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

1. P.N. Krishnaset up in 1923 a motor transport business in the former State of Travancore. In 1945 there arose disputes between the assessee and his brothers about the division of the estate of the joint family of which they were members. The disputes were settled by mutual agreement dated October 23, 1951 and the motor transport business together with the "wrokshop, stores, agency, cinema companies etc." were treat as the business of the joint family, and on partition were allotted to the assessee. An application filed by the assessee before the 1st AdditionalOfficer, Trichur, for recording the partition was accepted.2. In the meantime on July 3, 1952, a private limited company P. S. N. Motors (Private) Ltd. was floated with the object of taking over the motor transport business carried on by the assessee. By the Articles of Association, the assessee was to be the Governing Director of the Company for life and to draw such remuneration and exercise such powers detailed in the agreement to be entered into between him and the company in that behalf, and so long as he held the office of Governing Director, the general management of the companys business was to remain in his hands. The assessee purchased 100 shares of the Company of the face value of Rs. 100 each. On August 18, 1952, the assessee was appointed by the Company Governing Director with an officer allowance of Rs. 3,000 per mensem and a commission of 15 per cent on the net profit. On the same day the Directors approved the purchase from the Hindu undivided family of the assessee of assets (but not the liabilities) of the transport business valued at Rs. 8,01,074/1/4. In the books of the Company credit entries were posted in the name of the Hindu undivided family. On August 18, 1952, the Directors passed certain resolutions relating to the repayment of the amount due to the Hindu undivided family. On September 28, 1952, the Company passed a special resolution that in consideration of the "valuable services" rendered by the assessee in the promotion of the Company and of the "large sacrifices" made by him in agreeing to place his services at the disposal of the company and the benefit that the company received on account of his "long experience, goodwill and reputation in this line of business," the assessee be allotted 4880 fully paid up shares of the Company.3. TheOfficer brought to tax in the assessment yearthe remuneration received by the assessee from the Company together with the commission, "sitting fee" and income from property, business and other sources as the separate income of the assessee. The Appellate Assistant Commissioner modified that order, and directed that the income from salary, commission and "sitting fee" received from the Company be included in the assessment of the Hindu undivided family. TheOfficer then carried out the direction and included the income from property, business and other sources in the total income of the Hindu undivided family and made corresponding modifications in the assessment of the assessee as an individual.4. But the Commissioner ofbeing of the opinion that the order passed by theOfficer was wrong and prejudicial to the interests of revenue revised the order of theOfficer exercising power under Section 33B of theAct, 1922, and included the income from salary, commission and "sitting fee" aggregating to Rs. 43,240 in the total income of the Hindu undivided family. In appeal against the order, the Tribunal reversed the order of the Commissioner and ordered that the three items be excluded from the assessment of the Hindu undivided family.5. At the instance of the Commissioner ofthe following question was referred by the Tribunal to the High Court of Keralaon the facts and in the circumstances of the case, the Tribunal was justified in holding that the income from salary, commission and sitting fees obtained by Sri P. N. Krishna Iyer from M/s. P. S. N. Motors (Private) Ltd., Trichur, represented his individual income and not the income of the Hindu undivided family of which he is the karthathe instance of the assessee the following question also was referred by the Tribunalthe Commissioner has jurisdiction to revise the order of theOfficer in view of the decision of the Appellate Assistant Commissioner in appeals for the assessment years58 in the assessment of Sri P. N. Krishna Iyer in the status of an individualHigh Court answered the question referred at the instance of the Commissioner in the negative and the question referred at the instance of the assessee in the affirmative. The assessee has appealed to this Court with special leave granted by this Court.

Reasoning: 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.