Case: Raj Kumar Singh Hukam Chandji Vs. Commissioner of Income Tax, M.P

2. This question was referred by the Income-tax Appellate Tribunal, Bombay Bench A to the High Court of Judicature at Bombay (of M. P.?) on an application made under S. 66 (1) of the Act by the Commissioner of Income-tax Madhya Pradesh. The High Court has answered that question in favour of the Revenue. As against that decision this appeal has been brought.      3. The assessee in this case is a Hindu Undivided Family and the concerned assessment year is 1954-55, the relevant accounting period being the year ending Diwali 1953 i.e. November 6, 1953. Previously a Hindu Undivided Family was carrying on business under the name and style of Sarupchand Hukamchand. That family was carrying on several businesses one of which was the management certain mills. That family disrupted on March 30, 1950. The assessee is the branch of that family. On March 31, 1950, a company under the name and style of Sarupchand Hukumchand Private Ltd. was incorporated. The capital of the company consisted of Rs.5 crores divided into 20,000 preference shares of Rs. 1000 each and 3,000 ordinary shares of Rs. 1000 each. The company itself was incorporated for the purpose of acquisition from M/s. Sarupchand Hukumchand, certain managing agencies, businesses, factories and properties and for that purpose to enter into an agreement with the said firm and to carry on business as managing agents of Rajkumar Mills Ltd., the Hukumchand Mills Ltd. and the Hira Mills Ltd. and the other businesses mentioned more particularly in the Memorandum of Association of the company. The first Directors of the company were:(1) Sir Hukumchand Saroopchandji      (2) Rajkumarsingh Hukumchand ji      (3) Lady Kanchanbai Hukamchand ji      (4) Mrs. Premkumaridevi Rajkumarsinghji      (5) Raja Bahadursingh Rajkumarsinghji      (6) Rustomji Cowasji Jall4. The qualification prescribed for a director under Art. 53 was the holding of at least 10 shares in the company whether preference or ordinary or partly preference or partly ordinary. Article 55 provided that the Directors may from time to time appoint one or more of their body to the office of managing Director or manager on such terms and at such remuneration as may be determined by the Directors. In pursuance of the powers conferred on them under Art. 55, the Directors by their resolution dated March 31, 1950 appointed for the purpose of management of the business of the company Sir Hukumchand Rajbahadur, Rajkumar and Rajabahadur as managing Directors of the company on a remuneration of Rs. 5,000/per month for each of them for their services. Under Art. 63, the Directors were given certain powers for the management of the company. They were subject to the control of the Board of Directors. The three branches of the original Hindu Undivided Family namely the branches of Sir Seth Hukumchand, Lady Kanchanbai and Sri Rajkumar were allotted 5000 shares of the face value of Rupees 1000/- each. The assessees branch represented by its Karta got 5000 shares. Rajkumar acquired 30 further shares in the name of his wife, Prem kumari and 10 shares in the name of Rajabahadur. The consideration for all these subsequent acquisitions was found admittedly from the Hindu Undivided Family funds. All the 5030 sharer were treated in the books and the balance sheet of the assessee family as its property. The dividends in respect of these shares were also credited to the account of the family. Sir Hukumchand died and after his death the other two continued to be the managing Directors. For the years 1951-52, 1952-53 and 1953-54, the receipt of this Rs. 5,000/- per month received as remuneration was treated as the income of Rajkumar as an individual and assessed on that basis. Similarly the remuneration received by Sir Hukumchand and Rajabahadur have been and continued to be assessed as their individual income. In making the assessment of the assessee in the year 1954-55, the Income-tax Officer referred to this item in the following words;"It was claimed that the income from managing directors remuneration and from directors fees is assessable in his hands in individual capacity. As was done in the early assessments also."5. For that reason he did not assess the sum of Rs. 60,000/- and the sitting fee of Rs. 1420/- received by Rajkumar in the account year relevant to the assessment year 1954-55 in the hands of the Hindu undivided family but they were assessed in the hands of Rajkumar as an individual. On January 10, 1961, the Commissioner of Income-tax in exercise of his powers under S. 33 (B) issued a notice to the to show cause why the assessment of the assessee for the assessment year 1954-55 should not be revised by treating the sum of Rs. 60,000/-, plus Rs. 1420/- as the income of the assessee Hindu Undivided Family of which Rajkumar was the Karta. The assessee opposed that notice. He claimed the amount in question as his individual income. The Commissioner did not accept the contention of the assessee and purporting to rely on the decision of this Court in Commr. of Income-tax, West Bengal v. Kalu Babu Lal Chand, 37 ITR 123   - (AIR 1959 SC 1289  ) held that that income was of the assessee. He taxed the assessee accordingly. Aggrieved by that decision the assessee took up the matter in appeal to the Income-tax Appellate Tribunal Before the tribunal learned Counsel for the assessee conceded that the sitting fee of Rs. 1420/- may be treated as the income of the assessee. Hence the dispute centered round the sum of Rs. 60,000/- received by Rajkumar as salary. The Tribunal upheld the contention of the assessee. The tribunal after tracing the history of the Private Ltd. Co. of which Rajkumar was a Director and the manner in which the earlier assessments were made observed:"From the facts set out above it is clear that this is not a part and parcel of the same transaction or the same scheme of arrangement. Whatever may be said of the bigger Hindu undivided family, it was sheer accident of circumstances that the smaller Hindu undivided family came to hold these shares. Both Rajkumar and Rajabahadur belong to the same branch and both of them are managing directors. The managing directors were appointed by a resolution of the Board of Directors and they were subject to removal by the Directors at any time. The appointment of managing director was not conditioned upon either Rajkumar or Rajabahadur acquiring these shares. On the disruption of the larger Hindu undivided family the smaller Hindu undivided family got for its share certain shares. Whatever may be said of the directors fees, that having been now conceded as income of the Hindu undivided family, the same cannot be said of the managing directors remuneration. The managing director holds office by virtue of the resolution of the Board of Directors. He may not be a servant of the Company but still he receives his salary for his personal services.The contribution of the share capital may at best be considered as acquiring the qualification of a director. It is not all people who hold shares that could automatically aspire to be managing directors. There is no evidence to show that Rajkumar and Rajabahadur were appointed managing directors on behalf of the family or that the income was earned by utilizing the joint family property or there was detriment to the family property. There is no material in this case to hold that the acquisition of the business or floatation of the company and the appointment of the managing directors were inseparably linked together. As already noticed right upto the accounting year relevant to the present assessment year the income was treated as income of Rajkumar in his individual capacity. It is true no doubt that there is no question of res judicata but this fact has certainly to be taken into consideration. This income has been assessed under S. 7. It has been earned by Rajkumar for his services. It has accrued in his hands. It is open to him to give it over to the family and the mere fact that it was included in the familys amount or the balance sheet cannot in any event affect the question at issue..... Rajkumar was not appointed as managing director as a result of any outlay or expenditure of or detriment to the family property. The managing directorship was an employment of personal responsibility and ability and the mere fact that certain qualification shares and other shares were property of the Hindu undivided family was not the sole or even the main reason for his appointment to the responsible post of managing director. We are clearly of the opinion, therefore that the remuneration received by Rajkumar was assessable only in his hands as an individual and cannot be considered as and clubbed with the income of the Hindu undivided family."6. The High Court of Madhya Pradesh did not agree with the conclusion reached by the Income-tax Appellate Tribunal. It felt that in view of the decision of this Court in 37 ITR 123   = (AlR 1959 SC 1289) (supra), the answer to the question referred to it should be in favour of the Revenue.

Reasoning:
16. At first sight there appears to be conflict between the two lines of decisions namely Kalu Babus case, 37 ITR 123   = (AIR 1959 SC 1289  ) and Mathura Prasads case, (1966) 60 ITR 428 (SC); two Dhanwateys cases, 68 ITR 365   = (AIR 1968 SC 683  ) and 68 ITR 385   = (AIR 1968 SC 682  ) and Krishna Iyers case. 73 ITR 539  , Palaniappa Chettiars case, 68 ITR 221   = (AIR 1968 SC 678  ), Dakappas case, (1969) 72 ITR 192 (SC) and D. C. Shahs case, 73 ITR 692   = (AIR 1969 SC 927  ) on the other. The line that demarcates these two lines of decisions is not very distinct but on a closer examination that line can be located. In order to find out whether a given income is that of the person to whom it was purported to have been given or that of his family, several tests have been enumerated in the aforementioned decisions but none of them excepting Kalu Babus case, 37 ITR 123   = (AIR 1959 SC 1289  ) makes reference to the observations of Lord Sumner in Gokal Chands case, 48 Ind App 162 = (AIR 1921 PC 35) that"in considering whether gains are partible, there is no valid distinction between the direct me of the joint family funds and a use which qualifies the member to make the gains by his own efforts."We think that that principle is no more valid. The other tests enumerated are:(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;17. 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, the income of the Hindu undivided family. Applying the tests enumerated above to the facts found by the tribunal in the present case, there is hardly any room to doubt that the income in question was the individual income of Rajkumar. He did not become the managing director of the firm for the mere reason that his family had purchased considerable shares in the firm. He was elected as a managing director by the board of directors. The tribunal has found that he received his salary for his personal services. There is no material to hold that he was elected managing director on behalf of the family. In the past the salary received by him was assessed as his individual income. The same was the case as regards the salary received by the other directors. The tribunal has found that he was not appointed as managing director as a result of any outlay or expenditure of or detriment to the family property. It has further found that the managing directorship was an employment of personal responsibility and ability. In these circumstances we agree with the conclusions reached by the tribunal that the income in question cannot be treated as the income of the assessee. For these reasons we are unable to agree with the High Court that the income in question can be held to be the income of the assessee.