1970 (7) TMI 16 - HC - Income Tax

Partition of the assets of HUF - karta purchases shares in company out of family funds - assessability of remuneration received by karta as director of the company - amount must be assessed as the individual income of the karta

Summary

Issues:
Assessment of sitting fees and remuneration received by an individual as the income of a Hindu undivided family based on the purchase of qualifying shares from joint family funds.

Analysis:
The case involved the assessment of sitting fees and remuneration received by an individual, who was a director of a company, as the income of a Hindu undivided family. The individual, a member of the family, had acquired shares in the company using joint family funds. The Income-tax Officer treated the sitting fees and remuneration as the income of the family due to the purchase of qualifying shares from joint family funds. The Appellate Assistant Commissioner accepted the contention that the shares were acquired with a gift from the family and excluded the amount from the family's assessment.

The Tribunal, however, found contradictory positions taken by the assessee regarding the source of funds for share purchase. It noted the existence of a joint family nucleus from which the consideration could have been paid for the shares. The Tribunal concluded that the individual held the director's office mainly due to holding qualifying shares, making the sitting fees and remuneration assessable in the hands of the Hindu undivided family. The Tribunal relied on a decision later reversed by the Supreme Court.

In contrast, the Supreme Court's precedent in a similar case emphasized the lack of a real connection between the investment of joint family funds and the individual becoming a director. The Court clarified that income from a directorship should be taxable as family income only if earned by detriment to family funds or with their aid. In this case, the Court found no evidence of a real connection between the investment of joint funds and the individual becoming a director, thus ruling in favor of the assessee.

The Court highlighted that the Tribunal erred in assuming the sitting fees and remuneration as family income solely based on the ownership of qualifying shares. It emphasized the need for a genuine link between the income and the family funds for taxation as family income. As such, the Court ruled against the Tribunal's decision, holding that the sitting fees and remuneration should not be considered as the income of the Hindu undivided family.