TMI Blog1984 (12) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... ding 5 shares of the value of Rs. 500. As per article 93 of the articles of association of the company, the karta of the assessee-family is the first managing director ; the other director is the karta's wife, Smt. G. Krishna Kumari. The said article also provided that the karta of the assessee-family shall be the managing director for a period of five years. The company has been assessed to tax. In the previous years relevant for the income-tax assessment years 1973-74 and 1974-75, the company paid remuneration of Rs. 18,000 and Rs. 12,000, respectively, to the karta of the assessee-family for the services rendered by him as the managing director of the company. The remuneration paid to the managing director was allowed as deduction in computing the income of the company. The assessee-family filed in the usual course its income-tax returns for the two assessment years 1973-74 and 1974-75. The Income-tax Officer held that the remuneration of Rs. 18,000 and Rs. 12,000 paid by the company to the karta of the assessee-family was assessable as the income of the joint family. The Income-tax Officer rejected the assessee's claim that the remuneration was paid to the karta of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m to the company and not by way of return for utilisation of the joint family property in the form of shares in the business. The Tribunal referred to the principles of law governing the matter under consideration and held that, on the application of settled principles, it must be held that the remuneration represented the income of the karta of the assessee-family assessable in his individual hands. In that view, the Tribunal allowed the appeals filed by the assessee and directed the exclusion of the remuneration paid to the karta by the company from the assessment of the assessee. The Commissioner of Income-tax applied for and secured the present reference to this court under section 256(1) of the Income-tax Act, 1961, questioning the correctness of the Tribunal's decision. The Tribunal 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 justified in law in coming to the conclusion that the remuneration paid to the karta of the assessee by the company, M/s. G. V. Rathaiah Co. Pvt. Ltd., for the assessment years 1973-74 and 1974-75 was assessable in his 'individual' status and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel submitted that this is not a case where remuneration was paid to the karta of the joint family because of the investment of funds by the family in the company. It is claimed that it is not the Revenue's contention that the managerial affairs of the company were performed by any person or persons other than the karta and that the karta was a nominal head of the company as managing director without rendering active services to the company. It is further pointed out that, in the assessment of the company, there was no dispute that the karta rendered services entitling him to receive salary or remuneration. Learned counsel also pointed out that, apart from vaguely observing that the remuneration paid to the karta was to the detriment of the interests of the family, no material whatsoever was indicated as to how the payment of remuneration to the karta of the joint family caused any detriment to the interests of the family. Learned counsel urged that, if services are rendered personally and remuneration is paid in relation to such services, no inference of detriment to the family can be drawn. If the karta of the joint family did not act as the managing director, somebody else w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... triment in the process of realization of the income; and (4) whether the income was received with the aid and assistance of the family funds. In our opinion, from these subsidiary principles, 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 funds would not make the receipt, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices as managing director of the company was assessed in the hands of the joint family as its income. When the matter came before the Tribunal on appeal, the remuneration was excluded from the assessments of the joint family holding that, merely because the joint family held some shares in a limited company and the karta of the family was appointed as a managing director, it could not be said that he was so appointed because of the holding of his shares. It was held that the remuneration received by the karta of the family should be considered to be his personal income and not that of the joint family. The Commissioner carried the matter in reference to the High Court. The High Court held that there was no evidence to show that the karta was appointed as director on behalf of the family or to the detriment of the family property. There was also no material to show that there was any direct link between the shareholdings of the joint family and the appointment of the karta as a director. The High Court, therefore, upheld the Tribunal's view that the remuneration received by the karta from the limited company could not be taxed as the income of the joint family. In Shankerlal H. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the joint family that the income was not assessable in its hands. In the reference filed by the Commissioner, this court held that the remuneration received by the karta of the family could not be termed as a mode of return to the joint family merely on account of the latter's investment in the company managed by its karta. This court observed that there was no material to prove that the payment of remuneration was connected with the investment of the joint family in the company. It was held that the remuneration constituted the individual income of the karta and could not be assessed in the hands of the joint family. The principles emerging from the cases above referred clearly support the claim made in the assessee's case that the remuneration received by the karta from the company is not assessable as the income of the joint family. Learned standing counsel for the Revenue relied on the decision of the Supreme Court in P. N. Krishna Iyer v. CIT [1969] 73 ITR 539. Learned standing counsel also relied on two judgments of the Allahabad High Court in Bimal Kumar Jain v. CIT [1974] 93 ITR 225 (All) and Pratap Veer Kakkar v. CIT [1977] 107 ITR 435 (All). Learned standing cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber of the family. In the present case, from the investment of the joint family of its funds in the company, it is not possible to draw an inference that the remuneration paid to the karta of the joint family for the service rendered by him as managing director was one of the modes of return for the investment made by the family in the company. There was absolutely no material to prove that the payments were connected with the investment made by the family in the company. On the contrary, there is clear evidence in the present case that the karta of the joint family had rich experience in the line of business carried on by the company for over fifteen years. It would appear that the karta had visited several foreign countries in connection with the tobacco exports and acquired substantial experience in the export market. It cannot, therefore, be said that the services rendered by the karta as the managing director of the company were of a routine character. The services rendered by the karta required managerial ability and considerable skill in arranging commercial and financial transactions in the domestic as well as international markets. Learned standing counsel's contention tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence in the present case conclusively established that the remuneration was paid to the karta of the family by the company for services personally rendered by him as managing director. Apart from vaguely suggesting that, because of the payment of remuneration to the karta, there is a detriment to the family, there is no material on record, much less a finding by the Tribunal, that there was any detriment caused to the joint family by reason of the payment of remuneration to the karta. Indeed, the remuneration paid by a company to the karta or any member of the family for services personally rendered without any connection with the investment by the family of its funds in the company can never be regarded as a detriment to the interests of the family. On a consideration of the entire evidence on record, we are satisfied that the Tribunal correctly came to the conclusion that the remuneration paid to the karta of the joint family by the company constituted his individual income and is consequently not liable to be assessed in the hands of the joint family. We accordingly answer the question referred in the affirmative, that is to say, in favour of the assessee and against the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
