1963 (10) TMI 42 - HC - Income Tax

Summary

Issues Involved:
1. Whether the sums received by the assessee as managing director's remuneration, commission, and sitting fees are assessable as the income of the Hindu undivided family (HUF) of which Palaniappa Chettiar is the karta.

Issue-Wise Detailed Analysis:

1. Assessability of Managing Director's Remuneration, Commission, and Sitting Fees as HUF Income:

The primary issue referred by the Income-tax Appellate Tribunal was whether the sums of Rs. 9,000, Rs. 8,133, and Rs. 1,550 received by the assessee as managing director's remuneration, commission, and sitting fees, respectively, are assessable as the income of the Hindu undivided family (HUF) of which Palaniappa Chettiar is the karta.

The assessee, a HUF consisting of a father and his four major sons, acquired 90 shares in a private limited company, Trichy-Srirangam Transport Company (P.) Ltd., in 1934. The shares were purchased in the name of Palaniappa, the family manager, using family funds. Palaniappa became a director in 1941 and the managing director in 1942. The company passed a resolution granting him an honorarium, which was later increased to Rs. 1,000 per month plus a 12.5% commission on net profits.

For the year ended April 13, 1959, Palaniappa received Rs. 9,000 as salary, Rs. 8,133 as commission, and Rs. 1,550 as sitting fees, totaling Rs. 18,683. This amount was not included in the family's income return as Palaniappa considered it his individual income. However, the Income-tax Officer added this amount to the family income, and the Appellate Assistant Commissioner upheld this decision. The Tribunal, following the decision in Commissioner of Income-tax v. S.N.N. Sankaralinga Iyer [1950] 18 ITR 194, held that the remuneration was for services rendered by Palaniappa and was his individual income, not part of the family income. The Tribunal rejected the department's contention based on the Supreme Court's decision in Commissioner of Income-tax v. Kalu Babu Lal Chand [1959] 37 ITR 123.

The court examined the correctness of the Sankaralinga Iyer case in light of the Supreme Court's decision in Kalu Babu Lal Chand's case. In Sankaralinga Iyer's case, it was held that the remuneration earned by the karta of a HUF as managing director was his personal income because it was earned in consideration of services rendered to the company, and there was no detriment to the family property. However, the court disagreed with this view, stating that if the managing directorship owes its origin to family funds, the income earned by the managing director should be treated as family income. The court emphasized that the managing directorship and the income derived from it cannot be separated from the family shares that enabled the karta to hold the position.

The court also referred to the Supreme Court's decision in Kalu Babu Lal Chand's case, where it was held that the managing director's remuneration received by the karta was the income of the HUF because the shares and the company were financed by the family. The Supreme Court criticized the Sankaralinga Iyer decision for overlooking the principle that the use of family funds to acquire qualifications or positions leading to income makes such income part of the family property.

The court found that the Supreme Court's decision in Kalu Babu Lal Chand's case contradicted the Sankaralinga Iyer decision and was binding. The court also distinguished the case of Piyare Lal Adishwar Lal v. Commissioner of Income-tax [1960] 40 ITR 17, where the treasurer's salary was not considered family income because his appointment did not involve any outlay or detriment to the family property.

The court concluded that the manager of a HUF cannot claim income derived from the use of family assets or funds as his separate income, even if personal service or skill is involved. The character of the income must be determined based on its source, and if it is traceable to family property, it must be treated as family income. Therefore, the Tribunal erred in following the Sankaralinga Iyer decision after the Supreme Court's pronouncement in Kalu Babu Lal Chand's case.

In conclusion, the court answered the question in favor of the department, holding that the sums received by Palaniappa as managing director's remuneration, commission, and sitting fees are assessable as the income of the HUF. The assessee was ordered to pay the costs, with a counsel's fee of Rs. 250.