The Commissioner of Income Tax Vs S. Rm. Ct. Pl. Palaniappa Chettiar

G.R. Jagadisan, J.@mdashThe following question stands referred by the Income Tax Appellate Tribunal, u/s 66(1) of the Indian Income Tax Act:

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 ?

2. The assessee is a Hindu undivided family consisting of father and his four major sons. The father, Palaniappa Chettiar, is the family manager. In the year 1934, the family acquired 90 shares in a private limited company called the Trichy Srirangam Transport Company (Private) Limited. The Company issued in all 300 shares. The shares were purchased in the name of Palaniappa, the manager of the family ; but there is no dispute that the value of the shares was paid from and out of the family funds. There were four shareholders in this company, two of whom were Directors. On the death of one of the Directors, Palaniappa became a Director in the year 1941. Another Director also died, and Palaniappa became the Managing Director on and from 1942. The Company passed a resolution on 16th April, 1944, granting an honorarium of Rs. 3,000 for the year 1943-44 to the Managing Director. From time to time, the remuneration of the Managing Director was increased. The Managing Director became entitled, by virtue of resolutions passed by the shareholders of the Company, to a remuneration of Rs. 1,000 per month and a commission of 12 1/2% on the net profits of the Company. The Managing Director''s duty was to have general control over the financial and administrative matters of the Company. No special qualification has been prescribed in the Articles of Association of the Company to become a director, except what is provided for under Article 19 of the Articles of Association which reads:

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.

For the year ended 13th April, 1959, the previous year for the assessment year 1959-60, the assessee family returned a total income of Rs. 26,780. During that year, Palaniappa, the manager, received the following items of remuneration from the Company:

Salary                                           Rs. 9,000
Commission                                       Rs. 8,133
Sitting fees                                     Rs. 1,550
                                        Total .. Rs. 18,683

This amount was not included in the family''s return of income, presumably because Palaniappa thought that it was his individual and separate income, in which the family had no rights. The Income Tax Officer, however, added this amount to the family income. There was an appeal to the Appellate Assistant Commissioner of Income Tax but without success. There was a further appeal to the Income Tax Appellate Tribunal by the assessee. The Tribunal held, following the decision of this Court in The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, that the remuneration, commission and sitting fees earned by Palaniappa was for services rendered by him to the Company, that it was his individual income, and that it should not be treated as part of the income of the family, merely because the shares were purchased from and out of the family funds. The contention of the Department before the Tribunal, that the decision in The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, should not be followed, in view of the decision of the Supreme Court in The Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand, was repelled. The result was that the Tribunal allowed the appeal, and held that the sum of Rs. 18,683 was not includible in the income of the family. At the instance of the Commissioner of Income Tax, this Reference has been made by the Tribunal.

3. The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, is, no doubt, a direct authority in support of the contention of the assessee that the remuneration, commission and sitting fees of a Managing Director would only be his separate income, though the qualifying shares by which he became the Director might belong to the family. The question is, whether the said decision is correct, and whether the authority of the said decision has been totally undermined by the decision of the Supreme Court in The Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand, . We may at once mention that we are unable to agree with the view taken by the learned Judges in The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, . If we had come to the conclusion that the decision of the Supreme Court left the correctness of The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, untouched, we would have referred the matter to a Full Bench. But as, in our opinion, the Supreme Court has indicated fairly clearly that The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, has not been correctly decided, we are disposing of the Reference ourselves.

4. It will now be convenient to refer to The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, . In that case, the assessee was a Kartha of a Hindu undivided family. He claimed that a certain sum received by him as Managing Director''s remuneration and Director''s sitting fees from a bank, called the Indo-Commercial Bank Limited, by virtue of a contract entered into between him and the bank, was his separate income. The Department treated it as the income of the Hindu undivided family, of which the assessee was the Kartha, on the ground that the necessary shares to acquire the qualification of a Managing Director were purchased out of the joint family funds. The Division Bench of this Court (Satyanarayana Rao and Viswanatha Sastri, JJ.) held that, as the remuneration was earned by the assessee in consideration of the services which he rendered to the bank, and as there was no detriment to the family property in earning the remuneration, the income in question which accrued to the assessee was his personal income. At page 197, Satyanarayana Rao, J., observes as follows:

The remuneration of the Managing Director is earned by him in consideration of the service which he rendered to the Bank. No part of the family funds were spent or utilised for acquiring this remuneration, except that the necessary shares to acquire the qualification of a Managing Director were purchased out of the joint family funds. There is no detriment to the family property in any manner or to any extent as admittedly the shares earn dividend which is included in the income of the family.

With respect, we are unable to accept this as a correct proposition of the Hindu Law. It is true that, as between the Managing Director and the company the relationship is only contractual. The Company deals only with the Managing Director eo nominee and not with the members of the family, of which the Managing Director may happen to be the Kartha. But the position of the Managing Director vis-a-vis the other members of his family is something different. If the managing directorship owes its origin to the funds of the family, and if it can be said that the directorship itself emerged out of the family nucleus, it cannot be said that, whatever earnings the Director or the Managing Director would make, could be appropriated by him, as if they were his self-acquisitions. We are unable to agree with Satyanarayana Rao, J., that there is no detriment to the joint family property, because the shares would earn a dividend and that dividend would go as part of the family income.

5. At this stage, we wish to refer to a decision of a Bench of this Court, to which one of us was a party, Manicka Mudaliar v. Thangavelu (1963) 2 M.L.J. 297. It is not necessary to refer to the facts of that case, and it would suffice to note the following observation made by one of us at page 301:

It is true that the test of self-acquisition is that it should be '' without detriment to the father''s estate '' (see Mayne''s Hindu Law, 11th Edition, page 352).... This text of Hindu Law does not throw any light on the '' degree of detriment'' necessary to attribute to the acquisition the character of joint family property. The Court cannot undertake the impossible task of fixing the minimum standard of '' detriment''. It is of course clear that some detriment is necessary; this can only mean that it should not be vague or merely sentimental but should be something real. What would be the position if the '' detriment'' were trifling and unsubstantial, we do not propose to consider, as the question does not arise in this case. It seems to us that the question whether or not an acquisition was made to the detriment of the family estate is very largely one of fact.

The root cause of a person becoming a Managing Director is certainly the share position of such a person. If the shares belong to the family, then any income which the Managing Director might earn by way of remuneration or commission would certainly be stamped with the character of joint family income. In our opinion, it would be impossible to hold that the shares and the dividends accruing therefrom would belong to the family, but not the income of the Managing Director which is the necessary consequence of the holding of the office. There cannot be a dichotomy between the earnings of the Managing Director qua Managing Director and the holding of shares and the realisation of the dividends therefrom.

6. Viswanatha Sastri, J., who delivered a separate but concurring Judgment in The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, appears to have taken a slightly different view of the matter. The learned Judge emphasises that the facts have relation only to the contract between him and the company, and that therefore the said income does not stand on a different footing from the manager being employed elsewhere and earning a salary. At page 199, the learned Judge observes as follows:

The Managing Directorship was in fact a contract of service and it is not as if the family represented by the manager was the Managing Director. It was the individual that was appointed and that was functioning as the Managing Director. It may be that his holding of a large block of shares had indirect influence on his appointment but that is not the causa causans of his earnings, which were merely remuneration for personal services rendered by him to the Bank. It is not as if any family monies have been spent, consumed, or expended in the process of the acquisition of the Managing Directorship or in the earning of the remuneration which has been paid to the Managing Director. The moneys of the family represented by the shares are still in tact as an investment and the shares are giving dividends which go into the coffers of the family.

7. With great respect to the learned Judge, we are unable to subscribe to the view that the earnings of a Managing Director, who holds office by reason of his share position, the shares themselves belonging to the family of which he is the Kartha, should be treated as something unconnected with the shares themselves. We have already pointed out that, but for the holding of the shares, the Kartha could not become a director, much less a managing director.

8. In The Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand, the facts were as follows. One R was the Kartha of a Hindu undivided family. He was one of the promoters of a company to be floated. The Articles of Association of the Company provided that R would be the first managing director, and it also specified his remuneration. The shares held in the name of R and his brother were acquired with the funds belonging to the joint family, and the family was in enjoyment of the dividends paid on these shares. The company was floated with funds provided by the family. R made no contribution in this respect. The company was all along financed by the family. Prior to the accounting year relevant to the assessment year 1943-44, the Managing Director''s remuneration received by R was credited in the books of the family. In the assessment year 1943-44, for the first time, it was claimed that whole of the Managing Director''s remuneration constituted the personal earnings of R and should not be added to the income of the family. The Supreme Court held that the Managing Director''s remuneration received by R was, as between him and the Hindu undivided family, the income of the family, and should be assessed in its hands. S.R. Das, Chief Justice, delivering the judgment of the Court, referred to the decision in The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, the following observation occurs:

Satyanarayana Rao, J., took the view that, on the facts of that case it was impossible to infer that the appointment itself was on behalf and for the benefit of the family.... Viswanatha Sastri, J., in a separate but concurring judgment expressed the view that the mere fact that the assessee had a particular quantity of shares as manager of a joint family did not ipso facto enable him to function as the managing director.... The remuneration, according to the learned Judge, was really quid pro quo for the work which he did under the contract of service with the bank. The Managing Directorship, he held, was in fact a contract of service and it is not as if the family represented by the manager was the Managing Director. It was the individual that was appointed and that was functioning as the managing director. With great respect to the learned Judges, it appears to us that they overlooked the principles laid down by the Judicial Committee in Gokul Chand v. Hukam Chand Nath Mal (1920) 40 M.L.J. 327 : L.R. 48 LA. 162. (S.C.) 111 where it was pointed out that there could be no valid distinction between the direct use of the joint family funds and the use which qualified the member to make the gains on his own efforts. The member of the joint family entered into the Indian Civil Service, no doubt, by reason of his intelligence and other attainments. He certainly entered into a personal agreement with the Secretary of State in Council and he received his salary for rendering his personal service. But all that was made possible by the use of the joint family funds which enabled him to acquire the necessary qualification and that fact made his earnings part of the joint family properties. That apart, those decisions do not clearly govern the case now before us.

9. In our opinion, the Supreme Court has expressed a view contrary to that expressed by this Court in The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, and we are certainly bound by the decision of the Supreme Court. It is not possible to hold, in view of the observations set out above, that their Lordships of the Supreme Court merely distinguished The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, and decided the case before them on the peculiar facts of that case.

10. Learned Counsel for assessee relied upon the decision, in Piyare Lal Adishwar Lal Vs. The Commissioner of Income Tax, Delhi, in support of his contention that the income of the Managing Director cannot be treated as part of the income of the family, of which he was the Kartha. But, on an examination of the facts of that case, it seems to us that it is clearly distinguishable. The facts were that one S was employed as on overseer in a bank. The father of S was the Treasurer of the bank until his death. After him, S was appointed Treasurer of the bank at various branches, on a monthly salary. Properties of the Hindu undivided family of which he was a member were furnished by him as security for the due discharge of his duties as Treasurer. Under the agreement between him (S) and the bank, S was bound to engage and employ a staff to serve under him. He had the power to control, dismiss and change the staff at his pleasure. The members of the staff were to be paid salary directly by the bank. The Treasurer, was responsible for the acts and omissions of the members of the staff. Both the Treasurer and his staff were, however, under the control of the bank. The question that arose for consideration before the Supreme Court was, whether, on a true construction of the agreement between the Treasurer and the bank, the salary and other emoluments of the Treasurer would represent the income of the family of which the Treasurer was the Kartha. The Supreme Court held that, having regard to the nature of the work of the Treasurer, he was only a servant of the bank, that there was nothing to show that the Treasurer received any particular training at the expense of the family funds, or that his appointment was the result of any outlay or expenditure of or detriment to the family property. Accordingly, it was held that the salary of S was not the income of the Hindu undivided family. Except for the circumstances that the Treasurer in that case had offered family properties as security, there was nothing to show that the office itself came to be held by reason of any detriment suffered by the joint family property. A person employed in service, when called upon to give security for the due discharge of his duties, may offer the properties belonging to a third party as security, provided that such a party is willing to offer it. That would not mean that he holds his appointment itself beneficially for the third party, or that the appointment itself is rooted in the security that is offered by the third party. We have no doubt that the principle of the decision of the Supreme Court in the above case can in no way help the assessee in advancing his present contention.

11. The true view is that the manager of a joint family cannot gain a pecuniary advantage by utilising the family assets or funds, and claim that advantage as his own separate property, merely on the ground that in the process of gaining that advantage an element of personal service or skill or labour is involved. The character of the income has to be determined, taking into account the basic foundation from which it emanates. In all cases where the income is traceable to family property, it must partake of the joint family character, and it would not be open to the manager or any other member of the family to claim it as his own individual and separate income. In our opinion, the Tribunal is in error, in following the decision in The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, after the categoric pronouncement of the Supreme Court in The Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand, .

12. In the result, the question is answered in favour of the Department; the assessee will pay its costs. Counsel''s fee Rs. 250.