1. Dispute over whether remuneration, commission, and sitting fees received by the Karta of a Hindu Undivided Family as Managing Director of a company constitute family income. (Para 2 )
Back
Next 
1967 Supreme(SC) 308
SUPREME COURT OF INDIA
K.N. WANCHOO, C.J.I., R.S. BACHAWAT,V. RAMASWAMI, G.K. MITTER AND K.S. HEGDE, JJ.
S. RM. CT. PL. Palaniappa Chettiar, Appellant
Versus
Commissioner of Income Tax, Madras, Respondent.
Civil Appeal No. 1055 of 1966 ,
D/- 26 10-1967
Advocates Appeared
Mr. R. Gopalakrishnan, Advocate, for Appellant; M/s. T. A. Ramachandran and R. N. Sachthey Advocates, for Respondent.
Advocates:
R.GOPAL KRISHNAN, R.N.SACH, T.A.Ramachandran
R.GOPAL KRISHNAN, R.N.SACH, T.A.Ramachandran
Remuneration received by a Karta as Managing Director is not HUF income unless there is a direct link between the investment of joint family funds and the appointment, resulting in a detriment to family assets.
Headnote:(A) Income Tax - Hindu Undivided Family - Remuneration of Karta as Managing Director - Whether remuneration, commission, and sitting fees received by the Karta of a Hindu Undivided Family in his capacity as Managing Director of a company are assessable as income of the family - If the shares of the company were acquired by the family in the ordinary course of investment and not for the purpose of qualifying the Karta for directorship, and there is no real connection between the investment of family funds and the appointment of the Karta as Managing Director, such remuneration is not an accretion to the family income as there is no detriment to the family assets. (Paras 3, 4)
(B) Hindu Law - Accretion to joint family property - Remuneration earned by a member of the family is treated as family income only if it is earned as a result of the utilization of joint family funds or if there is a direct link between the investment of family assets and the appointment to the position yielding the remuneration. (Para 4)
Facts of the case:
A Hindu Undivided Family acquired shares in a company using family funds as an ordinary investment. Several years later, the Karta of the family was appointed as the Managing Director of the company and received remuneration, commission, and sitting fees. The tax authorities sought to treat this remuneration as income of the Hindu Undivided Family, relying on a precedent where a company was floated using family funds specifically to appoint the Karta as Managing Director.
Findings of Court:
The court found that the shares were purchased long before the appointment of the Karta as Managing Director and were not intended as a qualification for the post. There was no real connection between the investment of family funds and the appointment, and no detriment to the family assets was caused in earning the remuneration.
Issues: Whether the remuneration, commission, and sitting fees received by the Karta as Managing Director are assessable as the income of the Hindu Undivided Family of which he is the Karta.
Ratio Decidendi: Remuneration received by a Karta as Managing Director is not assessable as Hindu Undivided Family income unless there is a sufficient connection between the investment of joint family funds and the appointment, such that the remuneration is an accretion resulting from the detriment to family assets.
Result: Appeal allowed.
Legal Category Hierarchy
Table of Contents
2. Whether remuneration earned by the Managing Director resulted from utilizing joint family funds or caused detriment to family assets, thereby making it income of the Hindu Undivided Family. (Para 3 )
3. The court found no real connection between the ordinary investment of family funds in shares and the Karta's subsequent appointment as Managing Director, involving no detriment to assets. (Para 4 )
4. Remuneration of a Managing Director is not income of the Hindu Undivided Family unless there is a real connection to the investment of family funds or detriment to assets. (Para 4 )
5. Appeal allowed; remuneration, commission, and sitting fees received by the Karta as Managing Director are not assessable as income of the Hindu Undivided Family. (Para 5 )
6. When is the remuneration of a Managing Director who is also a Karta treated as income of the Hindu Undivided Family?
Remuneration is treated as family income when there is a real and sufficient connection between the investment of joint family funds and the appointment as managing director, such that the remuneration is an accretion from the utilization of family funds. (Para 4 )
7. Does the purchase of qualification shares using joint family funds make a Managing Director's remuneration assessable as HUF income?
No, if the shares were purchased in the ordinary course of investment and there is no detriment to the family property, the remuneration earned by rendering services is not an accretion to the family income. (Para 4 )
8. What is the legal significance of detriment to joint family assets regarding the taxability of a Karta's professional remuneration?
If remuneration is earned without any detriment or risk to the joint family property and without utilizing family funds to acquire the position, the emoluments are treated as the individual's personal earnings rather than family income. (Para 4 )
Judgement
RAMASWAMI, J. :- This appeal is brought, by certificate, from the judgment of the Madras High Court in T. C. No. 151 of 1962 dated October 17, 1963.
2. The appellant (hereinafter referred to as the assessee ) is a Hindu Undivided Family consisting of the father and four major sons. The assessee became a shareholder in the Trichy-Sri Rangam Transport Company Ltd. (hereinafter referred to as the company ) in 1934 and owned 90 shares out of the 300 shares of the company. The shares were acquired with the funds of the Hindu undivided family of the father and his four major sons. There were initially four shareholders including the assessee, two of whom were directors. On the death of one of the Directors, the assessee became a director in 1941 and on the death of another director who was managing the business the assessee became the Managing Director with effect from 1942. By a resolution dated April 16, 1944 the company granted him an honorarium of Rs. 3,000 for the year 1943 44 and subsequently raised it gradually till it became Rs. 1,000 per month with 121/2 per cent commission on the net profits of the company. The Managing Director had control over the financial and administrative affairs of the company and the only qualification required was set out under Article 19 of the Articles of Association of the company which was to the following effect:-
"The qualification of a Director including the first Director shall be the holding in his own right alone and not jointly with any other person of not less than 25 shares and the qualification shall be acquired within two months of appointment."
From 1938-39 to 1959-60 the assessee had been submitting returns in the status of Hindu undivided family and upto l949-50 the assessments were completed in that status. For the assessment years 1950-51 to 1955-56, the assessments were completed in the status of individual, though returns were submitted in the status of Hindu undivided family and the remuneration was included in those assessments. For the assessment year 1956-57, the assessee submitted the return in the status of Hindu undivided family but claimed for the first time that the remuneration and sitting fees from the company should he assessed separately in the Karta s hands. The claim was accepted and a separate assessment made on him as an individual in respect of the remuneration and commission received from the company. This continued till-the assessment for the year l958-59. For the year ended April 13 1959 which was the previous year for the assessment year 1959-60, the assessee family returned an income of Rs. 26,780) which did not include the Salary, Commission and Sitting fees received by the karta which amounted to Rs. 18,683. The Income-tax Officer added the remuneration of the karta for the assessment of the Hindu undivided family and on the basis of the decision of this Court in C. I. T., West Bengal v Kalu Babu Lal Chand 1980-1 SCR 320 held that the commission was to be treated as income of the family. The assessee appealed to the Appellate Assistant Commissioner but the appeal was dismissed. The assessee took the matter in further appeal to the Income-tax Appellate Tribunal, Madras Bench The Tribunal held that the case was governed by the decision of the Madras High Court in C. I. T., Madras v. S. N. N. Sankaralinga Iyer , 1950-18 ITR 194 and that the remuneration of the Managing Director ought not to be treated as income of the family. The Tribunal came to the conclusion that the judgment in 1950-18 ITR 194 was not affected by the decision of this Court in 1960-1 SCR 320 At the instance of the assessee the Appellate Tribunal stated a case to the Madras High Court on the following question of law -
"Whether sums of Rs. 9,000, Rs. 8,133 and Rs. 1,550 received by the assessee as Managing Director s remuneration, commission and sitting fees are assessable as the income of the Hindu undivided family of which Palaniappa Chettiar is the Kartha?"
