Delhi High Court

Commissioner Of Income Tax vs Late M.K. Swamy, Through Lrs on 18 September, 2000

Equivalent citations: (2001) 164 CTR Del 472

Author: C Arijit Pasayat

JUDGMENT

Arijit Pasayat, C. J.

These five references at the instance of the revenue , involve identical issues and, therefore, are disposed of by the common judgment. On being moved under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as 'Act'), following questions have been referred for opinion of this court. Dispute relates to the assessment years 1968-69, 1969-70, 1970-71, 1972-73 and 1973-74.

Following question has been referred for the assessment years 1968-69, 1969-70, 1970-71 and 1972-73 :

"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that the income from commission and the interest thereon are to be assessed in the assessment of the HUF of which the assessee was the Karta, by reason that the commission was impressed with the character of the HUF, and in the assessment of the assessee as his individual income ?"

For the assessment year 1973-74 following question has been referred :

"Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the income from the commission, director's fee and interest thereon amounting to Rs. 1,80,000, Rs. 1,000 and Rs. 5,390, respectively, are to be assessed in the hands of the HUF of which the assessee is a Karta and not in the assessment of the assessee in his individual capacity ?"

2. Factual position which is almost undisputed is as follows :

Assessee was an individual who acquired 50 shares of Rs. 100 each of M/s Geotze (India) Ltd. in the year 1955. According to article 89 of the Articles of Association of the said company, qualification shares of the value of Rs. 5,000 were required to be possessed by a person in order to be eligible for appointment as a director of the company. Assessee who held the requisite number of shares was appointed as a director of the company in the year 1955. He drew salary as a director of the company from 1955 to 1960 which was assessed in his hands as his individual income. In December, 1960 he was appointed as managing director of the company. By virtue of an agreement dated 21-12-1960, entered into between the assessee and the company, former was entitled to 1 per cent of the net profit of the company as his remuneration. Said remuneration was enhanced to 2 per cent of the net profit of the company by a subsequent agreement dated 21-12-1964. Agreement was further renewed by an agreement dated 21-12-1967 to be operative till 20-12-1969. In the meantime, company had issued certain bonus shares and as a result of such issue, twenty-seven more shares were issued to the assessee and his total shareholding came to 77. By a declaration dated 20-10-1967, assessee claimed to have thrown the said seventy-seven shares into the common hotch potch of his HUF. On the basis of said declaration, dividend income in respect of the shares were assessed in the hands of the HUF. Though assessee claimed that the commission and the director's fee received by him as managing director was income of the HUF of which he was the Karta, assessing officer rejected the claim. He took the view that assessee became director of the company only because of his personal qualification and experience and that ownership of fifty shares had nothing to do with his appointment as a director. It was only a qualification but not the sole one. Assessee preferred appeals before the Appellate Assistant Commissioner. Appellate Assistant Commissioner upheld the views of the assessing officer. Matter was carried in appeal before the Tribunal. When the appeals relating to the years 1968-69, 1969-70, 1970-71 and 1972-73 came up before the Tribunal there was divergence of views between the Accountant Member and the Judicial Member. While the Judicial Member upheld the views of the assessing officer as well as the Appellate Assistant Commissioner. Accountant Member was of the view that the income belonged to the HUF. Matter was referred to a Third Member, who concurred with the views of the Accountant Member. Accordingly, by a majority decision, claim of assessee was accepted. For the subsequent years, i.e., 1972-73 and 1973-74, earlier view of the Tribunal rendered by majority was followed. On being moved references have been made as aforesaid.

3. According to learned counsel for the revenue the basic feature of the income accruing to an individual who may be Karta of the HUF has not been kept in view. The distinctive test is whether the remuneration received by an individual is because of compensation made for the services rendered in his individual capacity or as a return for the investment made by the HUF. In the facts of the present case it was submitted that there was no nexus between the investment purportedly made by the HUF in the shares and the income earned by the assessee by way of director's fee and commission, etc.

There is no appearance on behalf of the assessee in spite of notice.

4. In Raj Kumar Singh Hukam Chandji v. CIT (1970) 78 ITR 33 (SC), the relevant principles were succinctly stated by the Apex Court. It was observed that in determining whether the remuneration received by an individual is the income of the individual to whom it is purported to have been given or that of the HUF of which he is coparcener, the test 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 HUF 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 HUF. Such principles were also stated in similar lines in V.D. Dhanwatey v. CIT (1968) 68 ITR 365 (SC).

5. As the factual position highlighted above goes to show, original investment on shares came out of the individual funds of the assessee. He received remuneration after he became a director and subsequently as the managing director in his individual capacity. In other words, his directorship had nothing to do with any funds of the HUF. On the contrary, subsequently individual funds were impressed with characteristic of joint family property by the process of blending and throwing into the common hotch potch. That in essence did not change the essential characteristic attached to the directorship of the assessee. The fact that a qualification of holding shares worth Rs. 5,000 was prescribed by the articles of association, did not mean that every person who held shares worth of Rs. 5,000 was to automatically become a director. That was only one of the requirements ; otherwise every person who held shaves worth Rs. 5,000 would have become director of the company. Factually that is not so. In other words, as observed by the Apex Court in Raj Kumar Singh Hukam Chandji (supra) the payment was made as a compensation for the services rendered in his individual capacity. To put it differently, there was no real and sufficient connection between investment from the joint family funds, if any, and the remuneration paid to the individual. Above being the factual position, Tribunal was not justified in holding that the income in question was assessable in the hands of the HUF. The answer, therefore, to both the questions as set out above, is in the negative, in favour of the revenue and against the assessee.

Reference stands disposed of accordingly.