Case: S. Rm. Ct. Pl. Palani Appa Chettiar Vs. The Commissioner Of Income-Tax, Madras

2. The appellant (hereinafter referred to as the assessee) is a Hindu Undivided Family consisting of the father and four major sons. The assessee became a shareholder in the Trichy-Sri Rangam Transport Company Ltd. (hereinafter referred to as the company) in 1934 and owned 90 shares out of the 300 shares of the company. The shares were acquired with the funds of the Hindu undivided family of the father and his four major sons. There were initially four shareholders including the assessee, two of whom were directors. On the death of one of the Directors, the assessee became a director in 1941 and on the death of another director who was managing the business the assessee became the Managing Director with effect from 1942. By a resolution dated April 16, 1944 the company granted him an honorarium of Rs. 3,000 for the year 1943 44 and subsequently raised it gradually till it became Rs. 1,000 per month with 121/2 per cent commission on the net profits of the company. The Managing Director had control over the financial and administrative affairs of the company and the only qualification required was set out under Article 19 of the Articles of Association of the company which was to the followingqualification of a Director including the first Director shall be the holding in his own right alone and not jointly with any other person of not less than 25 shares and the qualification shall be acquired within two months of1938-39 to 1959-60 the assessee had been submitting returns in the status of Hindu undivided family and upto l949-50 the assessments were completed in that status. For the assessment years 1950-51 to 1955-56, the assessments were completed in the status of individual, though returns were submitted in the status of Hindu undivided family and the remuneration was included in those assessments. For the assessment year 1956-57, the assessee submitted the return in the status of Hindu undivided family but claimed for the first time that the remuneration and sitting fees from the company should he assessed separately in the Kartas hands. The claim was accepted and a separate assessment made on him as an individual in respect of the remuneration and commission received from the company. This continued till-the assessment for the year l958-59. For the year ended April 13 1959 which was the previous year for the assessment year 1959-60, the assessee family returned an income of Rs. 26,780) which did not include the Salary, Commission and Sitting fees received by the karta which amounted to Rs. 18,683. The Income-tax Officer added the remuneration of the karta for the assessment of the Hindu undivided family and on the basis of the decision of this Court in C. I. T., West Bengal v Kalu Babu Lal Chand 1980-1 SCR 320   = (AIR l959 SC 1289) held that the commission was to be treated as income of the family. The assessee appealed to the Appellate Assistant Commissioner but the appeal was dismissed. The assessee took the matter in further appeal to the Income-tax Appellate Tribunal, Madras Bench The Tribunal held that the case was governed by the decision of the Madras High Court in C. I. T., Madras v. S. N. N. Sankaralinga Iyer, 1950-18 ITR 194   = (AIR 1950 Mad 610  ) and that the remuneration of the Managing Director ought not to be treated as income of the family. The Tribunal came to the conclusion that the judgment in 1950-18 ITR 194   = (AIR 1950 Mad 610  ) was not affected by the decision of this Court in 1960-1 SCR 320   = (AIR 1959 SC 1289  ). At the instance of the assessee the Appellate Tribunal stated a case to the Madras High Court on the following question of lawsums of Rs. 9,000, Rs. 8,133 and Rs. 1,550 received by the assessee as Managing Directors remuneration, commission and sitting fees are assessable as the income of the Hindu undivided family of which Palaniappa Chettiar is theHigh Court took the view that the decision in 1950-18 ITR 194   = (AIR 1950 Mad 610  ) was not authoritative as this Court had subsequently impliedly overruled that decision in 1960-1 SCR 320   = (AIR 1959 SC 1289  ) and the later decision of this Court in Piyare Lal Adishwar Lal v I. T. Commr. Delhi, 1960-3 SCR 669   = (AIR 1960 SC 997  ) was distinguishable. The High Court held that the case was governed by the ruling of this Court In 1960-l SCR 320 = (AIR 1959 SC 1289  ) and accordingly decided the question of law against the assessee and in favour of the Income-tax Department.

Reasoning: Applying the doctrine of Hindu law, the remuneration of the managing director was not earned by any detriment to the joint family assets. We are therefore of the opinion that the High Court was in error in holding that the present case falls within the principle of the decision of this Court in l960-l SCR 320 - (AIR 1959 SC 1289  ). On the contrary, we are of the opinion that the present case bears analogy to the decision of this Court in 1960-3 SCR 669   = (AIR 1960 SC 997  ). In that case a member of a Hindu Undivided Family had furnished as a security the properties of the family under an agreement whereby he was appointed treasurer of a bank. Remuneration received by the manager of the family for working as a treasurer was claimed to be income of the Hindu Undivided Family, because the properties of the family were furnished as security, but this claim was rejected by this Court on the ground that there was no detriment and risk to the joint family property and the emoluments of the treasurer could not be treated as an accretion to the income of the Hindu Undivided Family. We consider it also necessary to state that the decision of Madras High Court in 195018 ITR 194 = (AIR 1950 Mad 610  ) was not impliedly overruled by this Court in 1960-1 SCR 320   = (AIR 1959 SC 1289  ). It was merely pointed out that the material facts of that case were different from those of Kalu Babu Lal Chands case, 1960-1 SCR 320   = (AIR 1959 SC 1289  ). It was, for instance, found in 1950-18 ITR 194   = (AIR 1950 Mad 610  ) that the remuneration of the managing director was earned by rendering services to the bank and no part of the Family funds was utilised except that the necessary shares to acquire the qualification of a managing director were purchased out of joint family funds. It was held that there was no detriment to the family property in any manner or to any extent. In view of this finding it follows that the remuneration of the managing director could not be treated as an accretion to the income of the joint family and taxed in its hands. The process of reasoning of the Madras High Court in 1950-18 ITR 194   = (AIR 1950 Mad 610  ) may be open to criticism and may not be sound but,in our opinion, the actual decision in that case is correct and is supported by the principle that there is no detriment to the family property and no part of the family funds had been spent or utilised for acquiring the remuneration of the managing director.The facts in the present case are almost parallel to those in 1950-18 ITR 194   = (AIR 1950 Mad 610  ) and there is no detriment to the joint family assets and no part of the joint family property was spent in earning the remuneration or making the acquisition. It therefore follows that the principle of the decision in 1960-1 SCR 320   = (AIR 1959 SC 1289  ) cannot be applied for deciding the question presented for determination in this case.