TMI Blog1973 (4) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... y shares being 3,601, held by them as follows : A. H. S. Ramaswamy (Father) 700 shares A. H. S. R. Rukmani Ammal (Mother) 101 " A. R. Balakrishnan 700 " A. R. Ramakrishnan 700 " A. R. Radhakrishnan 700 " A. R. Rathinam 700 " The father, Ramaswamy, was the first managing director of the company as per article 93 of the articles of association. After his death in 1951, his eldest son, Balakrishnan, was elected as the managing director on September 30, 1952. The shareholding of Balakrishnan, his mother and brothers after the death of the father, was as follows : A. H. S. R. Rukmani Ammal 241 shares A. R. Balakrishnan 840 " A. R. Ramakrishnan 840 " A. R. Radhakrishnan 840 " A. R. Rathinam 840 " The share income from the company as well as the remuneration received by Balakrishnan as managing director of the company were being assessed in his hands as an individual up to the assessment year 1957-58. On March 31, 1958, a son was born to him and from the assessment year 1958-59 onwards, till the assessment year 1962-63, the share income from the company was assessed in the hands of the Hindu undivided family consisting of Balakrishnan and his son and the remuner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nconsistent with the decision of the Supreme Court in Kalu Babu Lal Chand's case and, therefore, the original assessments being based upon an erroneous rule of law, the correct position of law as enunciated by this court in Palaniappa Chettiar's case amounted to information within the meaning of section 147(b) and that, therefore, the reassessment proceedings were quite valid. As regards the second contention, it was urged by the assessee that, at the point of time when Balakrishnan became the managing director of the company, the Hindu undivided family had no claims over the remuneration earned by the karta and that the remuneration earned by Balakrishnan had no relation to the holding of the shares in the company by the family. The Tribunal observed that out of 840 shares held by Balakrishnan, 700 shares were obtained by him in the partition between himself and his father and brothers and the remaining 140 shares came to him by way of inheritance on the death of his father and that, therefore, all the said 840 shares were ancestral and had become the joint family property of himself and his son. In support of this view the Tribunal relied on the decision of the Supreme Court in G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar's case can be taken as constituting " information " within section 34(1)(b) of the Indian Income-tax Act, 1922, corresponding to section 147 of the Income-tax Act, 1961, so as to enable the Income-tax Officer to initiate reassessment proceedings. We are, therefore, of the view that the reassessment proceedings are valid in this case. Then we come to the second question. The assessee contends that the inclusion of the remuneration earned by the karta, Balakrishnan, as managing director of the company in the income of the assessee family was illegal and that the said remuneration has to be assessed only in the hands of the karta as an individual. It is pointed out by the assessee that at the point of time when Balakrishnan became the managing director of the company the Hindu undivided family did not come into existence and as such it was not the owner of any shares in the company at that time and therefore the shares becoming the property of the Hindu undivided family at a later stage will not make the appointment as one in favour of the family and the remuneration paid to the managing director the income of the Hindu undivided family and that the remuneration earned by the ka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lls Ltd., a managing director can be appointed from out of the directors of the company and in order to become a director one had to hold at least 100 shares of the company in his own right as per article 71. It is true that section 273 the Companies Act, 1956, exempted private companies from the operation of section 270 of the said Act which deals with the question of share qualification for becoming a director. But it is open to a company to prescribe a share qualification for its directors and that cannot be taken to be in conflict with the provisions of the Companies Act. It is not in dispute that in this case the articles of association were not modified after the coming into force of the Companies Act of 1956 during the assessment years in question. We cannot, therefore, agree with the assessee that it is not necessary for a managing director to hold the minimum number of shares referred to in article 71 of the articles of association. It is in the light of this admitted position we have to see whether the remuneration as managing director received by the karta of the Hindu undivided family is the income of the Hindu undivided family. The learned counsel for the assessee wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it will be the income of the individual coparcener. If the income was essentially earned as a result of the funds invested by the family, the fact that a coparcener has rendered some service would not change the character of the receipt. If, on the other hand, it is essentially a remuneration for the services rendered by a coparcener, the circumstances 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 funds would not make the receipt the income of the Hindu undivided family. Applying the said broad principle the Supreme Court held in that case that the assessee did not become the managing director of the firm for the mere reason that his family had purchased considerable shares in the firm, that he was elected as a managing director by the board of directors, that he received his salary for personal services rendered, that there was no material to show that he was elected managing director on behalf of the family and that, therefore, the remuneration received by the managing director cannot be treated as the income of the Hindu u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appointing him as the managing director does not show that he has been elected as managing director on behalf of his family. The appointment could not have been on behalf of the family as there was no joint family on the relevant date. He cannot also be said to have become managing director of the company only for the reason that his family owns 840 shares, for the other three brothers owned the same number of shares as Balakrishnan's family holds and if that 840 shares held by Balakrishnan alone is the reason for his being elected as the managing director, the other three brothers who owned the same number of shares are entitled to claim to be appointed as managing director. Therefore, it is not possible to say that Balakrishnan has been elected as managing director merely because he was holding 840 shares in the company. When an election to the managing director has taken place as between the persons holding equal number of shares, it cannot be said that the election of one of them was only because he held 840 shares in the company. Further, the main test propounded by the Supreme Court in the above decision is to see whether the remuneration received by Balakrishnan is in substa ..... 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