147(b) of the Income-tax Act, 1961.
2. Legality of including the remuneration received by the karta as managing director in the income of the Hindu undivided family.

Issue-wise Detailed Analysis:

1. Competency of the Income-tax Officer to Reopen Original Assessments:
The first issue pertains to whether the Income-tax Officer was competent to reopen the original assessments for the years 1959-60 to 1962-63 under section 147(b) of the Income-tax Act, 1961. The Tribunal noted that the original assessments were based on the decision in Commissioner of Income-tax v. S.N.N. Sankaralinga Iyer, which was inconsistent with the Supreme Court's ruling in Commissioner of Income-tax v. Kalu Babu Lal Chand. The subsequent decision in S. Rm. Ct. Pl. Palaniappa Chettiar v. Commissioner of Income-tax, which followed the Supreme Court ruling, constituted "information" under section 147(b), justifying the reopening of assessments. The court agreed with this view, stating that the decision in Palaniappa Chettiar's case, rendered after the original assessments, could be taken as "information" within section 34(1)(b) of the Indian Income-tax Act, 1922, corresponding to section 147 of the Income-tax Act, 1961. Thus, the reassessment proceedings were deemed valid.

2. Legality of Including the Remuneration Received by the Karta as Managing Director in the Income of the Hindu Undivided Family:
The second issue concerns whether the remuneration received by Balakrishnan as managing director of Balakrishna Mills Private Ltd. during the assessment years 1959-60 to 1964-65 constituted the income of the Hindu undivided family. The assessee contended that the remuneration should be assessed in the hands of Balakrishnan as an individual, not the Hindu undivided family. The Tribunal observed that Balakrishnan's shares, acquired through partition and inheritance, were ancestral and thus joint family property. The Tribunal relied on the Supreme Court's decision in Gowli Buddanna's case, concluding that the remuneration was connected to the family's shareholding.

However, the court examined the broader principles laid down by the Supreme Court in Raj Kumar Singh Hukam Chandji v. Commissioner of Income-tax. The Supreme Court had delineated tests to determine whether remuneration was family income or individual income, emphasizing the need to assess if the income was essentially a return on family investments or compensation for personal services. The court noted that Balakrishnan's shares, though ancestral, were not originally acquired with family funds. The remuneration was deemed to be for services rendered, as evidenced by the articles of association and the absence of any indication that Balakrishnan was elected managing director on behalf of the family. The court concluded that the remuneration was not a return on the family's investment but compensation for Balakrishnan's services. Therefore, the remuneration received by Balakrishnan as managing director was not the income of the Hindu undivided family.

Conclusion:
The court answered the first question in the affirmative, validating the reassessment proceedings. The second question was answered in the negative, ruling that the remuneration received by Balakrishnan as managing director should be assessed in his individual capacity, not as the income of the Hindu undivided family. The revenue was ordered to pay the costs of the assessee, with counsel's fee set at Rs. 250.