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TMI Blog1972 (8) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... p business with Jethabhai and his four sons as partners. The partnership of Jethabhai and his four sons carried on the business but it ran into heavy losses and a large amount had to be borrowed by it from one Rambhai. Ultimately, the partnership was reconstituted by the admission of Rambhai as a partner and the reconstituted partnership came into being from 1st January, 1953. Rambhai was given a share of 25 per cent. in the profits and losses of the partnership while the shares of the other partners were 30 per cent. for Jethabhai and 11 1/4 per cent. for each of the four sons of Jethabhai. Jethabhai and Rambhai both died in the year 1953, and the partnership was again reconstituted and the partners in the reconstituted partnership were the four sons of Jethabhai and Mahendrakumar, the son of Rambhai. The share of Mahendrakumar in the profits and losses of the partnership was four annas while the remaining twelve annas share was divided equally amongst the four sons of Jethabhai. It was common ground between the parties that each of the four sons of Jethabhai was a partner in the partnership as representing his Hindu undivided family and the amount of profit or loss coming to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctor under article 20 and the entire management of the affairs of the company was entrusted to them. Kantidev and Vidyasagar thereafter managed the affairs of the company as managing director and joint managing director, respectively, and the company prospered under their management. We are concerned in Income-tax Reference No. 50 with the case of Vidyasagar and we shall, therefore, first state the facts in regard to him. So far as Vidyasagar is concerned, he received, during the account year relevant to the assessment year 1960-61, an aggregate sum of Rs. 18,000 by way of remuneration as joint managing director and an aggregate sum of Rs. 1,000 as fees for attending the meetings of the directors. The total amount of the fees for attending the meetings of the directors remained the same during the account years relevant to the assessment years 1961-62 to 1965-66 but the amount of the remuneration went on progressively increasing until it reached the figure of Rs. 27,750 in the account year relevant to the assessment year 1965-66. The amount of the remuneration as joint managing director as also the fees for attending the meetings of the directors were originally assessed as the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal and on the application, the Tribunal referred the following question of law for the opinion of this court: " Whether, on the facts and circumstances of the case, the finding that the remuneration earned by Shri Vidyasagar was his individual income is justified ? " The Hindu undivided family of Vidyasagar submitted to the Tribunal at the hearing of the reference application that the question as to the validity of initiation of the proceedings under section 147(b) for the assessment years 1960-61, 1961-62 and 1962-63 also arose out of the order of the Tribunal and must, therefore be referred to this court. The Tribunal, accordingly, referred the following additional question of law at the instance of the Hindu undivided family of Vidyasagar. " Whether for the assessment years 1960-61 to 1962-63 proceedings under section 147(b) were validily initiated ? " So far as the Income-tax Reference No. 54 of 1970 is concerned, that relates to the case of Prafulkumar and we will now state the facts in regard to him. Prafulkumar was a permanent director appointed under article 18 of the articles of association, but no extra work was entrusted to him at the commencement of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the revenue as well as the Hindu undivided family of Prafulkumar and they are as follows: " (1) Whether, on the facts and in the circumstances of the case, the finding that the remuneration earned by Shri Prafulkumar was his individual income is justified ? (2) Whether for the assessment years 1961-62 and 1962-63 proceedings under section 147(b) were validly initiated ? " We are of the view that the Tribunal was right in holding that the amount of remuneration received by Vidyasagar as joint managing director was his individual income and not the income of his Hindu undivided family and, therefore, it is unnecessary for us to decide the second question as regards the validity of the initiation of proceedings under section 147(b) which has been referred to us in Income-tax Reference No. 50 of 1970. So also it is unnecessary for us to decide the second question referred to us in Income-tax Reference No. 54 of 1970 because we are of the opinion that, in the case of Prafulkumar too, the amount of remuneration received by him as engineer and technical director was his individual income and not the income of his Hindu undivided family. The point which arises for consideration in both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the income, and (4) whether the income was received with the aid and assistance of the family funds. The Supreme Court then evolved from these subsidiary principles a broad test for determining as to when remuneration earned by a member of a Hindu undivided family as an officer of a company or firm can be said to be his undivided income and when it can be said to be the income of his Hindu undivided family and formulated it in these words: " . . . 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 cop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r rendered by Vidyasagar ? Now, when the company was formed and it took over the business as a going concern, some arrangement had to be made for managing and looking after the business. The board of directors, obviously, could not look after the day to day management of the affairs of the company and article 18 of the articles of association, therefore, provided that Kantidev should be appointed managing director of the company and the board of directors at the first meeting held on 2nd August, 1957, appointed, by necessary implication, Vidyasagar as joint managing director. It is not possible to accept the contention of the revenue that Vidyasagar was appointed joint managing director because of the utilisation of his joint family property in the shape of share in the business. It is not because of any outlay or expenditure of or detriment to the joint family property that he came to be appointed joint managing director. If the main reason for his appointment as joint managing director had been the taking over of the share of his Hindu undivided family in the business, the same reason would have also dictated appointment of Arvindkumar and Prafulkumar as joint managing directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are entrusted to him as an individual or in his capacity as karta of his Hindu undivided family. That would always depend upon the facts and circumstances of each case and if the revenue wants to establish that it was in his capacity as a karta of the Hindu undivided family that he was entrusted with such powers of management and the remuneration paid to him must, therefore, be treated as the income of his Hindu undividual family, the burden of doing so must rest on the revenue. That is clear from the decision of the Supreme Court in Commissioner of Income-tax v. Gurunath Dhakappa, where Shah J., speaking on behalf of the Supreme Court, pointed out that : "In the absence of a finding that the income which was received by G. V. Dhakappa was directly related to any assets of the family utilised in the partnership, the income cannot be treated as the income of the Hindu undivided family." Here, there is nothing on the record of the case which would go to show that it was essentially by reason of utilisation of joint family property in the shape of share in the business that Vidyasagar was entrusted with substantial powers of management as joint managing director. On the contrary, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of the company, but from that it does not necessarily follow that the remuneration paid to him was on account of utilisation of joint family property. If it is found that the remuneration was primarily and essentially paid for the services rendered by Prafulkumar, it would be the individual income of Prafulkumar, and not that of his Hindu undivided family and the fact that the joint family property was invested in the company would not change the character of the receipt. The resolution of the annual general meeting of the company sanctioning remuneration to Prafulkumar as an engineer and technical director is clear and explicit and it clearly shows that Prafulkumar was acting as an engineer and technical director and was being remunerated for the services rendered by him to the company. The burden is on the revenue to show that what is apparent on the face of the resolution is not real and that the remuneration was paid to Prafulkumar by reason of utilisation of his joint family property in the shape of share in the business. This burden the revenue has failed to discharge and in the absence of any material to the contrary brought forward on behalf of the revenue, we must reach ..... X X X X Extracts X X X X X X X X Extracts X X X X
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