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Commissioner of Income-tax, Bombay City-iii Vs. C.D. Sanghavi - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtMumbai High Court
Decided On
Case NumberIncome-tax Reference No. 103 of 1968
Judge
Reported in[1979]119ITR863(Bom)
ActsIncome Tax Act, 1961 - Sections 171
AppellantCommissioner of Income-tax, Bombay City-iii
RespondentC.D. Sanghavi
Excerpt:
.....appointed because of holding of shares - no evidence to show that assessee appointed on behalf of family - remuneration received by 'karta' of huf should be considered as his personal income and liable to be taxed as his individual income. - - then in the assessment year 1959-60 champaklal pleaded for separating the huf income, but having failed before the ito, he went in appeal and, in appeal, the aac ordered the ito to assess the income from dividends and property in the hands of the huf of which champaklal was the karta. 5. the present case appears to be clearly covered by the decision of the supreme court in raj kumar singh's case [1970]78itr33(sc) .in that case a number of shares of the company were held by a huf, and the karta and another member of the family were the..........each of the three brothers, therefore, became equal to 4 annas. in the assessment year 1953-54, a limited company by name m/s. champaklal & brothers ltd. was floated and that company took over the cotton waste business of the partnership firm of m/s. champaklal & co. and the interest of the huf, the assessee, in the partnership firm was taken over by the limited company. m/s. champaklal & co. became the managing agents of the limited company and after one of the partners, shri l. a. shah, retired some time before 1954-55, the shares of the remaining partners increased to one-third each. the firm, champaklal & co., was dissolved on 28th february, 1955. the huf of champaklal holds 1,668 shares in the limited company. champaklal was a director of the limited company and, by a resolution of.....
Judgment:

Chandurkar, J.

1. At the instance of the revenue, the following question has been referred under s. 66(1) of the Indian I. T. Act, 1922, and s. 256(1) of the I. T. Act, 1961, since it arises out of the assessment for the assessment years 1960-61, 1961-62 and 1962-63 :

'Whether, on the facts and in the circumstances of the case, it was rightly held that the remuneration and director's fees received by Shri Champaklal from Champaklal and Brothers Limited could not be assessed in the hands of the assessee-HUF for all the three year ?'

2. Originally, there was a HUF consisting of one Doulatrai H. Sanghavi and his three sons, Champaklal D. Sanghavi, M. D. Sanghavi and Rasiklal D. Sanghavi. Champaklal is the karta of a smaller HUF, which is the assessee. D. H. Sanghavi was a partner having 12 annas share in the firm of M/s. Champaklal & Co., which dealt in cotton waste. There was a partition in the assessment year 1948-49 between Doulatrai and his sons and Champaklal became a partner in the firm of M/s. Champaklal & Co. to the extent of three annas share, the other brothers also being partners. Doulatrai retired from the firm in 1952 and the share of each of the three brothers, therefore, became equal to 4 annas. In the assessment year 1953-54, a limited company by name M/s. Champaklal & Brothers Ltd. was floated and that company took over the cotton waste business of the partnership firm of M/s. Champaklal & Co. and the interest of the HUF, the assessee, in the partnership firm was taken over by the limited company. M/s. Champaklal & Co. became the managing agents of the limited company and after one of the partners, Shri L. A. Shah, retired some time before 1954-55, the shares of the remaining partners increased to one-third each. The firm, Champaklal & Co., was dissolved on 28th February, 1955. The HUF of Champaklal holds 1,668 shares in the limited company. Champaklal was a director of the limited company and, by a resolution of the board of directors, he was appointed a director to manage and control the business and general administration of the company on a remuneration of Rs. 750 per month as from 1st of March, 1955. The two other brothers, M. D. Sanghavi and Rasiklal Sanghavi, were also appointed directors on similar remuneration. Champaklal was being assessed as individual in respect of the income from the firm, M/s. Champaklal & Co., and some dividends. In the year 1953-54, Champaklal's income included one-third share in one property, his share in the firm, M/s. Champaklal & Co., and remuneration from the said limited company. In 1958-59, he claimed that the property income and the income from the dividends should be assessed in his hands in the status of HUF. But the ITO did not accept this contention and the income was taxed in the hands of Champaklal as individual. Then in the assessment year 1959-60 Champaklal pleaded for separating the HUF income, but having failed before the ITO, he went in appeal and, in appeal, the AAC ordered the ITO to assess the income from dividends and property in the hands of the HUF of which Champaklal was the karta. Similar direction was given in respect of the assessment years 1960-61 and 1961-62. However, the ITO, while making the assessments on the HUF for the assessment years 1960-61 to 1962-63, took the view that since the assessee had taken a stand that the income from dividends came from a corpus which belonged to the HUF, the matter with regard to the director's fees and remuneration received by Champaklal from the limited company had also to be reconsidered. The assessee's case was that director's fees and remuneration were paid to him in his individual capacity, but the ITO took the view that the assessee had utilise HUF funds for acquiring the shares in the limited company, though there was no necessity, according to the articles of association, for a director to have shareholdings. Thus, the ITO found that the remuneration and sitting fees flowed directly from and had nexus with the substantial shareholdings of the assessee in the limited company and rejected the assessee's contention that the director's fees and remuneration were liable to be taxed on individual basis. The order of the ITO was upheld by the AAC and the assessee filed an appeal before the Tribunal. The Tribunal took the view that merely because a HUF held some shares in a limited company and the karta of the said family was appointed as a director it cannot be said that he was so appointed because of the holding of his shares. The Tribunal, therefore, took the view that the remuneration received by a karta of the HUF should be considered his personal income and not that of the HUF. It is necessary to state that the ITO had found that there was no detriment to the joint family funds caused as a result of the appointment of Champaklal as a director. On these facts, the question reproduced above has been referred to this court.

3. Mr. Joshi appearing on behalf of the revenue has mainly contended that Champaklal must have been appointed as a director because of the shareholdings of the HUF, and, therefore, there must be said to be established a nexus between the director's remuneration and the corpus of the HUF and, therefore, the director's fees and remuneration was liable to be treated as a part of the income of the HUF.

4. Mr. Mehta appearing on behalf of the assessee has relied on a decision of the Supreme Court in Raj Kumar Singh Hukam Chandji v. CIT : [1970]78ITR33(SC) , in which, according to the learned counsel, the legal position with regard to remuneration paid to the director of a company in a case where a HUF of which the director was a karta held shares has been laid down and, according to the view taken in that decision, it is contended that the Tribunal was right in treating the income from director's fees and remuneration as individual income.

5. The present case appears to be clearly covered by the decision of the Supreme Court in Raj Kumar Singh's case : [1970]78ITR33(SC) . In that case a number of shares of the company were held by a HUF, and the karta and another member of the family were the managing directors of the company, and the question was whether the managing director's remuneration received by the karta of the family was assessable in the hands of the family. The managing directors were appointed by a resolution of the board of directors of the company. There was no material to show that they were appointed managing directors on behalf of the family or as a result of any outlay or expenditure of or detriment to the family property, or that their appointment was linked with the acquisition of the business or floatation of the company. The Tribunal in that case had found that the managing directorship was an employment of personal responsibility and ability and that the karta received the remuneration for his personal services and, therefore, the managing director's remuneration received by the karta was assessable to tax as his individual income and not as the income of the HUF. The High Court did not agree with the decision of the Appellate Tribunal and the matter was, therefore, taken to the Supreme Court. The Supreme Court held that the managing director's remuneration received by the karta was assessable in his individual hands and not in the hands of the HUF. While taking the above view the Supreme Court laid down the principle which has to be borne in mind in such cases in the following words (p. 43) :

'In our opinion from these subsidiary principles, the broader principle that emerges is whether the remuneration received by the coparcener in substance though not inform was but one of the modes of return made to the family because of the investment of the family funds in the business or whether it was a compensation made for the services rendered by the individual coparcener. If it is the former, it is an income of the Hindu undivided family but if it is the latter then it is the income of the individual coparcener. If the income was essentially earned as a result of the funds invested the fact that a coparcener has rendered some service would not change the character of the receipt. But if an the other hand it is essentially a remuneration for the services rendered by a coparcener, the circumstance that his services were availed of because of the reason that he was a member of the family which had invested funds in that business or that he had obtained the qualification shares from out of the family funds would not make the receipt, the income of the Hindu undivided family.'

6. Now, even in the instant case, there is no evidence to show that Champaklal was appointed as a director on behalf of the family or to the detriment of the family property. There is also no material to show that there was any direct link between the shareholdings of the HUF and the appointment of Champaklal as a director. In view of the test laid down by the Supreme Court, it is, therefore, difficult to find any error in the order of the Tribunal holding that the income of Champaklal received in the form of remuneration and director's fees was liable to be taxed as his individual income.

7. In this view of the matter, the question referred to us must be answered in the affirmative and in favour of the assessee. The assessee will get the costs from the revenue.


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