T.T. Rathnasabapathy Pillai vs Commissioner of Income Tax, Madras

Veeraswami, J.—This reference u/s 66(1) of the Indian Income Tax Act, 1922, raises a question as to the character of the assessee''s

income which he received during the accounting year, relevant to the assessment year 1960-61, as director''s sitting fees from certain limited

companies. The assessee is an advocate by profession of Coimbatore and is the karta of a Hindu undivided family. From 1924-25 to 1956-57, he

was assessed as an individual on his income derived from the profession, dividend from companies and interest. In the course of these years, he

acquired shares in a number of companies which yielded dividends from Rs. 3,136 in 1932-33 to Rs. 1,10,178 in 1970-61. By virtue of the share

qualification he had, he also become a director in a number of these companies and the sitting fees received by him as a director increased from

Rs. 12 in the year 1932-33 to Rs. 8,708 in the assessment year 1960-61.

(2) On May 16, 1957, in relation to the assessment year for 1957-58, the assessee wrote to the Fifth Additional Income Tax, Officer,

Coimbatore, stating:

Until the year ended 31st March 1956, I was describing my status as ''individual'' assessee.

I hereby declare that from 31st March, 1956, I have changed the status into a ''Joint Hindu Family"" consisting of myself and my sons. All the

properties both movable and immovable belong to the said joint family consisting of myself, my sons, T. R. Natanasabapathy, aged about 34, T. R.

Dorairaj, aged about 23, and T.R. Thiagaraj, aged about 17. I am the head and manager of this joint family.

My wife, Srimathi Rajeswari, my married daughter Srimathi Saraswathi and my daughter, Kumari Devikarani, aged about 15, are residing with the

said joint family"".

(3) He also addressed the officer another letter dated August 10, 1957, in which, inter alia, he stated:

In connection with the above, I wish to give you the following additional particulars. The ancestral nucleus I got is comparatively small being about

half an acre of narija land, which I disposed of a few years ago. The proceeds were utilised to discharge my liability. All these liabilities which I

incurred were for the purpose of acquiring shares in public limited companies and immovable properties. My eldest son, T. R. Natanasabapathy,

who is also are advocate, and my wife have stood guarantee for some of my liabilities.

All my sons, daughters and my wife are living with me under my protection, having common mess, common lodging and worship. All my properties

both movables and immovables have been thrown into the common stock. I may mention that ancestral nucleus is not absolutely necessary for joint

family status. I have of my own volition a d intention waived and surrendered any special right which I may have to any of my properties acquired

in my name....

In view of my unequivocal declaration, I request you to recognise my status as an assessee as being that of a karta of a joint Hindu family

(4) The effect of these two letters of the assessee was that he abandoned all his separate interests in the properties owned by him as an individual

and threw them into the family hotchpot. His status was, therefore, taken for the assessment year 1957-58, as that of a joint Hindu family. His

income from profession and sitting fees, however, was assessed in his status as an individual from 1957-58. But, for the assessment year 1960-61,

with which we are now concerned, the Income Tax Officer, in view of The Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand,

, as he thought, treated the income from sitting fees as that of the Hindhu undivided family and assessed it on that basis. The Appellate Assistant

Commissioner of Income Tax and the Tribunal concurred with him. At the instance of the assessee, the Tribunal has referred to us the following

question;

Whether the inclusion of the sitting fees earned by T. T. Rathnasabapathy Pillai as a director in several companies in the total incomes of the Hindu

undivided family of which he is the karta is correct?

(5) Before we proceed to consider the question, we shall notice the factual findings recorded by the Tribunal. By reason of the unequivocal

declarations of the assessee, all the shares held by him as an individual became the property of the Hindu individual family from May 16, 1957, and

no share was left with him as an individual. In every one of the companies in order to qualify for directorship, a certain qualification shares are a

pre-requisite. As far as the Tribunal was able to see, there was no company in which he was a director which did not insist upon director''s

qualification shares as a condition for becoming a director. From May 16, 1957, he changed his status into a joint Hindu family consisting of

himself and his sons, and all his properties, both movables and immovables, including all the shares, belonged from that date to the said joint family

of which he was the karta. If the assessee was a director by virtues of holding shares, the Tribunal observed, it could only be as karta of the Hindu

family. As a matter of fact, he returned the income from the sitting fees of Rs. 8,133-8-4 in the assessment year 1957-58 as belonging to the Hindu

undivided family. He thus impressed all the assets with the character of Hindu undivided family and reserved nothing for himself as an individual.

No proof was offered that the assessee was appointed as a director irrespective of holding of shares in the company. On these facts found by it,

the Tribunal was of the opinion:

Therefore, if the holding of shares is connected with directorship and the sitting fees with the directorship, and the sitting fees with the directorship,

there can be no question but that the income belongs to the person who owned the shares and that person is the Hindu undivided family.......... In

the present case, after all had been done, shares had been acquired, directorship has been acquired, the assessee went all out to say that the

shares, the qualification shares and even the sittings fees of the directors belonged to the Hindu undivided family. We do not see how, in the face of

this, it would be possible for us to give a finding that the assessee had reserved this part of his income alone to himself. On the other hand, the

evidence is all the other way. We therefore uphold the order made below and dismiss the appeal.

(6) In coming to that conclusion, the Tribunal purported to follow The Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand, and

did not accept the assessee''s contention that he received the sitting fees not by virtue of his being a member or karta of a Hindu undivided family

but by reasons of his qualifications and vast experience in business and that even granting that the holding of qualification shares entitled the

assessee to become a director in the companies, by virtue of which he earned the sitting fees, such holding of shares, for the purpose of

qualification formed an insignificant fraction of the total holdings of the company.

(7) Before us it is contended for the assessee (1) that his declarations were limited to his movable and immovable properties and did not include

the sitting fees, (2) that the original acquisition by the assessee of the shares was without any detriment to his status of Hindu undivided family and

(3) that Piyare Lal Adishwar Lal Vs. The Commissioner of Income Tax, Delhi, , and not The Commissioner of Income Tax, West Bengal Vs. Kalu

Babu Lal Chand, that governs the facts of this case. On the other hand for the revenue, the argument is: (1) if the shares belong to the joint family,

as they do, and the shares provide the qualification for the assessee to become a director, the sitting fees earned by him belong to the joint family,

and (2) whatever the origin of the shares, inasmuch as to continue as a director, the requisite as to share qualification should continue to be

satisfied, the sitting fees earned by him were referable to the shares held by the joint Hindu family and will therefore belong to it.

(8) As regards the first contention, it is true the assessee''s declarations stated nothing about the vesting of income or throwing the office of the

director in the several companies into the hotchpot. Learned counsel for the assessee is right in his submission that the sitting fees pertain to the

office of director. There is no doubt that the sitting fees may and can be blended with the assets of the joint Hindu family but, for such blending, the

fee must exist: M.N. Murugappa Chetti and Sons, Tiruppur Vs. The Commissioner of Income Tax, Madras, : Mallesappa Bandeppa Desai and

Others Vs. Desai Mallappa and Others, . It is therefore stated that as the sitting fees accrue to the assessee from time to time every year, what did

not exist on the dates of his declarations cannot be regarded as blended with the joint family funds or assets. But the case for the revenue is not

rested on the doctrine of blending. No one has said that as and when the sitting fees are received by the assessee, he has blended them with the

joint family assets and so they are chargeable to tax as income of the family. Nor does the revenue say that the office of the director itself was

thrown into the hotchpot by the assessee and, therefore, the income from the sitting fees belongs to the joint family.

(9) It may be that the sitting fees pertain to the office of the director and are paid in a sense for the service rendered by the director in attending the

meetings of the board of directors and participating in its deliberations and decisions. As between the company and the director, the relationship is

contractual and is regulated in a measure by the provisions of the Companies Act. Where a karta of a joint Hindu family is a director, the Joint

Hindu family has nothing to do with the company in relation to it. The Supreme Court in The Commissioner of Income Tax, West Bengal Vs. Kalu

Babu Lal Chand, observed:

It is now well settled that a Hindu undivided family cannot as such enter into a contract of partnership with another person or persons. The karta

of the Hindu undivided family however, may and frequently does enter into partnership with outsiders on behalf and for the benefit of his joint

family. But when he does so, the other members of the family do not, vis-a-vis the outsiders, become partners in the firm. They cannot interfere in

the management of the firm or claim any account of the partnership business or exercise any of the rights of a partner. So far as outsiders are

concerned, it is the karta who alone is, and is in law recognised as, the partner. Whether in entering into a partnership with outsiders, the karta

acted in his individual capacity and for his own benefit or he did so as representing his joint family and for its benefit is a question of fact. If for the

purpose of contribution of his share of the capital in the firm the karta brought in monies out of the till of the Hindu undivided family, then he must

be regarded as having entered into the partnership for the benefit of the Hindu undivided family and as between him and the other members of his

family, he would be accountable for all profits received by him as his share out of the partnership profits and such profits would be assessable as

income in the hands of the Hindu undivided family"".

(10) This position of law applies equally to a case in which a member or karta of a Hindu undivided family is a director or a managing director of a

company. So far as the company is concerned, the karta is the shareholder and the joint family will have nothing to do with it. But, as between the

karta and the joint family, the relationship between them vis-a-vis the shareholder in the company is one of fact depending on whether the karta

acquired the shares on behalf of and for the benefit of the family by utilising or not the funds belonging to such family. The assessee cannot,

therefore, succeed by merely contending that the directorship in a company is office and sitting fees pertain to is, the liability in regard to the same

being a contractual one. We find, therefore, no force or substance in the first contention of the assessee. In relation to the second contention of the

assessee what is stated is that the acquisition by him of the qualification shares and his becoming a director by reasons of such holding was not with

joint family funds and, therefore, was not to the detriment of the family. Subsequent transfer of the shares, since their acquisition, to the Hindu

undivided family, according to the assessee, does not entitle the family to lay claim to the sitting fees earned by him as a director. It is stated that the

sitting fees were not earned by the assessee by utilising the joint family property or utilising it to its detriment. Learned counsel for the assessee

stresses that ""deteriment"" in the context should be in relation to acquisition and not with reference to something intermediate or continuos. In

support, he relies on Sivaramakrishnan Vs. Kaveri Ammal and Others, . We are unable to subscribe to this view of the doctrine of detriment and

we do not think that the decision relied on by learned counsel for the assessee is of assistance to him. After referring to the textual authority relating

to the doctrine of self-acquisition, Mayne''s Hindu Law (11th Edition) says that the test of self-acquisition is that it should be ""without detriment to

the father''s estate"", and ""accordingly all acquisitions made by a coparcener or coparceners with the aid of a joint estate become joint family

estate."" That is what Sivaramakrishnan Vs. Kaveri Ammal and Others, also stated:

.... it might be taken therefore that what is acquired ''without detriment to the father''s estate belongs to the acquirer himself.

(11) No decision has been cited to us that the applicability of the doctrine of detriment should be confined to the stage of original acquisition. We

fail to see why a case of deriving income by a member of a Hindu undivided family by utilisation directly or indirectly of its funds or assets is not

within the doctrine. In any case, where it is shown that, though the acquisition of the office of a director in a company by an individual was not by

means of qualification shares owned by his undivided Hindu family, he could not continue to be a director without the qualifying shares and the

shares after the purchase were thrown by him into the family hotchpot and thus came to be owned by the family, we are of the view that in such

circumstances, the qualifying shares, which are so owned by the family, being the very basis for continuing to hold the office of a director which

yields sitting fees, the fees as earned should be regarded as earned by utilising the family assets and that inasmuch as in that was the family suffered

a detriment, the fees partake the character of income of the family.

(12) In our opinion, the principle of The Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand, governs this reference. That was a

case of a karta of a Hindu undivided family who acquired a going concern, promoted and floated a company with the funds of his joint family,

acquired shares in his name as the karta and financed the company from the joint family assets. To this company was transferred the going corners.

As part of the agreement with the company, the karta became the managing Director and the remuneration received by him was credited in the

books of the family. The office of the managing director under the articles of association was assignable. The Supreme Court held that the

remuneration so received by the managing director as between him and his Hindu undivided family was the income of the family and should be

assessed in his hands. In reaching that conclusion the Supreme Court dissented from The Commissioner of Income Tax Vs. S.N.N. Sankaralinga

Ayyar, and did not accept the view that the mere fact that the assessee had a particular quantity of shares as manager of a joint family did not ipso

facto enable him to function as the managing director, that his personal qualifications were mainly responsible, in addition to the holding of shares,

for his selection and appointment as the managing director of the bank and that the remuneration was really quid pro quo for the work which he did

under the contract of service with the bank. Das, C. J., who spoke for the Supreme Court, after stating that a question relating to the character of

the remuneration would only arise as between the karta and the members of his family and not between the company and the family, observed:

....the answer to the question will depend on whether the remuneration or profit was earned with the help of joint family assets.

(13) It was pointed out that The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, , overlooked the principles laid down by the

Judicial Committee in Gokal Chand v. Hukam Chand, 48 Ind App 162: AIR 1921 PC 35, where it was pointed out that ""there could been valid

distinction between the director use of the joint family fund and the use which qualified the members to make the gains on his own efforts,."" The

decision of the Supreme Court that the remuneration belonged to the joint family was rested on the finding that the promotion of the company, the

taking over of the concern and the financing of it were all done with the help of the joint family funds and the karta did not contribute anything out

of his personal funds. The principles the Supreme Court laid down in this case, as we understand the decision, is that if remuneration was earned

with the help of the joint family and for this purpose there would be no difference between the direct use of the joint family funds and the use which

qualified the member to make the gains on his own efforts. In this case there can be no doubt, as we are inclined to think, that the shares owned by

the family of the assessee continued to quality him as a director and thus enabled him to earn the sitting fees. In our opinion, the use of joint family

funds for acquisition of qualifying shares for directorship and the use of the shares transferred to the joint family by the original holder-director, and,

therefore belonging to the joint family for continuance of his qualification to and of the directorship stand on the same footing and on principle no

intelligible differentiation between the two cases will be justifiable.

(14) We do not think that Piyare Lal Adishwar Lal Vs. The Commissioner of Income Tax, Delhi, , on which reliance for the assessee is placed,

helps him. The decision there went upon particular facts and it was considered that the mere fact that the joint family property was utilised for

furnishing security for holding the office of a treasurer did not mean that the salary earned by the treasure of a bank constituted income of the

family. It could not be said that furnishing security provided qualification for the treasurership which earned the salary unlike this case in which

holding a stated number of shares is a pre-requisite and provides the very qualification for directorship so that the assessee can only hold the

directorship so long as he holds the qualifying shares which belong to the family. Commissioner of Income Tax, Madras Vs. S. RM. CT. PL.

Palaniappa Chettiar, , decided by a Division Bench of this court, related to sitting fees received by a managing director of a company. No special

qualification was prescribed by the articles of association for a director except the holding of not less than 25 shares. The managing director, who

was the karta of a joint Hindu family, included the sitting fees received by him in his individual return. This court held:

The true view is that the manager of a joint family cannot gain a pecuniary advantage by utilising the family assets or funds, and claim that

advantage as his own separate property, merely on the ground that in the process of gaining that advantage an element of personal service or skill

or labour is involved. The character of the income has to be determined, taking into account the basic foundation from which it emanates and in all

cases where the income is traceable to the family character, and it would not be open to the manager or any other member of the family to claim it

as his own individual and separate income"".

(15) We are in respectful agreement with these observations which apply to the fact of this case. We are of the view, therefore, that the Tribunal

was correct in its conclusion that the sitting fees received by the assessee during the accounting year are chargeable to fax in the hands of the Hindu

undivided family.

(16) The question referred to us in answered against the assessee with costs. Counsel''s fee Rs. 250.

(17) Reference answered.