1972 (8) TMI 20 - HC - Income Tax

Kartas of two families formed a company and were appointed as joint managing director and technical director - whether the remuneration received by them would be their individual income - The burden is on the revenue to show that what is apparent on the face of the resolution is not real and that the remuneration was paid to Prafulkumar by reason of utilisation of his joint family property in the shape of share in the business. This burden the revenue has failed to discharge and in the absence of any material to the contrary brought forward on behalf of the revenue we must reach the conculsion that there was no direct or substantial connection between the remuneration earned Prafulkumar and the joint family property invested in the company. Prafulkumar was not appointed an engineer and technical director as a result of any outlay or expenditure of or detriment to the joint family property. We therefore agree with the Tribunal that the income received by Prafulkumar was his individual income and not that of his Hindu undivided family

Issues Involved:
1. Whether the remuneration earned by Vidyasagar and Prafulkumar was their individual income or the income of their respective Hindu undivided families (HUF).
2. Whether the proceedings under section 147(b) were validly initiated for the assessment years 1960-61 to 1962-63 for Vidyasagar and 1961-62 to 1962-63 for Prafulkumar.

Issue-wise Detailed Analysis:

1. Individual Income vs. HUF Income:

Vidyasagar's Case:
The court first examined whether the remuneration received by Vidyasagar as joint managing director was his individual income or the income of his HUF. The court noted that the business was initially carried on by a partnership, which was later converted into a company, with shares allotted to the partners. Vidyasagar was appointed as joint managing director, and the remuneration he received progressively increased over the years.

The Tribunal found that the remuneration received by Vidyasagar was for services rendered to the company and not connected to the assets of the HUF. The court agreed, stating that the remuneration was paid primarily for the services provided by Vidyasagar and not due to the investment of HUF assets in the company. The court emphasized that only Vidyasagar and Kantidev were appointed to remunerative positions, indicating that the remuneration was for their individual services. The court concluded that the remuneration was Vidyasagar's individual income.

Prafulkumar's Case:
Similarly, the court examined whether the remuneration received by Prafulkumar as an engineer and technical director was his individual income or the income of his HUF. Prafulkumar joined the company after leaving his engineering studies and began managing the mechanical and electrical side of the factory. The company passed a resolution to remunerate him for his services.

The court found that the remuneration paid to Prafulkumar was for the services rendered by him to the company and not as a return for the utilization of HUF assets. The court noted that the company did not pay any remuneration to Prafulkumar until he started serving as an engineer and technical director, indicating that the remuneration was for his individual services. The court concluded that the remuneration was Prafulkumar's individual income.

2. Validity of Proceedings under Section 147(b):

Vidyasagar's Case:
The court noted that the Tribunal had rejected the contention of the HUF that the Income-tax Officer had no jurisdiction to reopen the assessment under section 147(b). However, since the court concluded that the remuneration was Vidyasagar's individual income, it found it unnecessary to decide on the validity of the initiation of proceedings under section 147(b).

Prafulkumar's Case:
Similarly, the court found it unnecessary to decide on the validity of the initiation of proceedings under section 147(b) for Prafulkumar, as it concluded that the remuneration was his individual income.

Conclusion:
The court answered the first question in each reference in the affirmative, holding that the remuneration earned by Vidyasagar and Prafulkumar was their individual income. Consequently, the second question regarding the validity of proceedings under section 147(b) did not arise for consideration. The Commissioner was directed to pay the costs of each reference to the assessee.

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