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TMI Blog1979 (10) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... ds belonging to the HUF. In March, 1947, Shri K. S.Sankaram Pillai, father of Sri K. S. Subbaiah Pillai, died. He was carrying on business in tobacco for number of years at Guntur and Whitefield. A sum of Rs. 861, being the outstanding commission from Allori Kotaiah & Co., to late K. S. Sankaram Pillai was received by him. He continued the business after the death of his father and used the assets of the business after including the goodwill, from Allori Kotaiah & Co., towards commission due and payable to his father. The properties at Whitefield were sold for a sum of Rs. 10,000 in November, 1951. He received a sum of Rs. 2,350 towards the lease amount for barns and agricultural lands at Whitefield. The aforesaid properties were ancestral. He later on married and had a male child on October 30, 1956. On the basis of the aforesaid information, the ITO held that the entire business of the limited company was traceable to the HUF funds of Sri Sankaram Pillai and Subbaiah Pillai and, therefore, the remuneration, commission and sitting fees of Subbaiah Pillai and his wife, the two directors who were members of the HUF were to be assessed in the hands of the HUF consisting of Sri K. S. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the family became a director and also became entitled to the remuneration and commission by virtue of the investment made by the joint family in the company, that the remuneration and commission paid to the karta had been primarily earned by utilising the joint family assets or funds and that the mere fact that in the process of gaining the advantage an element of personal service or skill or labour is involved would not alter the character of the income received by the karta. In other words, the original capital investment of Rs. 25,000 was found to be ancestral property belonging to the HUF, that is, the respondent-assessee. The business in tobacco is not a new one but a family business which is being continued by Sri Subbaiah Pillai. The remuneration and commission earned by Subbaiah Pillai, who is the karta of the HUF, cannot, therefore, be held to to have been earned solely by his services rendered to the company. In support of his plea, he placed strong reliance on the decision of the Supreme Court in P. N. Krishna Iyer v. CIT [1969] 73 ITR 539. Secondly, it is urged that huge sums now claimed by the karta of the HUF as his individual earnings are disproportionate to the ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allotted to the assessee. On July 3, 1952, a private limited company, P.S.N. Motors P. Ltd., was floated with the object of taking over the transport business carried on by the assessee. The assessee purchased 100 shares of the company of the face value of Rs. 100 each. On August 18, 1952, he was appointed by the company as governing director with an allowance of Rs. 3,000 per month and a commission of 15% on the net profit.' Then, the directors approved the purchase, from the HUF of the assessee, of assets of the transport business valued at Rs. 8,01,074-1-4. Though no payment was made, credit entries were made in the books of the company in the name of the HUF. On September 28, 1952, a special resolution was passed by the company to the effect that in consideration of the " valuable services " rendered by the assessee in the promotion of the company and of the " large sacrifices " made by him to serve the company and in view of the benefit that the company received on account of his " long experience, goodwill and reputation in the transport line of business ", the assessee be allotted 4,880 fully paid up shares of the company. In those circumstances, the Supreme Court found thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessable in the hands of the HUF but assessable only in his hands as an individual. The learned judges of the Supreme Court have considered the entire case law on the subject. They also noticed the conflict between the two lines of decisions, namely, Kalu Babu's case [1959] 37 ITR 123 (SC), Mathura Prasad's case [1966] 60 ITR 428 (SC), the two Dhanwatey's cases: V. D. Dhanwatey [1968] 68 ITR 365 (SC) and M. D. Dhanwatey [1968] 68 ITR 385 (SC) and Krishna Iyer's case [1969] 73 ITR 539 (SC) and Palaniappa Chettiar's case [1968] 68 ITR 221 (SC), Dhakappa's case [1969] 72 ITR 192 (SC) and D. C. Shah's case [1969] 73 ITR 692 (SC) on the other. The learned judge, Hegde J. speaking for the court, observed at page 43 (of 78 ITR) thus: " The line that demarcates these two lines of decisions is not very distinct but on a closer examination that line can be located. In order to find out whether a given income is that of the person to whom it was purported to have been given or that of his family, several tests have been enumerated in the aforementioned decisions but none of them excepting Kalu Babu's case [1959] 37 ITR 123 (SC) makes reference to the observations of Lord Sumner in Gokul C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the investment of the family funds in the business, but it is only a commission paid by the company for the services rendered by the karta of the HUF and, therefore, the income has been earned by the individual karta and not as a result of the funds invested by the family.There is absolutely no material to hold that the payments made can be connected in any way to the investment of the family funds in the company judged from any angle, we are satisfied that the finding arrived at by the Tribunal that the amounts in question have been received by the karta for the services rendered by him and not on account of the investment made by the HUF is correct and there is ample material in support of the same. We may also add that in the assessment of the company, the remuneration and commission paid to Subbaiah Pillai, karta of the respondent-HUF, was allowed without any objection that it was unreasonable though the ITO could have certainly disallowed the same by the exercise of his powers under s. 40(c) of the I.T. Act. The ITO did not exercise his power under s. 40(c) in this regard to disallow the amount of remuneration or commission paid by the company to the karta as managing direc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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