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TMI Blog1980 (3) TMI 58X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent in Incometax Reference No. 161/78. Since the claims and the contentions are identical, arising out of the same facts and between the same parties, we intend to dispose of these references by this common judgment. The common facts, which we have mostly extracted below from the statement of case in Income-tax References Nos. 357/77 and 11/75, would be sufficient to enable us to comprehend the background of the aforesaid two issues, and they are as follows : The assessee is assessed in his status as an individual and also as karta of his HUF. He was director of several companies including M/s. C. Doctor Co. Pvt. Ltd. He was holding 61 shares in M/s. C. Doctor Co. Pvt. Ltd., 19 shares in Oriental Corporation Pvt. Ltd., 260 shares in C.V. Mehta Pvt. Ltd. and 100 shares in Mehta Sons Pvt. Ltd. By a resolution passed at the meeting of the board of directors of the said company, M/s. C. Doctor Co. Pvt. Ltd., held on November 7, 1961, a committee consisting of two directors, namely, the assessee and his mother, Smt. Vimlaben Vadilal, was appointed to manage the business and affairs of the said company with effect from November 15, 1961. Under the said resolution, remuner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee contended that having regard to the transactions as aforesaid, the remuneration received by him as director-in-charge was required to be treated as income of the HUF and the same should be excluded while computing his total income in his total personal income in his status as individual. He relied in support of this claim on his declaration of March 27, 1964, the letter of even date addressed in pursuance thereof to M/s. C. Doctor Co. Pvt. Ltd., and the relevant entries made in the books of account of the company as well as those of the HUF and of himself. The ITO, however, did not accept this contention and included the income received by way of remuneration in the assessment in his individual status for the assessment years 1964-65, 1965-66 and 1966-67. Being aggrieved by the order of the ITO, the assessee preferred appeals before the AAC, who held that the remuneration received by the assessee from M/s. C. Doctor Co. Pvt. Ltd. was the income of his HUF. The ITO, therefore, carried the matter in appeal before the Incometax Appellate Tribunal by preferring three appeals in respect of each of the assessment years. By a common order passed on November 26, 1973, the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r its accrual ? " Similarly, for the assessment years 1967-68 and 1968-69, this court had by its order of February 20, 1976, in Income-tax Reference No. 162 of 1974, declined to answer the composite question referred to by the Tribunal, whether the income from the remuneration as managing director of M/s. C. Doctor Co. Pvt. Ltd. and the director's fees received from other companies were not assessable in the hands of the assessee in his status as individual for the reasons recorded in the order of this court in Income-tax Reference No. 155 of 1974 (CIT v. Bipinbhai Vadilal [1978] 113 ITR 664) for the earlier years 1964-65 and 1966-67. The Tribunal, therefore, proceeded to pass an order under s. 260(1) of the I.T. Act, 1961, on the same lines as it did in its order of July 31, 1976, pertaining to assessment years 1964-65 and 1966-67, pursuant to the refusal of this court to answer the question referred in Income-tax Reference No. 155/74. The Tribunal held that the income of remuneration received from M/s. C. Doctor Co. Pvt. Ltd. and the director's fees received from the other companies were liable to be taxed in the hands of the assessee in his status as individual. At the ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Bipinbhai Vadilal [1978] 113 ITR 664) and 162 of 1974 pertaining to assessment years 1964-65 and 1968-69. The following question has, therefore, been referred to us at the instance of the HUF, which is the subject-matter of Income-tax Reference No. 11 of 1975, pertaining to assessment year 1965-66 : "Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the remuneration received by Shri Bipinbhai Vadilal from M/s. C. Doctor Co. (P) Ltd. was assessable in the hands of the assessee-Hindu undivided family? " Similarly, on the same facts and in the circumstances, the following question is referred to us at the instance of the HUF which is the subjectmatter of Income-tax Reference No. 158/76 pertaining to assessment year 1971-72 : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that for assessment year 1971-72, the remuneration and director's fees received by the assessee from M/s. C. Doctor Co. Pvt. Ltd. was assessable in the assessment of the assessee-HUF ? On the same facts and in the circumstances of the case, for the assessment year 1970-71, the following question has been r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee in the course of the hearing before the AAC ruled out the first inquiry, whether the income of remuneration was a return of investment of the funds of the HUF. In the opinion of the Division Bench, the alternative inquiry, whether an overriding title was created in favour of the HUF so as to impress the income from remuneration with the character of a joint Hindu family property was still required (but which) was still not held by the Tribunal and, therefore, the Division Bench found itself unable to answer the questions referred to it in the said references. The Division Bench, therefore, observed as under (p. 672) "The Tribunal, however, with respect, missed the real point and failed to determine whether or not by the deed and conduct of the assessee the income was taken away from him even before it accrued or arose to him or was received by him or whether by such deed and conduct the assessee merely applied his own income for the benefit of the HUF. Under the circumstances, it becomes difficult for us to answer the first question referred for our opinion. " It, therefore, became necessary for the Tribunal to inquire into and determine, whether the income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts in that case were that one P. N. Krishna Iyer set up in 1923 a motor transport business in the erstwhile princely State of Travancore. Some dispute arose between the said Krishna Iyer and his brother about the division of their joint family estate in 1945. By a mutual agreement of October 23, 1951, they agreed and undertook to treat the motor transport business together with the workshop, stores, agency, cinema, etc., as the business of the joint family and on partition were allotted to Krishna Iyer. The said partition was accepted by the ITO concerned. In July, 1952, a private limited company, P. S. N. Motors (Private) Ltd. was floated with the object of taking over the motor transport business carried on by the assessee. By the articles of association the said Krishna Iyer was appointed as the governing director of the company for life and to draw such remuneration and exercise such powers detailed in the agreement to be entered into between him and the company in that behalf. He purchased 100 shares of the company of the face value of Rs. 100 each, in pursuance of the articles. On August 18, 1952, he was appointed by the company as its governing director with an office al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly traceable to personal exertion of the member, is taxable as the income of the Hindu undivided family, if it is earned by detriment to the family funds or with the aid or assistance of those funds; otherwise it is taxable as the member's separate income ...... The shares which qualified the assessee to become a member of the company were purchased with the aid of joint family funds. The shares which were allotted to the assessee in lieu of his services were also treated as shares belonging to the joint family. The entire capital assets of the company originally belonged to the joint family and were made available to the company in consideration of a mere promise to pay the amount for which the assets were valued. The income was primarily earned by utilising the joint family assets or funds and the mere fact that in the process of gaining the advantage an element of personal service or skill or labour was involved did not alter the character of the income. In cases of this class the character of the receipt must be determined by reference to its source, its relations to the assets of the family of which the recipient was the member and the primary object with which the benefit r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of the investment of the HUF funds in the company. In fact, it was in terms admitted that his appointment as the director-in-charge had nothing whatsoever to do with the funds of the HUF. The only argument which was advanced before the Appellate Assistant Commissioner was that the assessee had manifested a clear intention to transfer the managing director's remuneration to the HUF books and that this intention became apparent from his conduct in throwing 61 shares into the hotchpot of the HUF and the manner in which the remuneration was subsequently dealt with in the books of account of the HUF as well as of the company. " Having regard to this singular contention and in view of the concession made by the assessee before the AAC, we do not think that there is any scope now remaining for the assessee to press into service the decision of the Supreme Court in Krishna Iyer's case [1969] 73 ITR 539. The learned advocate for the assessee, therefore, made a very strenuous attempt to impress upon us that there was no unequivocal concession made by the assessee as recorded by the Division Bench nor such concession, if any, which is clearly erroneous, can amount to estoppel so as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ITO found that there was no evidence to support the contention that he was appointed as managing director of the company because of the funds of the HUF having been invested in the company. In the appeal preferred by the assessee against the aforesaid order of the AAC, it is interesting to note as to what was the contention urged on behalf of the assessee before the Tribunal. The Tribunal recapitulated the contention urged on behalf of the assessee after referring to the contention of the revenue in the following terms : " Mr. C. R. Taishete, the learned departmental representative, mainly relied on the decision of the Supreme Court in Raj Kumar Singh Hukam Chandji v. CIT reported in [1970] 78 ITR 33, and submitted that the remuneration received by the assessee was compensation made for the services rendered by him and therefore it was his individual income ....... Mr. H. M. Talati, on the other hand, submitted that since there was clear expression of assessee's intention to treat the remuneration received by him as income of his HUF there was no question of applying the test laid down by their Lordships of the Supreme Court in the aforesaid decision...." In this state of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome a part of Hindu law. The decision of the Privy Council in Rajanikanta Pal v. Jagamohan Pal, AIR 1923 PC 57, was referred to where the Privy Council hold that where a member of a joint Hindu family blends his self-acquired property with property of the joint family, either by bringing his self-acquired property into a joint family account, or by bringing joint family property into his separate account, the effect is that all the property so blended becomes a joint family property. Gajendragadkar J. thereafter posed the question whether this doctrine was applicable in regard to property held by a Hindu female as a limited owner and found it difficult to answer the question in the affirmative. He held as under (p. 1271 of AIR 1961 SC) : " The rule of blending postulates that a coparcener who is interested in the coparcenary property and who owns separate property of his own may by deliberate and intentional conduct treat his separate property as forming part of the coparcenary property. If it appears that property which is separately acquired has been deliberately and voluntarily thrown by the owner into the joint stock with the clear intention of abandoning his claim on the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmon stock his self-acquired properties. The separate property of a member of a joint Hindu family may be impressed with the character of joint family property if it is voluntarily thrown by him into the common stock with the intention of abandoning his separate claim therein. The separate Property of a Hindu ceases to be separate property and acquires the characteristics of joint family or ancestral property not by any physical mixing with his joint family or his ancestral property but by his own volition and intention by his waiving and surrendering his separate rights in it as separate property." (Emphasis supplied by us). The scope and width of the doctrine of blending again came to be examined by the Supreme Court in Pushpa Devi v. CIT [1977] 109 ITR 730 where a question arose whether a female member of a joint family is competent to blend her separate property of which she may be an absolute owner with joint family property, or whether such right to blend was limited to coparceners only. In that context, Chandrachud J. (as he then was), speaking for the court, again referred to the above set out passage from the decision of Gajendragadkar J. in Mallesappa Bandeppa's case, A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar expression of intention, such as by statement in a deposition or by an affidavit or by executing a document, or by course of conduct he may alter the character of the self-acquired or separate property into joint family property. No formalities, whatsoever, are required for impressing the self-acquired property with the character of joint family property." (Emphasis supplied by us) In Lakkireddi Chinna Venkata Reddi v. Lakkireddi Lakshmama, AIR 1963 SC I 601, the court was concerned with the question as to when an inference can be made about the blending of separate property with the joint family property by a coparcener. Shah J., as he then was, speaking for the court, stated as under (p. 1604) " Law relating to blending of separate property with joint family property is well-settled. Property separate or self-acquired of a member of a joint Hindu family may be impressed with the character of joint family property if it is voluntarily thrown by the owner into the common stock with the intention of abandoning his separate claim therein ; but to establish such abandonment a clear intention to waive separate rights must be established. From the mere fact that other members of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his acts and conduct. When his intention with regard to his separate property is not expressed in words, we must seek for it in his acts and conduct. But it is the intention that we must seek in every case, the acts and conduct being no more than evidence of the intention." ( Emphasis supplied by us) The principle laid down in Lakkireddi's case, AIR 1963 SC 1601 land G. Narayana's case, AIR 1968 SC 1276 was reaffirmed by the Supreme Court in K. V. Narayanan v. K. V. Ranganadhan, AIR 1976 SC 1715. In CIT v. Kalu Babu Lal Chand [1959] 37 ITR 123 (SC), the facts were that one B. K. Rohatgi, who was the karta of his HUF became interested, in about the year 1930, in a concern called the Indian Electric Works carried on by one Mikhi Ram and other persons. It was agreed that a company should be floated for the purposes of acquiring and taking over the said concern as a going concern. B. K. Rohatgi was one of the promoter of that company. He took over the business of the said concern pursuant to the agreement with the original proprietors with effect from March 1, 1930. On December 19, 1930, the company was incorporated as a private limited company known as Indian Electric Works Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... naging agent of a company. In the next place, the office of a managing director it is urged, involves a personal element and the appointment of a managing director must necessarily be of a particular person for his personal skill and other qualities and, therefore, the remuneration received by him must be his personal earnings. Neither of these two considerations appears to us to be tenable. Vis-a-vis the company, the managing director is undoubtedly the individual person who is appointed as such. The company is not concerned with the managing director's Hindu undivided family or the members thereof, just as the outside partners know only the karta in his individual capacity as their partner and are not concerned with his Hindu undivided family or its members. The question whether the amount received by the karta by way of managing director's remuneration in the one case or as his share of profits in the partnership business in the other case is his personal income or is the income of his Hindu undivided family cannot arise as between the company and the karta as the managing director or between the outside partners and the karta as a partner. Neither the company nor the outside pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manage the affairs of M/s. C. Doctor Co. Pvt. Ltd., by virtue of the resolution of November 7, 1961, the shares of the said company were not the property of the HUF. It was only on March 27,1964, i.e., more than 2 years after such appointment, to manage the affairs of the company, that the shares of M/s. C. Doctor Co. along with shares of other companies were thrown into the common hotchpot of the HUF. Thus, the appointment as managing director cannot be traced to the shares held by the HUF and hence the remuneration earned by him as managing director and director's sitting fees flowing from the appointment which was made at a time when the shares were not the property of the HUF cannot be said to be have been earned as a result of the investment of HUF finds in the shares of this company. Applying these established principles, we have to decide whether the assessee has, by express words, or by his act or conduct, declared his intention to treat his remuneration as managing director of M/s. C. Doctor Co. as the joint family property? Since we have got an express declaration, we have to look to that declaration for purposes of finding out whether the necessary intention can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of a Hindu coparcener "ceases to be his separate property and acquires the characteristic of joint family or ancestral property not by mere act of physical mixing with his joint family or ancestral but his own volition and intention by his waiving or surrendering his special right in it as a separate property (vide G. Narayana Raju's case, AIR 1968 SC 1276). It cannot be contended by any stretch of imagination, without violence to the language, that the mere direction given by the assessee to the company, to credit the income of his remuneration and director's fees in his HUF's account and the credit entries made in pursuance thereof by the company, can be said to be sufficient for justifying an inference that the assessee had waived or surrendered his special right in it as a separate property. Since there is no other evidence except this letter and the entries made in pursuance thereof in the books of account of the company as well as the HUF, it cannot be said that the Tribunal has failed to consider any other relevant evidence in that behalf. The third contention, therefore, stands rejected. For the same reasons, we are of the opinion that the Tribunal has not committed an er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase [1933] 1 ITR 135. In Seth Motilal Manekchand v. CIT [1957] 31 1TR 735, the Bombay High Court held that the payment made to the mother out of a moiety of the income coming to the share of the father and son, each pursuant to the partition between them constituting an HUF which owned a managing agency, was diversion of income since in the opinion of the Division Bench of the Bombay High Court, speaking through Chagla C.J., the mother had a legal enforceable right against the partner who was under a legal obligation, to pay that amount. The Supreme Court, therefore, in Sitaldas's case [1961] 41 ITR 367, on a review of those authorities, concluded that the case before it was not one of a diversion of income but only of an application thereof. Hidayatullah J. as he then was, speaking for the court, therefore, observed as under (p. 375): " In our opinion, the present case is one in which the wife and children of the assessee who continued to be members of the family received a portion of the income of the assessee, after the assessee had received the income as his own. The case is one of application of a portion of the income to discharge an obligation and not a case in which by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed advocate for the assessee that this is a case of diversion of income at source. The reasons for our disagreed entire obvious. No overriding charge exists either upon the estate or its income. It is not traceable to any assignment or the creation of a superior title over it since no title is confirmed clearly. It does not arise out of division of assets where any overriding charge or title is created in favour of the beneficiaries. There is no enforceable legal right for the receipt of income of remuneration or director's fees either against the company or the assessee. The letter of 27th March, 1964, merely requests the company to credit the amount of remuneration payable to the assessee in the account of the HUF in the trading books of the company. The income which is to be credited is that which is payable to the assessee. We, therefore, do not find any intention on the part of the assessee to create an overriding charge so as to successfully contend that the income ceased to be his income and formed part of the HUF. The 4th contention should, therefore, be rejected. We, therefore, answer the questions referred to us in these references as under : ITR 357/77 : Questions No ..... X X X X Extracts X X X X X X X X Extracts X X X X
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