Case: P.N. Krishna Iyer Vs. Commissioner of Income Tax, Kerala

(AIR 1968 SC 682 ). No useful purpose will be served by making an analysis of the earlier cases, because in our view three recent judgments of this Court lay down the principles which govern this class of cases. In V. D. Dhanwateys case, 1968=68 ITR 365 = (AIR 1968 SC 683 ), V, the Karta of a Hindu undivided family contributed to the capital of a firm out of the funds of the family. Under the agreement of partnership the general management and supervision of the partnership business was to be in the hands of V, and he was to be paid a monthly remuneration out of the gross earnings of the partnership business. V joined the partnership as representing the family and he became a partner on account of the investments of the joint family assets in the capital of the partnership and that the remuneration receive by. V was only an increased share of the profits paid to him as representing the family. This Court (Hegde, J. dissenting) held that the remuneration paid to V was directly related to the investments from the assets of the family in the partnership business and "there was real and sufficient connection between the investment from the joint family funds and the remuneration paid to V". The salary paid to V was therefore assessable as the income of the Hindu undivided family.10. In M. D. Dhanwateys case, 1968-69 ITR 385 = (AIR 1968 SC 682 ) the facts were parallel to the facts in V. D. Dhanwateys case, 1968-68 ITR 365 = (AIR 1968 SC 683 ) and salary received by the Karta of the Hindu undivided family was treated as income of the family.11. In S. RM. CT. PL. Palaniappa Chettiars case, 1968-68 ITR 221 = (AIR 1968 SC 678 ) the Karta of a Hindu undivided family acquired go out of. 300 shares in a transport company with the funds of the family. In course of time be became the managing director of the Company. As managing director the Karta was entitled to salary and commission on the net profits of the company, and was entrusted with control over the financial and administrative affairs of the company. The only qualification under the articles of association for the office of a director was the holding of not less than is shares in his own right. It was held that the shares were acquired by the family not with the object that the Karta should become the managing director, but in the ordinary course of investment, and there was no real connection between the investment of joint family funds in the purchase of the shares and the appointment of the Karta as managing director of the company. The remuneration of the managing director, it was held, was not earned on account of any detriment to the joint family assets and the amounts received by the Karta as managing directors remuneration, commission an "sitting fee" were not assessable as the income of the Hindu undivided family.12. Income received by a member of a Hindu undivided family from a firm or a company in which the funds of the Hindu undivided family are invested,even though the income may be partially traceable to personal exertion of the member, is taxable as the income of the Hindu undivided family, if it is earned by detriment to the family funds or with the aid or assistance of those funds; otherwise it is taxable as the members separate income.13. Counsel for the assessee contended that the Tribunal had found that the business of M/s. P. S. N. Motors was built up "by the sole exertions" of the assessee and when the business was converted into a private limited company the shares therein were allotted to the assessee in view of "the valuable services rendered" by him in the promotion of the company and the "large sacrifices" he had made in agreeing to place his services at the disposal of the Company and "the immense benefit that the Company received "on account of his long experience, goodwill and reputation in the line of business", and, there ore, the salary, commission and "sitting fee" were in consideration of the services which the assessee rendered and were not attributable to the fact that the family had contributed to the main capital o the Company. Counsel said that this was a finding of fact which was binding upon the High Court. But this Court in V. D. Dhanwateys case, 1968-68 ITR 365 = (AIR 1968 SC 683 ) has held that the question whether the income was the income of the Hindu undivided family or the individual income was a finding on a mixed question of law and fact, and the final conclusion drawn from the primary evidentiary facts was open to challenge on the plea that the relevant principle had been misapplied by the Tribunal.14. The shares which qualified the assessee to become a member of the Company were purchased with the aid of joint family funds. The shares which were allotted to the assessee in lieu of his services were also treated as shares belonging to the joint family. The entire capital assets of the Company originally belonged to the joint family and were made available to the Company in consideration of a mere promise to pay the amount for which the assets were valued. The income was primarily earned by utilising the joint family assets or funds and the mere act that in the process of gaining the advantage an element of personal service or skill or labour was involved did not alter the character of the income. In cases of this class the character of the receipt must be determined by reference to its source, its relation to the assets of the family of which the recipient was the member, and the primary object with which the benefit received was disbursed. The conclusion of the High Court can not be said to be vitiated by any error.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]But in our judgment there is no ground for holding that the Commissioner has attempted to revise the order of the Appellate Assistant Commissioner. In computing the income of the assessee as an individual, the Appellate Assistant Commissioner had directed certain modifications to be made, and pursuant thereto the assessments of the assessee and of the Hindu undivided family of which the assessee was the karta were rectified. The order of assessment of the Hindu undivided family was never challenged in appeal to the Appellate Assistant Commissioner. The Commissioner revised the order passed by theOfficer in so far as it related to the Hindu undivided family. It is true that in conseqence of the order of the Commissioner the salary, commission and the "sitting fee" received by the assessee had to be excluded from the total income of the assessee. But the Commissioner had power to revise the order passed by theOfficer which had not been appealed from. Modification in the order of theOfficer in so far as it related to the assessment of the assessee was consequential upon that order : it was made to prevent double taxation of the same income. It is true that the assessment of the assessee as an individual had become final before the order of the Commissioner, but that did not bar the exercise of jurisdiction by the Commissioner under Section 33 B (1). The question referred at the instance of the assessee was, therefore, rightly answered by the HighIncome received by a member of a Hindu undivided family from a firm or a company in which the funds of the Hindu undivided family are invested,even though the income may be partially traceable to personal exertion of the member, is taxable as the income of the Hindu undivided family, if it is earned by detriment to the family funds or with the aid or assistance of those funds; otherwise it is taxable as the members separate income.The shares which qualified the assessee to become a member of the Company were purchased with the aid of joint family funds. The shares which were allotted to the assessee in lieu of his services were also treated as shares belonging to the joint family. The entire capital assets of the Company originally belonged to the joint family and were made available to the Company in consideration of a mere promise to pay the amount for which the assets were valued. The income was primarily earned by utilising the joint family assets or funds and the mere act that in the process of gaining the advantage an element of personal service or skill or labour was involved did not alter the character of the income. In cases of this class the character of the receipt must be determined by reference to its source, its relation to the assets of the family of which the recipient was the member, and the primary object with which the benefit received was disbursed. The conclusion of the High Court can not be said to be vitiated by anythis Court in V. D. Dhanwateys case,ITR 365 = (AIR 1968 SC 683  ) has held that the question whether the income was the income of the Hindu undivided family or the individual income was a finding on a mixed question of law and fact, and the final conclusion drawn from the primary evidentiary facts was open to challenge on the plea that the relevant principle had been misapplied by the Tribunal.