TMI Blog1972 (8) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... (s) : P. D. DESAI., P. N. BHAGWATI. JUDGMENT The judgment of the court was delivered by BHAGWATIC.J.- These two references arise out of assessments to income-tax made on the assessee for the assessment years 1960-61 to 1965-66 for which the relevant accounting years were the financial years ending on 31st March, 1960, to 31st March, 1965. The assessee in each reference is a Hindu undivided family. One Vidyasagar is the karta of the Hindu undivided family in Income-tax Reference No. 50 of 1970, while one Prafulkumar is the karta of the Hindu undivided family in Income-tax Reference No. 54 of 1970. Vidyasagar and Prafulkumar are the sons of one Jethabahi. Jethabhai had four sons, namely, Kantidev, Arvindkumar, Vidyasagar and Prafulkumar and they constituted a Hindu undivided family. This Hindu undivided family was disrupted by partition on 27th September, 1948, and the business, which was till then being carried on by it as joint family business, was converted into partnership 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 fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d from time to time by the board of directors. (b) If any director being willing shall be called upon to perform extra services for the purposes of the company, the company shall remunerate such director or directors (including managing director) by a fixed sum as may be determined by the directors from time to time." The parenthetical clause "including managing director" was added in article 19, clause (b), because Kantidev was designated as managing director in article 18. There was no provision in the article appointing Vidyasagar as joint managing director but it appears that at the first meeting of the board of directors held on 2nd August, 1957, a resolution was passed which impliedly recognised Vidyasagar as joint managing director. This resolution provided that the remuneration of managing director and joint managing director shall be Rs. 2,000 and Rs. 1,500, respectively, per month. The widest possible powers were conferred on the managing director and joint managing director 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sagar for attending the meetings of the board of directors were the income of the Hindu undivided family of Vidyasagar but so far as the amount of remuneration received by Vidyasagar as joint managing director during the relevant account years was concerned, the Tribunal found that it was income received by Vidyasagar for services rendered by him to the company as joint managing director and there was no real and sufficient connection between the remuneration received by him and the assets of the Hindu undivided family invested in the company. The Tribunal in this view of the matter directed that the amount of remuneration received by Vidyasagar as joint managing director during the relevant account years should be excluded from the assessments of the Hindu undivided family of Vidyasagar for the assessment years 1960-61 to 1965-66. The revenue was aggrieved by this view taken by the Tribunal in so far as it went against it and it, therefore, made an application for a reference to the Tribunal 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 remuner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22,950 in the account year relevant to the assessment year 1965-66. The amount of remuneration as engineer and technical director and the fees for attending the meetings of the board of directors received by Prafulkumar were claimed by the revenue to be income of the Hindu undivided family of Prafulkumar and not his individual income and they were accordingly sought to be included in the assessments of the Hindu undivided family of Prafulkumar for the assessment years 1961-62 to 1965-66. The assessments of the Hindu undivided family of Prafulkmar followed the same pattern as in the case of the Hindu undivided family of Vidyasagar and the same view was taken by the Tribunal in regard to the assessability of the amount of remuneration and fees for attending the meetings of the board of directors received by Prafulkumar as was taken in the case of the Hindu undivided family of Vidyasagar. The same two questions accordingly came to be referred by the Tribunal to this court at the instance of 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 earn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Hukam Chandji v. Commissioner of Income-tax. The Supreme Court in this case, which is, barring perhaps the decision in Prem Nath v. Commissioner of Income-tax, the latest pronouncement on the subject, reviewed all its previous decisions and pointed out that though at first sight the line dividing the two categories of decisions might appear to be indistinct, it was very real and could be located on closer examination. The Supreme Court stated that in order to find out whether "a given income is that of the person to whom it is purported to have been given or that of his family " suffered tests have been laid down in these decisions and enumerated them as follows: (1) whether the income received by a coparcener of a Hindu undivided family as remuneration had any real connection with the investment of the joint family funds, (2) whether the income received was directly related to any utilization of family assets, (3) whether the family had suffered any detriment in the process of realization 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company issued 225 shares to each of the four sons of Jethabhai and 300 shares to Mahendrakumar and as part and parcel of the same scheme, three out of the four sons of Jethabhai, namely, Kantidev, Vidyasagar and Prafulkumar and Mahendrakumar were appointed permanent directors for life and Arvindkumar was appointed an alternate director to Prafulkumar. 225 shares obtained by each of the four sons of Jethabhai were, therefore, clearly joint family property in the hands of each of them and the permanent directorship being secured by reason of utilisation of joint family property in the shape of shares in the business was held by each of the four sons of Jethabhai in his capacity as karta of his Hindu undivided family. But, the question is, in what capacity was remuneration received by Vidyasagar as joint managing director. Was it received by way of return to the Hindu undivided family for the employment of joint family property or was it by way of compensation for the services as joint managing director 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 busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich was taken over by the company belonged wholly to one Hindu undivided family and Krishna Iyer, the karta of that Hindu undivided family, was appointed the governing director of the company. It is no doubt true, as pointed out on behalf of the revenue, that the office of permanent director was held by Vidyasagar in his capacity as karta of his Hindu undivided family, but from that it does not necessarily follow that if any extra work was entrusted to him for remuneration, he would be doing such extra work also in his capacity as karta of his Hindu undivided family. Doubtless, a managing director must be a director, but, as the definition of managing director in section 2(26) of the Companies Act, 1956, shows, a director would be a managing director only when substantial powers of management are entrusted to him which would not otherwise be exercisable by him. When substantial powers of management are entrusted to a director, the question would have to be considered whether such powers of management 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 reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company as an engineer and technical director and not by way of return for uitilisation of his joint family property in the shape of share in the business. If any remuneration was intended to be paid to Prafulkumar on account of the joint family property in the share of the business contributed by his Hindu undivided family to the company, it could have been done immediately on the incorporation of the company. The company need not have waited till 1st January, 1959, in order to remunerate Prafulkumar. But the company did not sanction payment of any remuneration to Prafulkumar until 1st January, 1959, when Prafulkumar started serving the company as an engineer and technical director and that shows that the remuneration was paid to him primarily and essentially for the services rendered by him to the company. It may be that the services of Prafulkumar 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, 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 rem ..... X X X X Extracts X X X X X X X X Extracts X X X X
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