Bhagwant P. Sulakhe Vs. Digambak Gopal Sulakh and OBS [1985] INSC 215 (30 September 1985)
SEN, AMARENDRA NATH (J) SEN, AMARENDRA NATH (J) BHAGWATI, P.N. (CJ) MADON, D.P.
CITATION: 1986 AIR 79 1985 SCR Supl. (3) 169 1986 SCC (1) 366 1985 SCALE (2)819
ACT:
Joint family property, character of - When lt changes ether by an unilateral act it is open to any member of the joint family to convert any joint family property into his personal property - Partnership firm formed out of joint family funds and managing agency agreement entered into by such a partnership firm with another company - Commission received by the co-sharers of the point family in terms of the managing agency agreement and the remuneration received by them as the managing director treated as the joint family property for all purposes - Whether one of the co-sharers by a simple letter claim the commission remuneration received by him as his personal property till the joint family is disrupted - Position of managing director and the managing agent, explained.
HEADNOTE:
One Pandarinath Martand Sulakhe died leaving behind him his sons Vishwanath, Gopal, Govind and Bhagwant and considerable properties. Vishwanath died in 1910 leaving behind his son Dattatraya, Govind, one of the brothers who constituted a pint family after the death of their father Pandarinath Sulakhe, separated from the joint family in 1914 taking his share of the family properties. However, the other two brothers along with the son of Vishwanath continued to remain pint and lived as members of the joint family till 8.12.1941 on which date Bhagwant intimated Dattatraya son of Vishwanath his intention to cause severance of the point family status.
Prior to it, in the year 1922, a Public Limited Company named Lokmanya Mills Ltd. was intended to be floated and with that in view Dattatraya and Bhagwant entered into a partnership under the name and style of M/s. Sulakhe and Co.
with four outsiders, as per the Partnership Agreement dated 3rd January, 1923. me said Partnership firm Sulakhe and Co.
entered into a Managing Agency agreement on 5.2.1923 with the said Lokmanya Mills Company Ltd. The said agreement was to expire after 35 years. The mill actually went into production in the year 1938. on the basis of the managing agency agreement between the company 170 and the firm Sulakhe & Co., Dattatraya acted as the managing agent upto 1935 and thereafter Bhagwant became the managing agent. After Bhagwant's appointment as managing agent, Dattatraya was appointed as the Director of the company.
At the time when the company was incorporated and its articles were adopted and also at the time when the company entered into the managing agency agreement with Sulakhe and Co. and when the deed of partnership of the firm was executed Bhagwant and Dattatraya being members of the joint family, all the 325 shares which was initially purchased in the company - 200 in the name of Dattatraya and 125 in the name of Bhagwant - plus the 83 further shares - 79 in the name of Bhagwant and 4 in the name of Gopal - were paid for by the joint family out of the joint family funds.
Therefore, the entire amount of remuneration which was received by Dattatraya and Bhagwant not only on account of their shares of commission under the managing agency agreement on the basis of the partnership deed but also on account of the Director's fees paid to them and also on account of the salary paid to Dattatraya who acted as the managing agent of the company till 1935, was treated as joint family property. Even after Bhagwant took over as the managing agent in 1935, the position continued to be the same and the remuneration received by him formed part of the joint family income till the dispute raised by him by his letter dated 15th July, 1941. All monies received by Bhagwant and Dattatraya from the company were not only treated as joint family property, but also were so entered in the books of account of joint family and were so shown in the income tax returns.
However by his letter dated 15th July, 1941 Bhagwant informed Dattatraya that the remuneration received by him as the managing agent of the company on the basis of the managing agency agreement, fees received by him as the director of the company and his income from his profession as a lawyer were his personal income and should be treated as such. He made it clear that he will not in future put any of these incomes into the hotch pot of the joint family. By another letter dated 8.12.1941 Bhagwant intimated his intention to cause severance of the joint family status.
Since Dattatraya did not accept the claim of Bhagwant for treating the said amount as the personal property. Bhagwant filed a suit No. 166/43 in the original side of the Bombay High Court laying claim to the said amounts. In the meantime Gopal and Dattatraya filed two suits in the Civil Court against the Company and Bhagwant for the payment of the sum of money credited to the 171 joint family in the books of the parties and as a result thereof A most of the joint family properties came to be divided amongst the parties in accordance with their respective shares, except the dispute raised in the suit in the original side of the High Court.
During the pendency of the said suit the managing agency agreement had come to an end by virtue of the provisions contained in section 87 (A) (2) of the Companies Act, in as much as though the Board of Directors of the company had passed a resolution on 28.6.56 for the renewal of the managing agency agreement, no action was taken by SuLakhe & Co. to get the Managing Agency Agreement for a further term after 1957 extended. On the other hand, the company amended its articles of association and proceeded to appoint Bhagwant as its managing Director and neither his appointment nor the validity of the amendment of articles of association was objected to by either Sulakhe & Co. or any of the co-sharers forming part of the partnership firm. The trial Judge accepted the claims of Bhagwant and decreed the suit in his favour and made Gopal and Dattatraya accountable in respect of the joint family business. The High Court in appeal held that the income received by Bhagwant as managing agent and managing Director of the company could not be considered to be the personal property of Bhagwant and reversed the decision of the trial Judge in this respect and also on various other claims to cash etc. Hence the appeals by certificate under Article 133 (1) (a) as it stood before the Constitution (Thirtieth) Amendment Act, 1972.
Allowing the appeals in part and passing a final decree in terms clarified, the Court.
^
HELD : 1.1 The character of any joint family property does not change with the severance of the status of the joint family and a joint family property continues to retain its joint family-character so long as the joint family property is in existence and is not partitioned amongst the co-sharers. By an unilateral act it is not open to any member of the joint family to convert any joint family property into his personal property. [194 B-C]
1.2 The agreement of partnership clearly indicates that Bhagwant and Dattatraya became members of the firm M/s.
SuLakhe & Co- which Was appointed as the managing agent of the company, on the basis of the managing agency agreement, representing the joint family and for the benefit of the joint family. Their 172 interest in the partnership firm and managing agency was a part of joint family assets and whatever income was earned by them on the basis of the managing agency agreement belongs to the joint family and formed part of the joint family property. The same position must necessarily continue in the eye of law so long as the partnership agreement and the managing agency agreement continued. [192 G-H; 193 A-D]
1.3 By seeking to bring about a severance in the status of the joint family, one of the co-sharers cannot deprive the joint family of this property and the income derived on the basis of the managing agency agreement continues to remain the property of the joint family so long as the joint family asset is not partitioned and otherwise continues to remain in existence.
In the facts and circumstances of the case, the entire income arising out of the managing agency agreement and accruing to the two members of the family, namely, Bhagwant and Dattatraya who might have rendered the services had been earned for and on behalf of the family and as representatives of the point family. Dattatraya had continued as the managing agent for a number of years and there had been no question of apportionment of any income derived by him as his remunerations for the services rendered by him as managing agent. Therefore, Bhagwant cannot lay any claim for retaining any part of the remuneration received by him from the company for the services rendered by him. [193 D-E; 194 A]
2.1 In Raj Kumar Singh Hukum Chandji's case, [1971] S.C.R. 748, the Supreme Court held that the broader principle that emerges 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 sore 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. The legal principle enunciated therein for determining 173 the true nature and character of the remuneration received by any A member of the joint family equally applies in deciding the nature and character of the remuneration received by the Managing Director in the instant case. [195 C-D; 196 C-E; 197 A-B]
2.2 The position of the Managing Director is entirely different from the position of the managing agent on the basis of the managing agency agreement between the partnership firm of Sulakhe & Co. and the position of the Managing Director stands entirely on a different footing. At the time when Bhagwant was appointed the Managing Director of the company on 19.10.1957, with effect from 16.1.1957, there was complete disruption of the joint family and there was no joint family in existence. Further inspite of the Board of Director's resolution dated 28.6.1956 for the renewal of the managing agency agreement as required by section 87 A (2) of the Companies Act, no action was taken by the firm of sulakhe Co. or any partner thereof for obtaining renewal of the managing agency agreement for a further term after 1957. On the other hand when the company had amended its articles of association and had proceeded to appoint Bhagwant as the Managing Director, there was no challenge to them either by any partner of the firm of Sulakhe & Co. which hat been appointed as the managing agent of the company or by any member of the joint family. Is the managing agency agreement had ceased to exist at the time Bhagwant was appointed the Managing Director of the company and as at that time there was no joint family of Bhagwant and the other co-sharers in existence, Bhagwant cannot be said to have been appointed as the Managing Director of the company either because of the managing agency agreement or because of his being a member of the joint family. The facts and circumstances make it clear that the partnership agreement or the managing agency agreement had no relevance to the appointment of Bhagwant as the Managing Director of the Company. In the said circumstances, (i) the remuneration received by Bhagwant as Managing Director of the company from the company is his personal property ant cannot be considered to be the income of the joint family; (ii) the appointment of Bhagwant as Managing Director, at a time when there was complete disruption of the joint family and the members of the family were fighting in Court cannot be considered to be by way of any return on the investment mate by the Joint family; aud (iii) Bhagwant was appointed as the Managing Director by the company for services to be rendered by him, as the company might have been impressed by his performance as the managing agent for a number of years.
Though undoubtedly Bhagwant acted as the managing agent for ant on behalf of the joint family and for 174 benefit of the Joint family, yet what must have weighed with the company is the kind of services rendered by him to the company. The company was concerned with his services and not with the question whether he was rendering the services for and on behalf of the family. The remuneration which the company agreed to pay to Bhagwant for acting as the Managing Director was for the services to be rendered by him. [194 ;
195 A-B; 196 G] Raj kumar Singh Hukum Chandji v. Commissioner of Income Tax, Madhya Pradesh [1971] 1 S.C.B. 748 applied.
2.3 From the materials on record, it is clear that there can also be no question of Bhagwant being a trustee or acting as the trustee for the benefit of the joint family in relation to his appointment as the Managing Director of the company. The managing agency of the company was that of the partnership firm in which the four outside members with a majority of shares in the partnership were interested and the managing agency firm cannot therefore, be considered to be an asset of the joint family. It was the interest of Dattatraya and Bhagwant in the managing agency firm on the basis of their shares in the partnership which belonged to the joint family and the managing agency was an agreement between the company and the partnership firm. The effect of not renewing the agreement was that the interest of the partnership firm of Sulakhe & Co. in the company as the managing agent thereof with all the rights and privileges on the basis of the said agreement came to an end. With the termination of the managing agency agreement the interest of the joint family in the managing agency on the footing that two of the members of the joint family, namely, Dattatraya and Bhagwant were as partners of the firm associated with the managing agency and were acting as the managing agent on the basis of the partnership agreement and the managing agency agreement also ceased. [197 C-G; 198 G-H]
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 2622 & 2622A of 1969.
From the Judgment and Decree dated 18/19/20/25/29.9.1967 and 9.10.1967 of the Bombay High Court in First Appeal Nos. 278 and 279 of 1969.
V.M. Tarkunde, Dr. Y.S. Chitale, Mukul Mudgal, Mrs. M. Karanjawala and D.N. Mishra for the Appellant.
M.C. Bhandare, D.R. Dhanuka, Mrs. Rani Chhabra K.H. Kapadia and G.B. Sathe for the Respondents.
175 The Judgment of the Court was delivered by A.N. SEN, J. This is an unfortunate litigation between near relations and this litigation between the parties is now going on for over four decades.
These two appeals have been filed with the certificate granted by the High Court against the judgment of the High Court by the plaintiff in the suit instituted by him for partition of joint family properties, for accounts and other reliefs mentioned in the plaint.
By a common judgment delivered by the High Court in two separate appeals filed by the defendants in the suit against the judgment of the Trial Court., the High Court has substantially reversed the judgment of Trial Court.
The facts of the case have been fully set out in the judgment of the Trial Court and also in the judgment of the High Court. We shall briefly indicate the facts material for the purpose of disposal of these two appeals. As the High Court disposed of both the appeals by one common judgment and the two appeals which have been preferred against the same judgment have been heard together, this judgment will dispose of both the appeals.
One Pandarinath Martand Sulakhe died leaving behind him his sons Viswanath, Gopal, Govind and Bhagwant and considerable properties. The properties left by him included agricultural lands, a number of houses in Barshi and three shops. Of the three shops one was a Sharafi shop at Barshi, another cloth shop at Barshi and the other a commission Agency and Sarafi shop at Bombay. Business in all these three shops was carried on in the name of P.N. Sulakhe. Of the four sons Vishwanath died in 1910 leaving behind him his son Dattatraya who happens to be the second defendant in the suit. Govind, one of the brothers who constituted a joint family after the death of their father Pandarinath Sulakhe separated from the joint family in 1914 taking his share of the family properties. Though Govind separated in 1914, the other brothers and the son of Vishwanath continued to remain joint and lived as members of the joint family. Bhagwant who filed a suit for partition as the plaintiff was the youngest of the four brothers. He graduated in law in the year 1914 and commenced practice as a lawyer at about that time.
176 In 1922, a public limited company named Lokmanya Mills Ltd. (hereinafter referred to as the Company) was intended to be floated and with that end in view, the defendant No. 2 Dattatraya and the plaintiff Bhagwant entered into a partnership under the name and style of M/s. Sulakhe & Co.
with four outsiders. Managing agency agreement between the company and the partnership firm of Sulakhe & Company was executed. The mill actually went into production in 1938. On the basis of the managing agency agreement between the company and the firm of Sulakhe & Co. the defendant No. 2 Dattatraya acted as the managing agent upto 1935 and thereafter the plaintiff Bhagwant, became the managing agent. Sometime after the plaintiff Bhagwant had been appointed the managing agent, the defendant No. 2 Dattatraya was appointed as the Director of the Company. It appears that in the year 1935, a new Adat shop had been started at Barshi. All the shops were run in the name of P.N. Sulakhe.
It is not in dispute that all the shops were joint family businesses. It is also not in dispute that the remuneration paid to the defendant No. 2 and also the plaintiff Bhagwant as managing agent and also the amount of commission falling into the shares of defendant No. 2 Dattatraya and the plaintiff Bhagwant out of the commission earned by the managing agency firm were treated as joint family properties and were shown in the point family books so long as disputes between the parties had not arisen. During the period when there were no disputes between the parties, the Director's fees paid to defendant No. 2 Dattatraya and the plaintiff Bhagwant were treated as income of the point family and even the professional h income of the plaintiff Bhagwant earned by him as a lawyer was also thrown into the joint family hotch-pot and Was treated as joint family income. In the income-tax returns filed on behalf of the joint family, all these amounts were shown as income cf the joint family. It appears that everything did not go well with the members of the point family and disputes arose between the parties soon after the commencement of the second world war. The plaintiff Bhagwant by his letter dated 15th July, 1941 addressed to the defendant No. 2 Dattatraya informed him that the remuneration received by him as the managing agent of the company on the basis of the managing agency agreement, fees received by him as the director of the company and his income from his profession as lawyer were his personal income and should be treated as such. By this letter, he made it clear that he was not prepared to throw any of these incomes into the point family hotch-pot and he asked the defendant No. 2 Dattatraya that all these amounts should be shown as his separate income for the purposes of income tax and should be credited to his personal 177 Khata in Sarafi shop account. Disputes and differences between the parties became more acute and the plaintiff on 8.12.1941 intimated to the defendant No. 2 Dattatraya his intention to cause severance of the joint family status.
Thereafter attempts were made to divide the properties amicably between the parties without success. The plaintiff Bhagwant claimed that the remunerations paid to him by the company as managing agent, the fees paid to him as director of the company and his income from his profession as a lawyer were his personal income and as such his personal property. The defendants did not accept the claim of the plaintiff Bhagwant that the remuneration paid to him as managing agent by the company and the fees paid to him as the director of the company, could be his personal income and the defendants claimed that all such amounts received by him belonged to the joint family and formed part of the joint family properties. Ultimately Bhagwant filed a suit being suit No. 166/43 in the original side of the High Court in Bombay. In this suit Gopal was the first defendant and Dattatraya was the second defendant and the suit was filed in the original side of the Bombay High Court on the basis that the Adat Shop and Sarafi Shop were situated within the original jurisdiction of the Bombay High Court. In this suit, Bhagwant the plaintiff did not made any reference to the managing agency of the company in the plaint and he claimed partition of the joint family shares and moveable and immovable properties mentioned in the plaint as belonging to the joint family, seeking to reserve his right under 0. 2, rule 2 of the Code of Civil Procedure to file a suit for partition of the joint family properties situated at Barshi. The plaintiff Bhagwant in this suit claimed various other reliefs. He prayed for a direction that the immovable properties and the business at Bombay should be ordered to be partitioned under the directions of the Court, that the joint family firms should be wound up that the sum of Rs. 6843-36 claimed by him as his personal Income as a lawyer from his profession from 1940 should be awarded to him with interest at 12% interest on the same and he also claimed as consequential relief that the defendants should be ordered to account for the profits earned by them from the joint family business from the date of severance and also of the income derived by them from immoveable properties belonging to the joint family. In the suit Govind as defendant No. 1 and Dattatraya as defendant No. 2 were impleaded and no other members of their branches were made parties to the suit. On the death of defendant No. 1 Gopal during the pendency of the suit his five sons were brought on record as his heirs and legal representatives. The defendants resisted the suit of the plaintiff on 178 various grounds, mainly however on the ground that the plaintiff had asked for partition only of some of the joint family properties without including in the suit various other joint family properties, particularly the shares and interest of the joint family in the company. The defendants contended that the plaintiff was bound to include in the suit all the joint family properties which also comprised all the interests of the joint family in the company and various other immovable properties in the possession of the plaintiff. It may be noted that defendant No. l Gopal and the defendant No. 2 Dattatraya filed two suits in the Court of Civil Judge against the company and the plaintiff for payment of the sum of money credited to the joint family in the books of the company in accordance with the respective shares of the parties. In the suits various proceedings were taken and various orders including the appointment of the Court receiver for all the properties of the joint family were passed from time to time. It does not become necessary for us to refer to these proceedings at any length as in the present appeals these questions are no longer germane. It appears that as a result of the various proceedings in the suit most of the joint family properties came to be divided amongst the parties in accordance with their respective shares and the disputes between the parties now centre on the following questions :-
1. Whether the shares in the company standing in the names of the various members of the family are joint family properties?
2. Whether the commission received by the two members of the family namely, defendant No. 2 Dattatraya and plaintiff Bhagwant from the managing agency firm in respect of their shares in the firm out of the total commission paid by the company to the managing agency firm belongs to the joint family?
3. Whether the remuneration received by the plaintiff Bhagwant from the company as managing agent on the basis of the managing agency agreement with the company is the personal property of the plaintiff or whether the same belongs to the joint family?
4. Whether the remunerations paid to the plaintiff as the managing director of the company is his personal income or is the property of the joint family? 179
5. Whether there was any amount in cash in Mahalaxmi room belonging to the family and if so, how much?
6. Whether there were any ornaments and jewellary belonging to the joint family? If SO, in whose possession and custody are such ornaments lying and what is the value of such ornaments? It is to be noted that during the pendency of the proceedings in the Court relating to partition of the joint family properties the managing agency agreement had come to an end and it has also become inoperative by virtue of the provisions of law. The plaintiff Bhagwant was the managing agent on the basis of the managing agency agreement and thereafter he had been appointed ac the managing director of the company. The learned trial Judge on the question of the remuneration paid to the plaintiff as managing agent on the basis of the managing agency agreement and the fees paid to him as the director of the company has held in favour of the plaintiff that these are the personal incomes of the plaintiff and do not belong to the joint family. The learned trial Judge also held in favour of the plaintiff on the question of cash money belonging to the joint family found in the Mahalaxmi room and also on the question of accountability of the defendants in respect of the joint family business. The High Court in appeal has held that the income received by the plaintiff as managing agent and as Managing director of the company could not be considered to be the personal property of the plaintiff and they belonged to the joint family and the High Court has reversed the decision of the trial Judge on this question. On various other questions also, the High Court has held in favour of the defendants reversing the decision of the Trial Court.
The correctness of the High Court judgment is questioned by the plaintiff in the appeals.
The principal controversy between the parties relates to the question whether the remuneration paid to the plaintiff Bhagwant by the company as the Managing Agent and also as the Managing Director is his personal property or whether the sane forms as part of the joint family property.
The contention of the plaintiff-appellant Bhagwant is that the remuneration received by him for acting as Managing Agent and also as Managing Director of the company is his personal income and cannot be considered to belong to the joint family, whereas it is the case of the defendant No. 2 Dattatraya and the heirs of the Defendant No. 1 Gopal and that all such remuneration received by the plaintiff 180 must belong to the joint family and must be held to constitute part of the joint family properties. They further contend that the shares in the company subsequently purchased by the members of the plaintiff's family must also be held to belong to the joint family. As this happens to be the most important question which has been urged at length before us, we propose to deal with this question in the first place. In our view it will be appropriate to consider this question under two separate heads, namely, (1) the remuneration received by the plaintiff Bhagwant as managing agent and (2) remunerations received by him as managing director. We first propose to take up the question whether the remuneration received by the plaintiff from the company as managing agent, is his personal income or the same constitutes a part of the joint family property.
For a proper appreciation of this question it is necessary to consider some broad facts which are not in serious dispute.
A partnership agreement was entered into on the 3rd of January, 1923 between defendant No. 2 Dattatraya, plaintiff Bhagwant, one Ramchandra Moreshwar Sane, one Moolchand Jotiram Baldote, one Nemchand Shivram Baldote and one Ganoba Andoba Gavane to start a mill by the name 'The Lokmanya Mills Barso Limited' as promoters and agents of the said mills on terms and conditions set out in the deed of partnership dated 3rd January, 1923. This deed of partnership which is not in dispute and which has been exhibited in the suit provides :- "An agreement dated 3rd of the month of January, 1923. We, Dattatraya Vishwanath Sulakhe, Caste Brahmin, aged 37, profession trader, resident of Barsi and Bhagwant Pandharinath Sulakhe, caste Brahmin, age 33, profession pleader, resident of Barsi, and Ramchandra Moreshwar Sane, caste Brahmin, age 64 profession pleader, resident of Barsi and Moolchand Jotiram Baldote, Gaste Marwari, resident of Barsi age 48, profession trade, and Nemchand Shivaram Baldote, caste Marwari, age 39, profession trade, resident of Barsi, and Ganoba Andoba Gavane, caste Maratha, age 58 profession agriculturist resident of Pangaon, Taluka Barsi, Distt. Sholapur, all of us make an agreement as follows :- We all of us have agreed and decided between us on 29th November, 1922 to start a mill by name 'The 181 Lokamanya Mills Barsi Limited'. The following are the terms of agreement, that we have agreed to, between us all as the promoters agents of the Mills.
1. The agency firm should be named as 'Sulakhe & Co.' and the agreement of this firm are to be in force and existence for the period of 35 years from the date of registration of the said company.
2. Messers. Dattatraya, Vishwanath Sulakhe and Bhagwant Pandharinath Sulakhe should jointly contribute towards the purchase of shares of the value of Rs.40,625 (forty thousand six hundred and twenty five). Mr. Moolchand Jotiram should purchase in his name shares of a value of Rs.25,000 (twenty five thousand), Namchand Shivram should purchase in his name shares of the value of Rs.9375 (nine thousand three hundred seventy five) and Ganoba Andoba Gavane should purchase in his name shares of the value of Rs.25,000 (twenty five thousand) and Ramchandra Moreshwar Sane should purchase in his name share of the value of Rs.3000 (Rupees three thousand). The above named persons, or in case of their death, or if they become incapable on account of some illness or if they have been unable to purchase the said shares or have been unable to pay further instalments after purchase of the said shares on account of some difficulty, their heirs should as stated above purchase the shares or pay the amount of further instalments.
3. After the shares are purchased as stated in the foregoing clause, the agents are to get 10% commission on the net profit earned by the Lokamanya Mills Barsi Limited. Out of this 10% commission 1/1/2% amount is to be paid to a committee appointed in that behalf for the purpose of spending that amount over public charitable purposes and the remaining 8/1/2% commission is agreed to be distributed as follows:-
1. Messrs D.V.Sulakhe & B.P. Sulakhe to get 3/1/4%
2. Moolchand Jotiram - 2%
3. Ganoba Andoba Gavane - 2% 182
4. Namchand Shivaram -3/4%
5. Ramchandra Moreshwar Sane -1/2% The total amount of 8/1/2% is to be thus distributed.
4. The amount of profits is to be distributed as stated in the foregoing clause, after it has been received by the Managing Agents from the company.
If any partner or his heirs had not purchased the shares originally or not paid amount of further instalments after allotment on account of some inability stated in the last foregoing clause 2, he will lose his share in the agency firm and his share is to be distributed among the remaining partners in proportion to the capital contributed by each of them. The partners must keep in tact their shares for the period of five years from the date of allotment. The partners have no right to dispose of or mortgage their share within that period of five years. If any of the partners fails to do so, he stands to lose his interest in the partnership.
5. The agents firm is entitled to receive 2-1/2% commission on the amounts of expenditure which the company may incur towards the construction of buildings, purchase of machinery and other necessaries, purchase of lands and other materials. Out of the amounts so received, an amount of 1-1/2% is to be paid towards public charitable purposes and the remaining amount is to be distributed among the partners in proportion to their shares described above. This amount is to be received in the first instance by the managing agents, and after setting a part the amount of charity, he has to distribute the balance amongst the partners in proportion of their respective shares.
6. All the responsibility of all work of whatever kind to be performed by the managing agents firm such as, raising of capital of the said mill running of the mill, keeping of accounts, purchase of land, purchase of machinery, appointing and removing of servants, solicitors, auditors, banker, agents, brokers, and underwriters to keep accounts and prepare the reports 183 of the company and do all such other as the managing agents are required to do shall be on the managing agent Mr. D.V. Sulakhe or his family.
His family means the joint family of three persons viz: D.V. Sulakhe, B.P. Sulakhe and Gopal Pandharinath Sulakhe. The other partners have nothing to do with the above work and they have no right to interfere with the power of the managing agents. The company will' hold only the managing agent responsible for his faults and the other partners are not to be responsible to the company.
7. The preliminary expenses of the mill will be about Rs.8000 (eight thousand). This amount is to be paid to the managing agent Mr. D.V. Sulakhe, by all the partners except Mr.sane, in proportion to their respective shares. The managing agent is to return this amount of expenditure to the partners form the proceeds of the shares of the company that may be collected after its registration.
8. Some one person from among the family of Sulakhe described above shall always be an Ex- officio Director. some other person from amongst the agency firm, or some other person from outside elected by majority, and who is not in the agency firm shall be a special director, but he shall not be in office permanently. The term of his office will be as of the other directors and he shall be eligible for re-election. Some person from the firm or some one from outside according to the opinion of the firm shall always be among the directors.
9. No partner of the agent's firm, shall except with the leave of the directors, enter in any other agency firm of a mill of the like tenure and situate within the limits of Barsi Taluka. If any one of them does so enter he will stand to lose his share in this partnership firm of this mill.
10. A partner of the agent's firm shall be entitled as any other outsider to do business with the company and enter into private transactions on reasonable terms and to take commission from the company.
184
11. From the date the share, of the value of Rs.7,00,000 (seven lacs) are sold the managing agent Mr. Sulakhe shall get a remuneration (salary) of Rs.600 per month. The other partners or the charity fund shall have no interest whatsoever therein. From the time when products shall be begun to be manufactured in the mill, the managing agents are to receive a remuneration of Rs.1000 (salary) every month. Out of that amount Rs.600 are to be taken by the managing agent every month and the remaining amount of Rs.400 (Four hundred) is to be divided among all the partners of the agency firm including Sulakhe, in proportion to their respective shares (till the profits of the company come to 10% by the way of divident) so that the partners may get an interest over their amounts at the rate of 5% per annum, but from and after the date when the dividend of the company shall be distributed at the rate of 10% on the amount of shares, the other partners shall have no right over the said sum of Rs.400 (Four hundred) to be received every month, and this amount is to be taken by the managing agent Mr. Sulakhe as the increase in his remuneration (salary). After that period other partners will have no claim whatever against the said amount of Rs.400.
12. The rights of the partners in the agency firm are to pass to their respective lineal descendants or to their respective assignees after the expiration of the period of 5 years allotment. The right of a partner shall go to other persons by partition among his family or by heirship and if such persons to whom the rights of a partner in the agency firm are to pass, are more than one, they shall unanimously elect some one from among themselves for the purpose. If there is disagreement between them the board of directors shall choose some such person from among them and the person so chosen shall take interest in the agency firm. The company or the managing agents shall not take cognizance of the other sub- partners.
The terms of agreement between us all are as above, and for that this agreement (in writing), is prepared and is signed by us all and a copy of this agreement i.e. a counter part of it is delivered to each of us 185 all. This agreement made and signed on the 3rd of the A month of January in the year of 1923, and it is in the handwriting of Sarbootam Annaji Madhekar, a resident of Barshi .
Sd/- Datartraya Vishwanath Sulakhe d/- Bhagwant Pandharinath Sulakhe Sd/- Ramchandra Moreshwar Sane Sd/- Molchand Jotiram Marwadi Nemchand Shivaram Marwadi Ganoba Andoba Gavane.
The said partnership firm of M/s. Sulakhe & Co.
consisting of the aforesaid six partners entered into a managing agency agreement on 5.2.1923 with the company. Relevant provisions of the managing agency agreement dated 5.2.192% may be set out:
1. The Agents will faithfully and with best of their ability perform the offices of the Secretaries, Treasurers and Agents of the Company for purposes of carrying on the best advantage the business of the company so long as the company and the agents shall continue to carry on their respective business (unless prevented from so doing in manner hereinafter mentioned) at the remuneration upon the terms and subject to the conditions hereinafter particularly mentioned and described.
2. In consideration of the agreement hereinafter contained on the part of the Agents and in further consideration of the Agents having advanced the company - the Company hereby promise and agree with the Agents that the agent shall be the Secretaries, Treasurers and Agents of the Company for the period of 35 years from the date of these presents unless prevented from so doing in manner hereinafter mention ed PROVIDED ALWAYS AND IT IS HEREBY AGREED AND DECLARED that after the lapse of the said period of 35 years the Agents shall not be removed from the office as the Secretaries, Treasurers and Agents but shall carry on their respective business unless found guilty of fraud in the management of their duties as Secretaries, Treasurers and Agents of the Company.
186 Clause 2A. The Managing Agents shall not transfer or assign or cause to be transferred or assign the present Managing Agency Agreement of the Company their right, title and interest therein to any person or persons firm or Company during the continuation of the security created by the Indenture of Mortgage dated the 29th day of December 1950 without first obtaining the approval in writing of the corporation to any such transfer or assignment and the Company shall not cause or permit or suffer to be transferred or assigned the present Managing Agency Agreement of the Company or the right, title and interest of the Managing Agents therein to any other person or persons or firm or Company during the continuance of the said security without first obtaining the approval in writing of the Corporation to such transfer or assignment nor shall the Company appoint any other person or persons or firm or Company to be the Managing Agents of the company during the continuance of the said security without first obtaining the approval in writin of the Corporation to such appointment.
(Amended as per Special resolution No. 2 in Extra ordinary general meeting held on 18.3.1951)
2. A Commission at the rate of 10% per annum on the annual net profits of the said company after making all allowance and deductions from revenue for interest on loans and deposits and working expenses chargeable against profits without making any deductions for or in respect of interest on debentures Income Tax, Super Tax or any other tax based on profits or of any amount carried to insurance, reserve, depreciation or sinking fund or to any other special fund or in respect of any expenditure on capital amount or on the wages or remuneration which shall be payable to Bankers Auditor, Solicitors, Mukadams, Clerks, Brokers, Under writers or any other officers or employees who may be employed by the said firm for or on behalf of the Company or for carrying on and conducting the business of the Company and for any rent, cost of postage, telegram printing stationery or other expenses or travelling expenses incurred and to be paid by the said Company.
187 "The Company shall not pay and the Managing Agents shall not receive any commission during the pendency of the loan from Industrial Finance Corporation of India as provided above in Clause 3 without previous consent in writing of the Corporation unless the interest and instalment of principal sum due in any year as provided by the Indenture of mortgage dated the 29th December 1950 have been duly paid by the Company to the Corporation.
(Amended as per Special Resolution No.2 in Extra ordinary general meeting held on 18.3.1951.) Clause 4. The Agents are entitled to two and half percent commission on all sum or sums expended towards the purchase of the land, construction of the mill premises, including outhouses etc., the cost price of Machinery, appliances and initial stock in trade necessary in establishing and starting the mill.
But during the pendency at the said loan, provisions contained in clause 4 above relating to payment of commission to the Managing Agents on the Capital Expenditure shall remain suspended.
(Amended as per special Resolution No. 2, in extra ordinary general meeting held on 18.3.1951.)
5. Out of the Commission of 10 per cent and out of the amount of 2-1/2 per cent commission as stated above Agents will have to set apart for public charitable purposes 1-1/2 per cent of their gains.
The purpose shall be uplift of the masses in the Bombay Presidency, without any distinction of caste, creed or religion in matters social, educational, economic cr national as the committee of three persons, two of whom shall be unconnected with the firm of the Agency and one from the Agency firm. The first such members shall be N.C. Kelkar Esqr. B.A. LL.B. Editor of Kesari Poona.
M.R. Jayalkar Esqr. Bar-at-Law, Bombay and R.M. Sane Esqr. pleader Barsi.
6. On the death or retirement of any of the said members their place or places shall be filled in by the remaining members of the Committee, or if he or 188 they fail or neglect to make the appointment as aforesaid within a reasonable time, such appointment is to be made by the Board of Directors strictly conforming to the condition stated above that the majority of the committee should be independent and unconnected with the firm of the Agency.
7. The commission due to the Agency shall be payable yearly immediately when the accounts are made up.
8. After deducting the amount from the commission for public purposes as stated above the remaining amount will be received by Mr. D.V. Sulakhe and his successors and divided among the members of the firm as agreed upon between them.
9. The Directors are authorised to increase the amount of remuneration or the percentage of commission on profits or to allow any bonus if they think that the profits of the concern are encouraging enough to grant an increase.
Clause 9. The said clause shall remain modified to the extent that "so long as any moneys due to the Corporation under the Indenture of Mortgage dated 29th day of December 1950 remain unpaid, no payments what soever under this clause shall be made to the Managing Agent without first obtaining the approval in writing of the Corporation to such payment.
(Amended as per Special Resolution No. 2 in Extra ordinary general meeting held on 18.3.1951)
10. The remuneration of the Agents' firm shall be Rs.600 per month from the date of allotment and Rs.1000 per month from the date when products are begun to be manufactured and the said remuneration is always to be received from the Company by Mr. D.V. Sulakhe or his successors.
11. If the said firm or any member of the firm shall at any time hereinafter act as Mucadams or brokers of the Company or as selling agents of the Company's yarn or cloth or for purchase of other articles such as coal, wool machinery oil-seeds or other products or 189 other things required for the business of the Company they shall be paid such commission or additional remuneration as shall be agreed to between them and the directors.
The said clause shall remain modified to the extent that so long as any moneys due to the Corporation under the Indenture of Mortgage dated 29th day of December 1950 remain unpaid, no payments whatsoever under the clause shall be made to the Managing Agent without first obtaining the approval in writing of the Corporation to such payment." C (Amended as per special Resolution No. 2 in Extraordinary general meeting held on 18.3.1951)
12. Until the Company is registered all expenses of whatever nature of and incidental to the promotion thereof shall be defrayed in the first instance by the firm of Agency as agreed between them. The sum or sums os expended will be duly refunded to the aforesaid firm when the first call in respect of the subscribed shares of the Company is paid in and realized.
13. All work of whatsoever kind which is usually attended to or done by the managing agents in connection with the business of the Company by virtue of the Articles of Association of the Company such as raising the necessary capital, erection of the mill premises employment of staff, establishment of Agencies buying of raw materials, disposing of the finished products of the Mill, keeping regular accounts preparing the statutory reports &c. &c. will be attended to and all powers of the managing Agents shall be vasted in and exercised by Mr. D.V. Sulakhe alone or in case of his retirement or death by Mr. B.P. Sulakhe if he survives him, or by a person of the Sulakhe family nominated unanimously by all the surviving major male members of the family of Messrs. D.V.
Sulakhe, B.P. Sulakhe and Gopal P. Sulakhe and in case of disagreement between these members in nominating a member from the Sulakhe family, the board of directors will choose some one from the said Sulakhe family for acting as a Managing Agent on behalf of the firm. There will be no inter- 190 ference or obstruction from any other member of the Agency Firm who will have neither any voice nor control of any kind over the matters of management of the business of the company such as those enumerated above. All the responsibility with regard to such work lies solely and entirely on the said D.V. Sulakhe and his successor or successors as aforesaid.
14. me other partners of the Agency firm who have no right to take any part in the management of the Agency business or no right to interfere with such management will not be liable in any way whatsoever to the Company for any acts of commission or omission, misfeasance, malfeasance fraud, misappropriation or any other act or acts of the said D.V. Sulakhe and his successors. me company will look to and hold responsible the said D.V. Sulakhe and his successors aforesaid in respect of the management of the Agency business in all branches and in all its aspects.
15. Either D.V. Sulakhe or B.P. Sulakhe may act as Ex-officio Director and after them some person from the Sulakhe family shall be entitled to act as Ex officio Director and he will not be liable to retirement or he will not be removed from such office.
15A. The firm of Agency has always a right of appointing any one of them or outsider as a special Director and he will be liable to retire as other Directors, but he is eligible for re- election by the firm of Agency.
20. The shares of the profits of the Agency business to which each partner is entitled according to their mutual agreement will pass to their direct lineal descendants by way of an ancestral and hereditary right unless alienated or disposed of by such partner during his life time.
If the said share devolves on more than one of such lineal descendants by way of inheritance or otherwise they (they said descendants) should elect one of them to be the member of the firm on the-r behalf. If they cannot agree among themselves for the purpose of such election the Board of 191 Directors has the right to elect one of them to be their representative in the Agency Firm for receiving commission; neither the Board of Directors nor the Agents are bound to recognise the rights of the other heirs and legal representatives as aforesaid.
Two of the relevant Articles namely, Art. 113A and Art.
146 cf the Articles of Association may be noted. Art.113A reads:- M/s. D.V. Or B.P. Or Gopal P. Sulakhe or any other members of the Sulakhe family who may be chosen for that purpose in terms of the agency agreement shall be an ex-officio director of the company.
Agents firm have, however, subject to the terms of the agency agreement to appoint any other person whether a member of the firm or not, as a special director. The person appointed as special director as aforesaid shall after the lapse of one year, retire but be eligible for re-election.
Art. 146 of the Articles of Association provides as follows:- "The firm of M/s. Sulakhe & Co. and the partners or members for the time being constituting the said firm and their successors in business notwithstanding any change in the constitution or in the name or style of the said firm by the death, retirement or insolvancy of any member of the said firm shall be and they are hereby appointed the managing agency of the company for the period and upon the terms, provisions and conditions set out in the agreement referred to in article hereof. Such agreement may be modified in such manner as may be mutually agreed between the firm and the directors and the Board is hereby authorised to execute the said agreement on behalf of the company.
It has to be borne in mind that at the time when the company was incorporated and its articles were adopted and also at the time when the company entered into the managing agency agreement with Sulakhe & Co. and when the deed of partnership of the firm of Sulakhe & Co. was executed, the plaintiff Bhagwant and the defendant No. 2 Dattatraya were admittedly the members of the joint family and no disputed of any kind had arisen amongst the members of the joint family. It is not in dispute that 325 shares 192 which were Initially purchased in the company - 200 in the name of the defendant No. 2 Dattatraya and 125 in the name of the plaintiff Bhagwant were paid for by the joint family out of the joint family funds. It is also an admitted position that the entire amount of remuneration which was received by the defendant No. 2 Dattatraya and plaintiff Bhagwant not only on account of their shares of commission under the managing agency agreement on the basis of the partnership deed but also on account of the Directors' fees paid to them and also on account of the salary paid to defendant No.2 Dattatraya who acted as the managing agent on behalf of the firm was treated as joint family property.
Defendant No. 2 Dattatraya had continued to be the managing agent of the company till 1935. It is also not in dispute that when the plaintiff Bhagwant took over as the managing agent from defendant No. 2 Dattatraya in 1935, the position continued to be the same and the remuneration received by him formed part of the joint family income till the dispute raised by plaintiff Bhagwant by his letter dated 15th July, 1941 to the defendant No. 2 Dattatraya. The agreement of partnership clearly indicates that the plaintiff Bhagwant and the defendant No. 2 Dattatraya became members of the firm M/s. Sulakhe & Co. which was appointed the managing agent of the company on the basis of the managing agency agreement, representing the joint family and for the benefit of the joint family. Since the establishment of the partnership firm of Sulakhe & Co. On the 3rd day of January, 1923 and since this firm's appointment as the managing agent of the company under the managing agency agreement dated 5- 2-1923 till the dispute was raised by the plaintiff in July, 1941 this position appears to be accepted by all without any kind of reservation. All monies received by the plaintiff Bhagwant and defendant No. 2 Dattatraya from the company, were treated as joint family income , were entered in the books of account of joint family and were shown in income tax returns to be the income of the joint family.
The facts and circumstances of this Case clearly indicate that in the partnership agreement and the managing agency agreement in which the plaintiff Bhagwant and defendant No. 2 Dattatraya were parties, they had become parties on behalf of the joint family representing the joint family and the entire remuneration received by them, whether by way of commission or the directors' fees or by way of salary for having acted as the managing agent, was joint family income. On the materials on record we have no hesitation in coming to the conclusion that the plaintiff Bhagwant and the defendant No. 2 Dattatraya became the partners of Sulakhe & Co. which was appointed as the managing 193 agent of the company on the basis of the Managing Agency Agreement for the benefit of the joint family and their interest in the partnership firm and Managing Agency was a part of joint family assets and whatever income was earned either by the plaintiff Bhagwant or by the defendant No. 2 Dattatraya on the basis of the managing agency agreement belongs to the joint family and formed part of the joint family property. As the entire income coming in the hands of the plaintiff Bhagwant or defendant No. 2 Dattatraya on the basis of the partnership agreement and the managing agency agreement, whether on account of commission or by way of directors' fees or remuneration for acting as the managing agent, belonged to the joint family and formed part of the joint family property, the same position must necessarily continue in the eye of law so long as the partnership agreement and the managing agency agreement continued. The plaintiff by seeking to bring about a severance in the status of the joint family, cannot deprive the joint family of this property and the income derived on the basis of the managing agency agreement continues to remain the property of the joint family, so long as this pint family asset is not partitioned and otherwise continues to remain in existence. We have, therefore, no hesitation in holding that the remuneration received by the plaintiff Bhagwant from the company for acting as the managing agent on the basis of the managing agency agreement must necessarily be held to be the joint family property and the plaintiff Bhagwant cannot claim the same to be his personal property.
Mr. Tarkunde had addressed a novel and interesting argument that even if the Income derived by the plaintiff Bhagwant from the company by way of remuneration for acting as the managing agent can be considered to be the income of the joint family, there should be an apportionment of this income between the plaintiff and the joint family, as the plaintiff alone had rendered all services on behalf of the family and he should, therefore, be held entitled to retain a part thereof for himself for the services rendered by him.
This argument of Mr. Tarkunde sounds attractive and my raise an interesting question in an appropriate case. But in the facts and circumstances of this case and taking into consideration the true nature of the partnership and the Managing Agency Agreement and the conduct of the parties, we are of the opinion that there is no merit in the plaintiff's claim for retaining any part of the remuneration received by him from the company for the services rendered by him. The entire income arising out of the managing agency agreement and accruing 194 to the two members of the family, namely, the plaintiff Bhagwant and the defendant No. 2 Dattatraya who might have rendered the services, had been earned for and on behalf of the family and as representatives of the joint family. The defendant No. 2 Dattatraya had continued as the managing agent for a number of years and there has been no question of apportionment of any income derived by him as his remunerations for the services rendered by him as managing agent. The character of any joint family property does not change with the severance of the status of the joint family and a joint family property continues to retain its joint family character so long as the joint family property is in existence and is not partitioned amongst the cosharers. By an unilateral act it is not open to any member of the Joint Family to convert any joint family property into his personal property.
We now proceed to consider whether the remunerations received by the plaintiff Bhagwant from the company as the Managing Director of the Company belonged to the joint family or not. The position of the Managing Director is entirely different from the position of the Managing Agent on the basis of the Managing Agency Agreement between the firm of Sulakhe & Co. and the company and the position of the Managing Director stands entirely on a different footing. At the time the plaintiff was appointed the Managing Director of the company on 19.10.1957 with effect from 16th January, 1957, there was complete disruption of the joint family and there was no joint family in existence.
In fact at that point of time litigation between the parties was going on. By virtue of the incorporation of S. 87A in the Indian Companies Act by amendment in 1937 the duration of any Managing Agency Agreement was limited to a period of 20 years only at a time though on the expiry of the period of 20 years the Managing Agency Agreement could be renewed by virtue of the provisions contained in Sub-Sec. (2) of S. 87A of the Act. In view of the change brought about with regard to the duration of the Managing Agency Agreement at a time the Managing agency Agreement automatically came to an end on the expiry of the period of 20 years and though there was the provision with regard to the renewal of the Managing Agency Agreement it appears that the Managing Agency Agreement was not renewed. It appears that the Board of Directors of the Company had passed a resolution on 28.6.56 for the renewal of the Managing Agency Agreement. The Managing Agency Agreement was not ultimately renewed and it does not appear that any action was taken by the firm of Sulakhe & Co. Or any partner thereof for obtaining renewal of the Managing 195 Agency Agreement for a further term after 1957. On the other hand it appears that the company had amended its articles of association and had proceeded tc appoint the plaintiff Bhagwant as the Managing Director. It is significant to note that no partner of the firm of Sulakhe & Co. which had been appointed as the Managing Agent of the Company or no member of the joint family took any steps for challenging the validity of the amendment of the articles of association or the validity of the appointment of the plaintiff as the Managing Director of the Company.
Before we proceed to decide whether the remuneration received by the plaintiff as the Managing Director of the Company can be considered to be part of the joint family property, it will be appropriate to refer to a decision of this Court for proper appreciation of the legal position.
Though a number of decisions had been cited from the Bar, we do not consider it necessary to refer to all the decisions, as in our view the legal position has been very lucidly and clearly discussed in the case of Raj Kumar Singh Hukum Chandji v. Commissioner of Income-Tax Madhya Pradesh, [1971] 1 S.C.R. 748 by this Court after reviewing the earlier decisions on this question. After considering various earlier decisions, this Court at page 758-759 observed:- At first sight there appears to be conflict between the two lines of decisions namely Kalu Babu's case, Mathura Prasad's case; two Dhanwatey's cases and Krishna Iyer's case on one side Palaniappa Chettiar's case, Dakappa's case and D.C. Shah's case on the other. The line that demarcates these two lines of decisions is not very distinct but on a closer examination that line cane be located. In order to find out whether a given income is that of the person to whom it was purported to have been given or that of his family, several tests have been enumerated in the aforementioned decisions but none of them excepting Kalu Babu's case makes reference to the observations of Lord Summer in Gokal Chand's case that 'in considering whether gains are partible, there is no (' valid distinction between the direct use of the joint family funds and a sue which qualifies the member to make the gains by his own efforts.' We think that that principle is no more valid. The other tests enumerated are:
(1) Whether the income received by a co-parcener of a Hindu undivided family as remuneration had any real 196 connection with the investment of the joint family funds:
(2) Whether the income received was directly related to any utilization of family assets;
(3) Whether the family had suffered any detriment in the process of realization of the income; and (4) Whether the income was received with the aid and a
