Commissioner Of Income-Tax vs M.K. Swamy
2000 Latest Caselaw 990 Del

JUDGMENT

Arijit Pasayat, C.J.

1. 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 (in short the "Act"), the following questions have been referred for the opinion of this court. The dispute relates to the assessment years 1968-69, 1969-70, 1970-71, 1972-73 and 1973-74.

2. The 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 the commission and the interest thereon are to be assessed in the assessment of the Hindu undivided family of which the assessed was the karta, by reason that the commission was impressed with the character of the Hindu undivided family, and (not ?) in the assessment of the assessed as his individual income ?"

3. For the assessment years 1973-74, the 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 Hindu undivided family of which the assessed is a karta and not in the assessment of the assessed in his individual capacity ?"

4. The factual position which is almost undisputed is as follows :

The assessed was an individual who acquired 50 shares of Rs. 100 each of Goetze (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. The assessed, 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 December 21, 1960, entered into between the assessed and the company, the former was entitled to 1 per cent, of the net profit of the company as his remuneration. The said remuneration was enhanced to 2 per cent, of the net profit of the company by a subsequent agreement dated December 21, 1964. The agreement was further renewed by an agreement dated December 21, 1967, to be operative till December 20, 1969. In the meantime, the company had issued certain bonus shares and as a result of such issue, twenty-seven more shares were issued to the assessed and his total shareholding came to 77. By a declaration dated October 20, 1967, the assessed claimed to have thrown the said seventy-seven shares into the common hotchpotch of his Hindu undivided family (in short the "HUF"). On the basis of the said declaration, dividend income in respect of the shares was assessed in the hands of the Hindu undivided family. Though the assessed claimed that the commission and the director's fee received by him as managing director was the income of the Hindu undivided family of which he was the karta, the Assessing Officer rejected the claim. He took the view that the assessed became a director of the company only because of his personal qualification and experience and that the ownership of fifty shares had nothing to do with his appointment as a director. It was only a qualification but not the sole one. The assessed preferred appeals before the Appellate Assistant Commissioner of Income-tax (in short the "AAC"). The Appellate Assistant Commissioner upheld the views of the Assessing Officer. The 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 a 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, the Accountant Member was of the view that the income belonged to the Hindu undivided family. The matter was referred to a Third Member, who concurred with the views of the Accountant Member. Accordingly, by a majority decision, the claim of the assessed was accepted. For the subsequent years, i.e., 1972-73 and 1973-74, the earlier view of the Tribunal rendered by the majority was followed. On being moved, references have been made as aforesaid.

5. According to learned counsel for the Revenue, the basic feature of the income accruing to an individual who may be the karta of the Hindu undivided family 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 Hindu undivided family. In the facts of the present case, it was submitted that there was no nexus between the investment purportedly made by the Hindu undivided family in the shares and the income earned by the assessed by way of director's fee and commission, etc.

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

7. In Raj Kumar Singh Hukam Chandji v. CIT , 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 Hindu undivided family of which he is a 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 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. Such principles were also stated in similar lines in Dhanwatey (V.D.) v. CIT .

8. As the factual position highlighted above goes to show, the original investment in the shares came out of the individual funds of the assessed. 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 Hindu undivided family.

9. On the contrary, subsequently, the individual funds were impressed with the characteristic of the joint family property by the process of blending and throwing into the common hotchpotch. That in essence did not change the essential characteristic attached to the directorship of the asses-see. 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 shares worth Rs. 5,000 would have become a director of the company. Factually, that is not so. In other words, as observed by the apex court in, Raj Kumar Singh Hukam Chandji v. CIT [1970] 78 ITR 33 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. The above being the factual position, the Tribunal was not justified in holding that the income in question was assessable in the hands of the Hindu undivided family. The answer, therefore, to both the questions as set out above, is in the negative, in favor of the Revenue and against the assessed. Reference stands disposed of accordingly.