Commissioner of Income Tax, Gujarat-II vs Dineschandra Sumatilal

P.D. Desai, J.—The assessee in this case is the Hindu undivided family of which one Dineshchandra Sumatilal is the karta. The assessment

years involved are assessment years 1968-69 and 1969-70, the relevant previous years being calendar years 1967 and 1968.

Dineshchandra, the karta, is the son of one Sumatilal Maganlal. It appears that Sumatilal was the permanent director of Panalal Silk Mills Ltd.,

along with three other persons. The articles of association of the said mill company made a provision in article 99 relating to the vacancies to be

filled in the office of the permanent director. The aforesaid article 99, which is material, may be set out in extenso :

(a) If any of the said Narrottamdas Maganlal Shah, Sumatilal Maganlal Shah, Kantilal Maganlal Shah and Panalal Maganlal Shah dies whilst a

member of the company and holding not less than ten share in the company as aforesaid, one of his sons to be selected by agreement between his

sons or if he shall leave only one son, then such one son, shall be appointed as a permanent director in his place, and if his sons shall not agree

upon selecting one of themselves to take office in his place, then such one of his sons as may bed selected by the remaining permanent directors

shall be appointed a permanent director in his place.

(b) If any of the said Narottamdas Maganlal Shah, Sumatilal Maganlal Shah, Kantilal Maganlal Shah and Panalal Maganlal Shah shall die whilst

holding not less than ten shares in the company as aforesaid without a son but leaving a widow, then his widow shall be appointed a permanent

director in his place, and if he shall leave no widow, then his eldest daughter (if any) shall be appointed a permanent director in his place, and if he

shall leave neither any son, nor any widow nor any daughter then such person as he shall by deed or will or other testamentary writing appoint to

succeed his office, shall be appointed as a permanent director in his place.

(c) Where any person entitled to succeed to any of the above four permanent directors shall be under the age of 18 years his or her appointment

shall not take effect until he or she attains the age of 18 years.

(d) No person other than a male descendant of the late Maganlal Shah shall be appointed a permanent director under the power of appointment

given by the above sub-clause (b)"". Sumatilal Maganlal, who was the permanent director, died and the board of directors of the mill-company, at

its meeting held on March 15, 1967, passed the following resolution appointing Dineshchandra, the karta, as a permanent director of the company

in place of his father, late Sumatilal :

The board further noted with gratitude the services rendered by Shri Sumatilal Maganlal to the company right from its inception. The board has

decided to fill the vacancy thus caused by appointing Shri Dinesh Sumatilal Shah as a permanent director of the company in the place of late Shri

Sumatilal Maganlal.

Resolved and pursuant to the provisions contained in the articles of association and conveyed by the three sons of the deceased Shri Sumatilal

Maganlal suggesting the name of Shri Dinesh Sumatilal, the eldest son of the deceased, as a director which was approved by the board, Shri

Dinesh Sumatilal is hereby appointed as a permanent director of the company as from the 18th March 1967, and the same is hereby approved.

Further resolved that Shri Dinesh Sumatilal, a director of the company, be paid a remuneration on Rs. 1,000 (one thousand only) per mensem for

his full time service to the company.

It would thus appear that Dineshchandra was appointed a permanent director of the mill-company on and with effect from March 15, 1967, in

place of his father, Sumatilal, and that the company agreed to pay him remuneration of Rs. 1,000 per month ""for his full time service to the

company"". The explanatory statement u/s 173 of the Companies Act attached to the aforesaid resolution read as under :

Shri Dinesh Sumatilal Shah, a director of the company, holds a bachelor''s degree in science. He has many years'' experience in that art silk

industry. He has travelled abroad and acquired useful knowledge in the technique of manufacturing art silk fabrics. He also has good experience in

the processing work of art silk fabrics. In view of his wide experience and knowledge about the industry, the board has approved payment of Rs.

1,000 per mensem as remuneration. Shri Dinesh Sumatilal holds 53 ordinary shares of the company and, therefore, he is interested in the

resolution."" The explanatory statement makes it clear that Dineshchandra held a bachelor''s degree in science, that he had many years'' experience

in the art silk industry, that he had travelled abroad and acquired useful knowledge in the technique of manufacturing art silk fabrics, that he had

good experience in the processing work of art silk fabrics and that in view of his wide experience and knowledge with regard to the industry, the

board of directors had approved the payment of Rs. 1,000 per month as remuneration to him.

In the course of proceedings for assessment to Income Tax of the Hindu undivided family the question arose as to whether the remuneration

received by Dineshchandra for the services rendered to the mill-company was liable to be taxed in the hands of the Hindu undivided family. It was

contended on behalf of the assessee that the remuneration received by Dineshchandra was in consideration of the services rendered by him to the

mill-company and that it was his individual income with which the Hindu undivided family had no concern. The Income Tax Officer rejected this

contention holding that : (1) Dineshchandra was made a permanent director by virtue of the shareholding which was the asset of the Hindu

undivided family; (2) whatever income he earned as a permanent director was by virtue of the expoitation of the Hindu undivided family property in

the shape of such shareholding; and (3) he did not in his individual capacity hold even a single share in the mill-company. Having regard to the

findings aforesaid, the Income Tax Officer taxed the remuneration received by Dineshchandra from the mill-company in the hands of the Hindu

undivided family.

The assessee carried an appeal to the Appellate Assistant Commissioner challenging the aforesaid decision. The Appellate Assistant

Commissioner found that : (1) the evidence on record disclosed that Dineshchandra had been appointed only on account of his personal

qualifications and not because the Hindu undivided family held shares in the mill-company; (2) there was no nexus between the investment of the

family and the remuneration paid by the mill-company to him; (3) there was no detriment to the joint family funds as a result of the investment; and

(4) even Sumatilal, the father of Dineshchandra, who was a permanent director before him and received remuneration from the mill-company was

assessed in his individual capacity in respect of such remuneration. In the light of the findings aforesaid the Appellate Assistant Commissioner

ultimately came to the conclusion that the remuneration received by Dineshchandra was not one of the modes of return of the investment of the

Hindu undivided family in the mill-company and the remuneration was paid to him only on account of his personal qualifications. The fact that

Dineshchandra did not hold any share in the mill-company and that he was appointed as a permanent director on the strength of the Hindu

undivided family''s shareholding in the said company could not be allowed to stand in the way of the remuneration being assessed in the hands of

Dineshchandra personally. The Appellate Assistant Commissioner accordingly directed the Income Tax Officer to exclude the remuneration of

Dineshchandra from the total income of the Hindu undivided family.

The matter was carried in further appeal to the Income Tax Appellate Tribunal by the Income Tax Officer. The Tribunal found that : (1) the

remuneration paid to Dineshchandra was not on account of the right which flowed out of article 99 of the articles of association of the mill-

company but because of his personal qualifications; (2) his appointment as permanent director did not adversely affect the Hindu undivided family

interest in the company; in fact, such appointment benefited the Hindu undivided family because it could result in better earning capacity of the mill-

company in which the Hindu undivided family had shareholding; and (3) the fact that he became a director of the mill-company by virtue of the

provision made in article 99 and with the aid of the Hindu undivided family shareholding in the said company could not make the slightest difference

regarding the assessability of the remuneration received by him in his own hands, having regard to its having been received by him on account of his

personal qualifications. The decision of the Appellate Assistant Commissioner was thus confirmed by the Tribunal.

At the instance of the revenue, the Tribunal has referred the following question of law for the opinion of this court :

Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the remuneration received by Shri

Dineshchandra from M/s. Panalal Silk Mills Private Ltd. was not assessable in the hands of the assessee-Hindu undivided family ?

It is well settled that whether remuneration earned by a member of a Hindu undivided family as an officer of a company or a firm, in which the

assets of the Hindu undivided family have either been invested or the office has been acquired with the aid of the funds of the family is the income

of the family or the individual income of the member is a mixed question of law and facts, and the final conclusion drawn from the primary

evidentiary facts is open to challenge on the plea that the relevant principle had been misapplied by the Tribunal (See P.N. Krishna Iyer Vs.

Commissioner of Income Tax, Kerala, . It is in the light of this legal position that we must approach the question posed for our opinion.

In a number of ceases the question similar to the one under our consideration had arisen before the courts. Some of these cases were cited

before us. It is unnecessary, however, to refer to all the cases. We shall refer to only two of such cases which, in our opinion, provide sufficient

guideline.

In Shri Raj Kumar Singh Hukam Chandji Vs. Commissioner of Income Tax, Madhya Pradesh, , the assessee was the Hindu undivided family

which was a branch of a larger family which had disrupted. It was allotted considerable shares in a company which was formed to take over

certain business of the larger family. Its karta and another member were managing directors of the company at the relevant time and the question

was whether the managing director''s remuneration received by the karta from the company was assessable in the hands of the family. The

Supreme Court, in the course of its decision, observed that though the question of law arising for its decision was the subject-matter of numerous

decisions of its own and those of various High Courts, yet the law could not be said to have been settled beyond controversy. The Supreme Court

then reviewed at length the various decided cases and then enumerated several tests which had been laid down in those decisions as follows :

(1) whether the income received by a coparcener of a Hindu undivided family as remuneration had any real connection with the investment of the

joint family funds;

(2) whether the income received was directly related to any utilisation 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 assistance of the family funds."" The Supreme Court then culled out of the aforesaid

subsidiary tests the broader principle and stated it thus at pages 43 and 44 :

... 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 t 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."" Applying the said tests the Supreme Court held in that case that the karta was not appointed the managing director of the firm

for the mere reason that his family had purchased considerable shares in the firm. He was elected as a managing director by the board of directors

and he received his salary for his personal services. In the past the salary received by him was assessed as his individual income and the same was

the case as regards the salary received by the other managing directors. The appointment as managing director was not as a result of any outlay or

expenditure of or detriment to the family property. The appointment was an employment of personal responsibility and ability. Under the

circumstances, the income was held to be the individual income of the karta and not the income of the Hindu undivided family.

In V. J. PATEL AND P. J. PATEL Vs. COMMISSIONER OF Income Tax., , a Division Bench of this court was concerned with the case

of two assessees who were both Hindu undivided families and the question was whether the remuneration received by the karta of one of the

Hindu undivided families as managing director and the karta of the other Hindu undivided family as technical director from a company was liable to

be taxed in the hands of the Hindu undivided family. The facts were as follows. One J and his four sons, K, A, V, and P, constituted a Hindu

undivided family till 1948. The business, which was till then carried on as joint family till carried on as joint family business, was converted after

partition into partnership business with J and his four sons as partners. Subsequently, the partnership was reconstituted from time to time and as a

result of the final reconstitution, the four sons, namely, K. A. V and P, and a stranger M, became partners. Each of the brothers represented his

Hindu undivided family in the partnership and the amount of profit or loss coming to the share of each of them was treated as belonging to his

Hindu undivided family. In the course of time a private limited company was floated by the partners for the purpose of taking over the business of

the partnership. The company had an issued share capital consisting of 1,200 shares of the face value of Rs. 1,000 each and in consideration of

taking over the business of the partnership, the company allotted 300 shares to M and 255 shares to each of the four sons of J. Under article 18 of

the company, K. V. P and M were appointed an alternate director of P. K was appointed as managing director and V as joint managing director

and the remuneration of V was fixed at Rs. 1,500 per month. P, though he was appointed a permanent director, did not receive any remuneration

at the time of the incorporation of the company other than what he was entitled to for attending the meeting of the board of directors. After some

time, however, he jointed the company after pursuing degree course in engineering for some time and without obtaining a degree. He started

looking after the mechanical and electrical side of the factory of the company as an engineer and technical director and for the services so rendered

by him, it was agreed that he should be given the pay scale of Rs. 750-75-1,500 per month. It is he amount of these remuneration received by the

two kartas, one of whom was the managing director and the other technical director, which was sought to be taxed in the hands of the respective

Hindu undivided family and the matter ultimately reached up to this court. The Division Bench applied the tests laid down in Shri Raj Kumar Singh

Hukam Chandji Vs. Commissioner of Income Tax, Madhya Pradesh, and held that though 225 shares held by each of the two kartas, V and P,

were clearly joint family property in the hands of each of them and the permanent directorship secured by reason of utilization of joint family

property in the shape of shares was held by each of them in his capacity as karta of his Hindu undivided family, the remuneration received by each

of them could not be taxed in the hands of the Hindu undivided family because it constituted the individual income of the concerned karta. In the

case of V, this court found that he was appointed joint managing director manage and look after the business of the company and not on account

of any outlay or expenditure of or detriment to the joint family property. The mere fact that the other brothers were not appointed as joint managing

directors or officers with some other designation although they had an equal share in the business which was taken over by the company and that

no remuneration was also paid to them (excepting P who came to be paid remuneration later on, as stated earlier) was a factor of great

importance, which showed beyond doubt that the remuneration paid to V was primarily and essentially for the services rendered by him as joint

managing director and not because of utilization of his joint family property in the shape of share in the business. Although the office of permanent

director was held by V in his capacity as karta of his Hindu undivided family, it did not necessarily follow that if any extra work was entrusted to

him for remuneration, he would be doing such extra work also in his capacity as karta of his Hindu undivided family.

The burden was on the revenue to show that it was essentially by reason of utilisation of joint family property in the shape of share in the

business that V was entrusted with substantial powers of management as joint managing director and this burden the revenue had failed to

discharge. In the case of P this court held that though he did not possess any educational qualification which would entitle him to rank as a

technically qualified person, the fact remained that he joined the (company and looked after the mechanical and electrical side of the factory as an

engineer and technical director. The remuneration paid to him was clearly for the services rendered by him to the company as an engineer and

technical director and not by way of return for utilisation of his joint family property in the shape of share in the business. The very fact that the

company did not pay him when he was appointed a permanent director and sanctioned payment of remuneration only which he started serving the

company as an engineer and technical director showed that the remuneration was paid to him primarily and essentially for the services rendered by

him to the company. The possibility that the services of P were availed of in preference to any other qualified person because of the reason that his

Hindu undivided family had contributed its share in the business of the company did not necessarily lead to the conclusion that the remuneration

paid to him was on account of utilisation of joint family property. The resolution which sanctioned remuneration was clear and explicit and it clearly

showed that he was being remunerated for the services rendered by him to the company. The revenue had to discharge the burden of showing that

what was apparent on the face of the resolution was not real and that the remuneration was paid to him by reason of utilisation of his joint family

property in the shape of share in the business. It is on the basis of this reasoning that this court came to the conclusion that the income received by

the two kartas, V and P, could not be taxed in the hands of the Hindu undivided family.

Now, let us proceed to examine in the light of the well-settled principles whether the remuneration received by Dineshchandra in the present

case is his individual income or the income of the assessee-Hindu undivided family. The test to be applied, as earlier stated, is whether the

remuneration received by Dineshchandra 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 of the mill-company or whether it was a compensation made for the services rendered by him in his

personal capacity. If it is found that the remuneration earned by him was essentially for the services rendered by him to the mill-company, the

circumstance that his services were availed of because of the reason that he was a member of the family which had invested funds 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. If we

apply this test to the facts found by the Tribunal, the answer cannot but be one, namely, that in the facts and circumstances of the case, the income

earned by Dineshchandra was his individual income.

It is true - and it has not been disputed - that 53 shares held by Dineshchandra in the mill-company were the asset of the Hindu undivided

family and the he came to be appointed as a permanent director of the mill-company in the place of his deceased father, Sumatilal, by virtue of

article 99 which, inter alia, provided that in case of death of one of the permanent directors, when he has still continued to be a member of the

company and is holding not less than ten shares in the company, one of his sons to be selected by agreement between his sons or if all the sons

could not agree upon selecting one to take office in his place, then such one of his sons as may be selected by the remaining permanent directors,

was to be appointed a permanent director in the place of the deceased permanent director in the place of the deceased permanent director. It is

also not in dispute that Dineshchandra did not in his individual capacity hold any share in the mill-company. The position which thus remains

beyond dispute is that Dineshchandra became a permanent director of the mill-company on the strength of the shareholding which was the asset of

the Hindu undivided family. Against this background, let us proceed to consider further whether the remuneration which is received by him could

be said to be the income of the Hindu undivided family and not his personal income.

Now, the Tribunal, as earlier stated, has found as a matter of fact that the remuneration paid to Dineshchandra was not because of the right

which flowed out of article 99, that is to say, the right of being appointed a permanent director but because of his personal qualifications. Apart

from the fact that this is particularly a finding on a question of fact, there is no manner of doubt that the Tribunal rightly reached the aforesaid

conclusion. Article 99 provides merely for the appointment of a permanent director. It does not prescribe that any remuneration shall be paid to

such permanent director. Any remuneration other than that payable for attending the meetings of the board of directors, which is paid to a

permanent director, cannot, therefore, necessarily be linked up with his right to hold the post of a permanent director under article 99. There is

nothing on record to show that any other permanent director of the company was paid any remuneration for holding the post of permanent

director. But that is not all. The resolution passed by the board of directors of the mill-company on March 15, 1967, makes it clear beyond doubt

that the remuneration payable to Dineshchandra was not referable to his holding the post of permanent director but to something else. The

resolution, in terms, says that he will be paid the remuneration for his full time service to the company. The explanatory statement accompanying the

resolution recounted that he held the bachelor''s degree in science and had many years'' experience in the art silk industry. Besides, he had travelled

abroad and acquired useful knowledge in the technique of manufacturing art silk fabrics. He had good experience in the processing work of art silk

fabrics. It is in view of this wide experience acquired by Dineshchandra that the board approved the payment of remuneration to Dineshchandra.

These recitals in the resolution as well as in the explanatory statement show beyond doubt that remuneration was paid to Dineshchandra primarily

and essentially for the services rendered by him by devoting his full-time attention and skill to the business of the company and not because of

utilisation of the joint family assets in the shape of the shareholding of the Hindu undivided family in the mill-company. The burden was on the

revenue to show that what was apparent on the face of the resolution was not real and that the resolution was a mere camouflage or device and

that the remuneration was in fact paid on account of utilisation of the joint family property in the mill-company. The revenue has obviously failed to

discharge such burden, for there is not a title of evidence which could support such a contention. It is true that, by virtue of article 99,

Dineshchandra became a permanent director of the company and that he could not have been removed from that office. However, having regard

to the fact, that the remuneration in question was paid to him for his full-time services to the company, there was nothing to prevent the board of

directors from discontinuing the remuneration in case they found that it no longer required his personal services dependent upon his skill and

experience. We are unable to appreciate how, in the circumstances aforesaid, what was earned by Dineshchandra by contribution of his own time,

labour, attention, skill and experience in the management of the company could ever be said to be referable to the utilisation of the joint family

property in the shape of the shares in the mill-company and how the income earned by him in that manner could be taxed in the hands of the Hindu

undivided family. It is true, as contended on behalf of the revenue, that Dineshchandra did not hold any shares in his private capacity and that he

obtained the qualification shares for becoming the permanent director out of the family funds. However, as observed in Shri Raj Kumar Singh

Hukam Chandji Vs. Commissioner of Income Tax, Madhya Pradesh, , the fact that he obtained the qualification shares from out of the family funds

would not make the receipt the income of the Hindu undivided family if the income was essentially earned as a result of the services rendered by

him to the company. It is also true that the occasion to give such services was presumably provided because he was the karta of the Hindu

undivided family which had invested funds in the company and he had thereby become a permanent director of the company. However, once it is

found, as has been done by the authorities in this case, that the remuneration was essentially and primarily referable to the services rendered by him

to the company, apart from the holding of the post of permanent director, even the circumstance that he gained footing in the company on account

of the investment of the funds by the Hindu undivided family would not tend to make his personal income the income of the family.

In the ultimate analysis, one cannot overlook the fact that unless in substance and reality the income earned by Dineshchandra was the income

of the Hindu undivided family, it could not have been taxed in the hands of the Hindu undivided family. There was once upon a time a view

prevalent that there could not be any valid distinction between the direct use of the joint family funds and use which qualified the members to make

the gains of his own efforts (See Amar Nath v. Hukum Chand Nathu Mal AIR 1921 PC 35 ). As pointed out in Shri Raj Kumar Singh Hukam

Chandji Vs. Commissioner of Income Tax, Madhya Pradesh, , this view of law became an impediment to the progress of the Hindu society and

discontent which it generated let to the enactment of the Hindu Gains of Learning Act, 1930, which had the effect of nullifying the ratio of the said

decision. The law thus recognises now the distinction between the earnings of a coparcener as a result of his own learning, efforts and advancement

in life and the income which a coparcener receives merely as a result of the investment of the family funds in the source which produces such

income. In modern times, with technological advancement in commerce and industry, many a qualified coparcener might be employed in a business

in which his family has contributed its fund and by his skill, experience and labour, all of which are his incorporeal property or intangible assets, he

might contribute his own mite to the growth of such business. If any remuneration is received by him for the services so rendered, it cannot, by any

stretch of imagination, be related to the joint family investment in the business. Salary of such a coparcener is not an alias for the return by way of

profits of the investment made by the family. It is a legitimate return for the human capital - sweat, skill and toil, which are productive investments,

which such coparcener makes in such business. To treat his income in such a case as the income of the family is not only not in consonance with

the true legal position, but it would also lead to the denial to the family business of the human capital which the coparcener would contribute with

greater sincerity than an outsider.

In our opinion, the present case stands very much close to the case of the karta, P, in V. J. PATEL AND P. J. PATEL Vs.

COMMISSIONER OF Income Tax., decided by this court. There also P had become a permanent director of the company in his capacity as the

karta and as result of the investment of the joint family funds in the company. He later came to render services to the company and for the services

so rendered he was paid remuneration. This court took the view in the said circumstances that the remuneration was paid to P not on account of

utilisation of the joint family property in the shape of share in the business but because he rendered technical services to the company. In the

present case also, Dineshchandra undoubtedly became permanent director of the company under article 99 of the company representing his Hindu

undivided family and on the strength of the shareholding of the said Hindu undivided family in the mill-company. However, as earlier pointed out,

there is no direct nexus between his holding the post of a permanent director and the remuneration received by him. The remuneration in fact and

reality us not paid to him because he was a permanent director but because he rendered services to the company. This is found from what is

expressly stated in the resolution passed by the board of directors and the revenue has been unable to show that the said resolution was a

camouflage or device to divert what really was the income of the Hindu undivided family from the Hindu undivided family to Dineshchandra.

The foregoing discussion would show that the Tribunal was right in law in taking the view that it did. The question referred to us will

accordingly stand answered in the affirmative, that is to say, against the revenue and in favour of the assessee. The Commissioner will pay the costs

of the reference to the assessee.