Delhi High Court
Commissioner Of Income-Tax vs Bhai Sardar Singh & Sons on 14 November, 1979
Author: D Khanna
Bench: S Ranganathan, D Khanna
JUDGMENT
D.R. Khanna, J.
1. The assessed before us is the HUF known as Bhai Sardar Singh & Sons. This family had acquired 100 shares of the face value of Rs. 10,000 of Sunder Das Sardar Singh Pvt. Ltd.
2. Bhai Sardar Singh who is the karta of the family became the director of the company and was paid amounts of Rs. 22,500 and Rs. 24,000 for the previous years relevant to the assessment years 1959-60 and 1960-61. These amounts included salaries paid to Bhai Sardar Singh for the services rendered to the company as director and also fees paid for attending meetings of the directors of the company under Article 80 of the articles of association.
3. At the stage of the assessment, the assessed did not dispute that the meeting fees paid to Bhai Sardar Singh in terms of Article 80 of the articles of association belonged to the HUF and were assessable in its hands. However, with respect to the salary amounts which Bhai Sardar Singh enjoyed from the company, it was asserted that they were his individual incomes and could not be clubbed with the income of the family. This contention did not prevail with the ITO and the AAC. However, in second appeal, the Appellate Tribunal, following the ratio of the decision given by the Supreme Court in the case of Palaniappa Chettiar v. CIT [1968] 68 ITR 221, held that the salary incomes enjoyed by Bhai Sardar Singh were his individual earnings.
4. It is in these circumstances that the Commissioner of Income-tax, Delhi, has got referred the following question for opinion of this court :
"Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in holding that the remuneration received by Bhai Sardar Singh from M/s. Bhai Sunder Das Sardar Singh did not constitute income of the assessed-family in respect of each of the two years ?"
5. This remuneration to Bhai Sardar Singh was allowed under a special resolution of the general body of the shareholders, in compliance with the provisions of Section 314 of the Indian Companies Act and Article 82 of the articles of association. The Tribunal had taken note that the salary was being paid on account of the special qualifications, experience, aptitude and ability of Bhai Sardar Singh, and not because the family happened to hold shares of the company worth Rs. 10,000. These are significant findings, and de-link the enjoyment of the salary from the investment of the family funds in the purchase of the shares of the company. The Tribunal also found as a fact that Bhai Sardar Singh possessed long experience in building contract business and had, besides, stayed at Srinagar for three years at a stretch to look after the business of the company.
6. It may also be mentioned that only four of the five directors of the company were being allowed salaries. The salaries of the other directors were at lesser rates than that drawn by Bhai Sardar Singh. Even otherwise, it is clear that the amounts of salaries enjoyed by Bhai Sardar Singh were much larger than the investment of the family in the shares of the company. This tends to show that the salaries were more towards the services rendered and the expertise extended by the karta to the company as an individual, than as a return on that investment. It could not, therefore, be said that because of the holding of 100 shares in the company by the family the karta was being allowed salary.
7. The Supreme Court has, thus, in the case of Palaniappa Chettiar v. CIT [1968] 68 ITR 221, held that when there was no real connection between the investment of the joint family funds and the appointment of the karta as a director of the company, the remuneration paid to him could not be held as earned by any detriment to the joint family assets. The same was, therefore, not treated as the income of the HUF.
8. In view of the discussion above, we answer the question referred in the affirmative. There will be no order as to costs.
