1979 (11) TMI 25 - HC - Income Tax

Summary

Issues:
Interpretation of income tax law regarding the treatment of remuneration received by the karta of a Hindu Undivided Family (HUF) from a company where the family holds shares.

Analysis:
The case involved the HUF known as Bhai Sardar Singh & Sons, which owned 100 shares of a company. The karta of the family, Bhai Sardar Singh, also served as a director of the company and received remuneration in the form of salaries and meeting fees. The issue was whether the salary amounts received by Bhai Sardar Singh were to be considered as individual income or income of the HUF.

During the assessment, it was contended that the meeting fees belonged to the HUF, but the salary amounts were the individual earnings of Bhai Sardar Singh. The Income Tax Officer (ITO) and the Appellate Authority Commissioner (AAC) did not accept this contention. However, the Appellate Tribunal, relying on a Supreme Court decision in Palaniappa Chettiar v. CIT, held that the salary incomes were individual earnings of Bhai Sardar Singh.

The remuneration received by Bhai Sardar Singh was allowed under a special resolution of the shareholders and based on his qualifications and experience, not merely because of the family's shareholding in the company. The Tribunal noted that Bhai Sardar Singh had significant experience in the business and had special skills, justifying the remuneration received. Additionally, the salaries of other directors were lower, indicating that Bhai Sardar Singh's remuneration was based on his services and expertise, not just the family's investment in the company.

The Supreme Court precedent in Palaniappa Chettiar v. CIT was cited, emphasizing that if there was no direct link between the family's investment and the appointment of the karta as a director, the remuneration received could not be considered as income of the HUF. Therefore, the court held that the salary received by Bhai Sardar Singh was his individual income and not part of the HUF's income.

In conclusion, the court answered the question referred by the Commissioner of Income-tax in the affirmative, stating that the remuneration received by Bhai Sardar Singh was not considered income of the assessee-family. No costs were awarded in the judgment.