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TMI Blog1955 (9) TMI 76X X X X Extracts X X X X X X X X Extracts X X X X ..... cle laid down the procedure which would have to be followed if the company desired to remove Mr. Rohatgi from his position of Managing Director at any time. Article 138 next provided that the company would forthwith enter into an agreement with Mr. Rohatgi in terms of a draft which had already been approved on behalf of the company and that the validity of that agreement would not be liable to be impeached on the ground that Mr. Rohatgi stood in a fiduciary relation to the company or on any other ground. The Article proceeded to provide that every person who might at any time become a member of the company would be deemed to approve of and confirm the said agreement. 3. Although Article 138 stated that an agreement had already been drafted and the terms had been approved by the company, it would appear that it was not till 31-1-1934, that an agreement was actually entered into between the company and Mr. Rohatgi. The recitals in the prefatory part of that agreement as to how the draft had come into existence and when its terms had been formally approved do not correspond with what is stated in Article 138 of the Articles of Association, but it is not disputed that it is under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration earned by the family on account of the benefits conferred by it on the company. 5. The reason on which the Tribunal proceeded was that it had nowhere been stated that when Mr. Rohatgi had promoted the incorporation of the company, he had done so in his individual capacity and that it had also not been proved that he had attained his position of Managing Director without the aid of the family funds. The controlling shares in the new company were owned by the family of which Mr. Rohatgi was the Karta, and that circumstance, the Tribunal thought, justified the conclusion that the attainment by Mr. Rohatgi of his position as Managing Director was a product of family assets. The Tribunal also referred to the fact that in the past the family had offered Mr. Rohatgi's remuneration for assessment as a part of its own income. 6. The assessee was dissatisfied with the Tribunal's decision and asked for a Reference to this Court. The Tribunal made a Reference and the questions referred are as follows : (1) Whether on the facts and in the circumstances of this case, the Income Tax Appellate Tribunal was justified in apportioning the sum of ₹ 61,282/- into two pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is a matter of inference from the facts stated by them, but their own conclusion was that Mr. B. K. Rohatgi had been originally appointed to and was, at the relevant time, holding the office of the Managing Director of the India Electric Works Limited in his capacity as a member and Karta of the assessee family. 10. The principal question to be answered in this Reference is the second one. As to the first, the assessee naturally submitted that the Tribunal had been wholly unjustified in making an artificial division of the income on an imaginary basis of their own. On behalf of the Commissioner of Income Tax also, no attempt was made to support the Tribunal in their choice of the middle path. Mr. Meyer, who appeared for the Commissioner, submitted that the income was either the income of the family or the personal income of Mr. Rohatgi and that there could be no justification for ascribing a portion of it to the remuneration of Mr. Rohatgi as an officer of the company and ascribing the other portion to a return made by the company to the family for benefits received. 11. In our opinion, the parties were right in their disapproval of the manner in which the Tribunal had dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13. The real question, as I have said, is the second one which asks directly whether it was Mr. Rohatgi who was liable to be assessed in his personal capacity on the amount of the remuneration or whether the liability to assessment was of the family. 14. Mr. Gupta, who appeared on behalf of the assessee, advanced an argument which he had advanced before us on other occasions. He contended that the principles on which the earnings of a member of a Hindu undivided family might be treated in Hindu Law as the family's income were altogether irrelevant to the application of taxing statutes. The Income Tax Act, Mr. Gupta contended, caught income at the stage at which it accrued or arose or was received and it had its own standards as to what receipts were taxable as income and as to the categories under which they would fall. The remuneration of a Managing Director, Mr. Gupta contended, was the fruit of the personal agreement which he had with the company and it came to him and was paid to him as his salary. Whether it then found its way into the family coffers, either by way of a gift from the recipient or whether it could be treated as the family's income for purposes of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d : by labouring on the patrimony or, by laying out the family funds and reaping the fruits of the outlay. I must hasten, however, to add that Lord Sumner was not using those words to describe a case where the profits would be the property of the family, but he was describing amounts which would be exceptions. The decisions on the Income Tax Act, however, as I have already said, do not seem to have observed the distinction between mere use of their family funds and use to their detriment. 16. I have referred, to the above consideration, because it was contended in this case that if the majority of the shares were held by the family and even if Mr. Rohatgi had become Managing Director, because his family held those shares, yet by the in-vestment of the funds of the family in the purchase of the shares, no detriment to them had been caused. The shares were earning dividends and no one disputed that those dividends were the property of the family. The real question was whether the earnings made by Mr. Rohatgi out of his position as Managing Director and as consideration for the services rendered by him in that capacity could be said to be the income of the family for taxing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the fact that he had been one of the persons who had promoted the company and that he had carried on the business of the concern, both before the company had been incorporated and thereafter, till the date of the agreement. It is not stated that Mr. Rohatgi had promoted the company as the Karta of the undivided family and it may well have been that his efforts in that behalf were purely personal, although he might have received the wherewithal from the family over which he presided. The fact that he was assisted by family funds does not, to my mind, itself establish that his employment as Managing Director was due to the fact that he was the Karta of the family or that the remuneration paid to him was paid, because the family had practically financed the formation of the company. If the agreement or the Memorandum of the Articles of Association of the company had stated that inasmuch as the family had rendered conspicuous service towards the formation of the company, its Karta for the time being would always be the Managing Director, there might be some justification for saying that the remuneration paid to the Managing director was not really paid as salary for services rendere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even upon the transfer of the majority of the shares held by his family to third parties, it would seem to be clear that his post of Managing Director is not really dependent on family assets or the investment made by the family in the shares of the company. The primary circumstance, as I have already said, is that a Managing Director is under a contract of service with the company and he earns his remuneration as the price of the labour which he expends in the prosecution of the duties of the office held by him, I am unable to hold that there were any facts in the present case from which it could be concluded that Mr. Rohatgi's-remuneration as a Managing Director was the income-of his family for taxing purposes and that it could be assessed in the family's hands. Even the Tribunal found that Mr. Rohatgi did render personal service to the company which had to be paid for in money and that he earned such remuneration by personal labour, although, according to the Tribunal, the whole of the remuneration could not be attributed to the service rendered by him. A Managing Director's income can be held to be the income of the family over which he presides only by introducing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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