TMI Blog1982 (3) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... d company called K. S. Subbiah Pillai and Co. Pvt. Ltd. It is not disputed that the assessee inherited the business as well as the barns and agricultural lands as joint family properties. The authorised capital of the company was Rs. 1,00,000 divided into 1,000 shares of Rs. 100 each. The assessee and his wife, Kamala Subbiah Pillai, held 500 shares each. Initially the shares in the name of the assessee were paid up to the extent of Rs. 50 per share and the shares in the name of Kamala Subbiah Pillai were unpaid for. In 1962 the capital of the company was increased by another one lakh rupees and the increased 1,000 shares of Rs. 100 each were allotted to Kamala Subbiah Pillai. The shares were fully paid for Kamala Subbiah Pillai. Subsequently, she transferred the 500 shares which were originally allotted to her back to the undivided family of which the assessee was the karta. The resultant position was that as on March l, 1964, the capital of K. S. Subbiah Pillai and Co. Pvt. Ltd. was made up of 2,000 shares of which 1,000 shares were owned by the HUF of which the assessee was the karta and 1,000 shares owned by the assessee's wife, Kamala Subbiah Pillai. Accordingly, they were the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income of the HUF and found that the remuneration and commission received by him as managing director could not be included in the assessment of the HUF. He further found that the income received by the assessee's wife should be treated as her own separate income. In arriving at this conclusion, the AAC relied upon the orders of assessment passed for the years 1966-67 ' 1967-68 and 1968-69. For those years the assessee admitted that the interest, dividends and sitting fees received by him, from the business, constituted the income of the HUF, but claimed that the salary and commission received by him as managing director formed part of his individual income. The ITO, however, rejected the assessee's claim and held that the remuneration received by him as managing director as well as the commission and sitting fee received by him and his wife were to be treated as income of the HUF along with the dividend. Ultimately the assessee took up the matter to the. Appellate Tribunal, Hyderabad, in I.T.A. Nos. 747, 748 and 749 of 1969-70. The Appellate Tribunal, Hyderabad, found that the sitting fees received by the assessee should be treated as the income of HUF along with the income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the income of the HUF and that has become final. However, at the instance of the Revenue, the Tribunal has referred for our opinion the following question of law in both sets of appeals. The question of law referred for our opinion reads as follows : "Whether, on the facts and in the circumstances of the case, the remuneration and commission received by Sri K. S. Subbiah Pillai was assessable in the hands of the assessee-Hindu undivided family ? " In this context, it is necessary to observe that against the order passed by the Appellate Tribunal, Hyderabad, for the assessment years 1966-67 to 1968-69, an identical question was referred by the Tribunal, Hyderabad Bench, for the opinion of the Andhra Pradesh High Court and the Andhra Pradesh High Court answered the question in the negative and against the Revenue. The decision of the Andhra Pradesh High Court is reported in CIT v. K. S. Subbiah Pillai [1981] 127 ITR 505. The undisputed facts in these tax cases are that the tobacco business was inherited by the assessee from his father Sankaran Pillai, and that he also invested in the business the sale proceeds of the barns and agricultural lands inherited by him from his f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the use of the word " father" signifies jointness. By labour means by agriculture and the like requiring labour. " Without prejudice " means without detriment It may also be stated that the texts on Hindu law have explained " without assistance " as meaning without deriving assistance for the purpose of gaining and the word " father " as meaning an undivided co-heir. The above proposition of law came to be settled by the Privy Council as early as in 1920 in Gokul Chand's case: Amar Nath v. Hukam Chand Nathu Mal [1921] LR 48 IA 162; AIR 1921 PC 35, where the Privy Council held that the salary obtained by a member of the Indian Civil Service was partible property of the joint family since it resulted from a special educational training given to the member at the instance of patrimony. This decision, it may be observed, resulted in the enactment of the Hindu Gains of Learning Act (Act No. 30 of 1930) by which it was stated that no gains of learning shall be held not to be the exclusive and separate property of the acquirer merely by reason of (a) his learning having been in whole or in part, imparted to him by any member, living or deceased, of his family, or with the aid of the joi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whose decision the matter had been taken to the Supreme Court, had held that the sum of Rs. 61,282 should be treated as the personal income of Rohatgi. The Supreme Court, however, set aside the decision of the Calcutta High Court and held that the remuneration received by Rohatgi as managing director was not his personal income but income of the family of which he was the karta. Das C.J., who spoke for the Supreme Court, stated thus (p. 128): " If for the purposes of contribution of his share of the capital in the firm, the karta brought in monies out of the till of the Hindu undivided family, then he must be regarded as having entered into the partnership for the benefit of the Hindu undivided family and as between him and the other members of his family he would be accountable for all profits received by him as his share out of the partnership profits and such profits would be assessable as income in the hands of the Hindu undivided family. Reference may be made to the cases of Kaniram Hazarimull v. Commissioner of Income-tax [1955] 27 ITR 294 (Cal) and V. D. Dhanwatay v. Commissioner of Income-tax [1957] 32 ITR 682 (Bom), in support of this view. The same principle has been a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cheme, the managing directorship of the company when incorporated. In Mathura Prasad v. CIT [1966] 60 ITR 428 (SC) one Mathura Prasad had become a partner in the firm, M/s. Badri Prasad Jagan Prasad, with the funds of the HUF and as a partner of the firm he was entrusted with the management of Agarwal Iron Works and he earned an allowance which was claimed to be salary. The Income-tax Appellate Tribunal held that the right to draw the allowance was made possible by the use of the family funds and consequently the allowance must be treated as the income in the hands of the family. The High Court upheld the finding o the Tribunal on the basis of the decision of the Supreme Court in CIT v. Kalu Babu Lal Chand [1959] 37 ITR 123. The High Court having refused to direct a reference under s. 66(2) of the 1922 Act, the assessee went up in appeal to the Supreme Court. The Supreme Court held that the matter was concluded by the judgment in CIT v. Kalu Babu Lal Chand and that the High Court was right in refusing to direct a case to be stated under s. 66(2) of the 1922 Act. In R. V. Manicka Mudaliar v. Thangavelu, AIR 1964 Mad 35, Jagadisan J. had observed as follows (p. 38): "...where m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 60 ITR 428. In M. D. Dhanwatey v. CIT [1968] 68 ITR 385 (SC), one M. D. Dhanwatey was the karta of a joint Hindu family. He was also a partner in the partnership firm carrying on business under the name and style of M/s. Shivraj Fine Art Litho Works, the share capital of which was contributed by the HUF of which be was the karta. It may be remembered that this is the same firm with which the Supreme Court was concerned in V. D. Dhanwatey v. CIT [1968] 68 ITR 365. Under a deed of partnership, it was provided that M. D. Dhanwatey should be paid Rs. 1,250 per month. For the assessment year 1954-55 he received a sum of Rs. 7,500. The question, therefore, arose whether this sum of Rs. 7,500 should be treated as the individual income of M. D. Dhanwatey or it should be included in the total income of the HUF. The Supreme Court, following the ratio in V. D. Dhanwatey v. CIT by a majority, Hegde J., dissenting, held that the income received by M. D. Dhanwatey should be treated as the income of the HUF. The same principle was reiterated by the Supreme Court in P. N. Krishna Iyer v. CIT [1969] 73 ITR 539, where Shah J., stated the ratio thus (p. 545): "Income received by a member of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee for the years 1966-67, 1967-68 and 1968-69 referred to four decisions. The first case referred to by the learned counsel was a Bench decision of this court in CIT v. S. N. N. Sankaralinga Iyer (1950] 18 ITR 194. .There, Sankaralinga Iyer who was the karta of a Hindu joint family and who was receiving remuneration as managing director of the Indo-Commercial Bank claimed that the remuneration as well as the sitting fees received by him as managing director were his individual property. The claim was not accepted by the Revenue. On a reference to this court at the instance of the Revenue, this court came to the conclusion that the income received by Sankaralinga Iyer as managing director's remuneration and director's fees was his own individual income. The actual basis on which this court came to the conclusion can be discerned from the judgment of Viswanatha Sastri J., who observed as follows (p. 199): "By virtue of his position as the holder of a large number of shares, Mr. Sankaralinga Iyer became eligible for appointment as the managing director of the Indo-Commercial Bank. But his actual appointment and his remuneration were the result of a contract of service entere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... followed by the Supreme Court itself in V. D. Dhanwatey v. CIT [1968] 68 ITR 365 (SC), M. D. Dhanwatey v. CIT [1 968] 68 ITR 385 (SC), P. N. Krishna Iyer v. CIT [1969] 73 ITR 539 (SC), CIT v. D. C. Shah [1969] 73 ITR 692 (SC) and Raj Kumar Singh Hukam Chandji v. CIT [1970] 78 ITR 33 (SC), the ratio in Sankaralinga Iyer's case cannot in any way help Mr. Uttam Reddi. The next case relied upon by Mr. Uttam Reddi is Piyare Lal Adishwar Lal v. CIT [1960] 40 ITR 17 (SC). The said decision does not render any assistance to the learned counsel for the assessee as the facts in that case have to be and have been distinguished from the facts in CIT v. Kalu Babu Lal Chand. Referring to the judgment in Piyare Lal's case Shah J. in Mathura Prasad v. CIT [1966] 60 ITR 428 (SC), has observed as follows (p. 433): "The decision in Piyare Lal Adishwar Lal v. CIT [1960] 40 ITR l7 (SC), on which reliance was sought to be placed, has no bearing on the question sought to be raised in this appeal. That was a case in which member of a Hindu undivided family had furnished as security the properties of the family under an agreement whereby he was appointed treasurer of a bank. Remuneration received by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 221 (SC), and still held that the income received by a member of an HUF from a firm or a company in which the funds of the HUF were invested, even though the income might be partially traceable to personal exertion of the member was taxable as the income of the HUF if it was earned by detriment to the family funds or with the aid or assistance of those funds and otherwise it would be taxable as members' separate income. In this connection, it is necessary to refer to the decision of the Supreme Court in Raj Kumar Singh Hukam Chandji v. CIT [1970] 78 ITR 33 (SC). This judgment of the court was delivered by Hegde J., who had dissented from the majority in CIT v. Kalu Babu Lal Chand. After referring to the earlier cases of the Supreme Court on the subject, the learned judge has observed as follows (p. 43): " At first sight there appears to be conflict between the two lines of decisions, namely, Kalu Babu's case [1959] 37 ITR 123 (SC), Mathura Prasad's case [1966] 60 ITR 428 (SC), the two Dhanwateys' cases (V. D. Dhanwatey [1968] 68 ITR 365 (SC) and M. D. Dhanwatey [1968] 68 ITR 385 (SC)) and Krishna Iyer's case [1969] 73 ITR 539 (SC), on the one hand and Palaniappa Chettiar's ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make the receipt, the income of the Hindu undivided family." The last of the cases cited by the learned counsel for the assessee is that of a Bench decision of this court in T.C. Nos. 345 to 348 of 1977 (CIT v. V. S. Thyagaraja Mudaliar [1983] 140 ITR 128), to which one of us was a party. The question that arose for decision in the said case was whether the remuneration received by the assessee as managing director from M/s. Trichy Distilleries and Chemicals Ltd., M/s. Venkatesa Thyagaraja Ltd. and M/s. Arooran Sugars Ltd., constituted separate income or the income of the HUF. This court came to the conclusion that the income was separate income of the assessee. In arriving at the said conclusion, this court laid emphasis on the special experience which the assessee had in the sugar industry and also his particular experience in the field of banking, insurance and other financial institutions. The fact that the assessee in that case had been nominated as director by the Government in various co-operative factories and that he was director of the Central Board of the Reserve Bank of India and the Industrial Development Bank of India and President of the southern area of the local ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that but for the fact that the assessee was allotted 1,000 shares, the amount for which had been paid from and out of the family funds and to the detriment of the family estate, the assessee would not have become the managing director. There is absolutely no evidence to support the contention of the learned counsel for the assessee that the development of the business was due to any peculiar qualification or experience on the part of the assessee. We are not impressed with the argument of the learned counsel that the assessee developed the same by virtue of any particular qualification in him in tobacco business, in the absence of relevant materials to that effect. The argument that the fact that the original investment was only Rs. 25,000 and the business earned large profits progressively from year to year would show the personal exertions of the assessee and, therefore, the remuneration and commission received by the assessee should be treated as his separate income, does not carry any conviction. Even in a case where the joint family had invested some moneys in the business and the business is being managed on behalf of the family by the karta thereof, the latter is expected to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee for the services rendered by him and not on account of the investment made by the HUF. The learned judges have not given due weight to the fact that but for the investment of the family funds in the tobacco business and in the acquisition of 1,000 shares in the name the assessee, he would not have been in a position to earn the remuneration and commission as managing director. When once we come to the conclusion that on the facts of this case, there is clear nexus between the investment of the funds of the HUF and the remuneration and commission received by the karta from the business, we are bound to apply the ratio laid down by the Supreme Court in the various decisions already referred to. In the present case, the Tribunal has observed as follows : " We find that K. S. Subbiah Pillai and Co. Pvt. Ltd. was started in the year 1957 with a subscribed capital of Rs. 25,000 only. For the first year, the company's profits was barely Rs. 5,000. Thereafter, from the next year, its profit began to rise : Rs. 46,137 in 1958 ; Rs. 75,259 in 1959; Rs. 1,83,687 in 1960 ; Rs. 3,48,202 in 1961 ; Rs. 31,01,584 in 1962 ; Rs. 2,29,174 in 1963, by which time some further capital h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all litigations including litigations arising out of the I.T. Act. Notwithstanding this salutary principle of law, we are reluctantly constrained to respectfully dissent from the decision of the Andhra Pradesh High Court in CIT v. K. S. Subbiah Pillai [1981] 127 ITR 505, for the reason that we are bound to apply the principles laid down by the Supreme Court in the decisions already cited by us to the facts of this case. Mr. Uttam Reddi then argued that in the assessment of the company the remuneration and commission paid to Subbiah Pillai, the assessee, was allowed without any objection that it was unreasonable. In this connection, the learned counsel referred to s. 40(c) of the I.T. Act which confers power on the ITO to disallow any remuneration paid to a director on the ground that the amount is excessive or unreasonable. We are of the opinion that this argument based on s. 40(c) has no relevance at all in considering the question whether the remuneration and commission received by the assessee as managing director constituted the income of the HUF. This is because in considering the question of assessment of the tobacco business and in exercising his powers under s. 40(c), the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
