S. K. Desai J. - This reference relates to the assessment of Shri K. K. Shah as the Karta of Hindu Undivided Family for the assessment year 1955-56 and 1956-57, the relevant previous years for which ended on 31st March, 1955 and 31st March, 1956 respectively. A firm called Gill and Company consisting of five partners, all Englishmen, was carrying on the business in partnership. On 26th February, 1947 a private limited company by name Gill and Company Ltd. was incorporated, which company had been formed to acquire the business of the partnership firm of cotton brokers and merchants with effect from 1st March, 1947. The assessee is the Karta of Hindu Undivided Family. The Hindu Undivided Family held 340 shares of Rs. 500/- each in the Gill and Company and the assessee came to be appointed as one of the Directors of the said Company, the other four Directors being four of the five erstwhile partners of the said firm. During the relevant assessment years K. K. Shah received by way of salary from Gill and Company (Private) Ltd. a sum of Rs. 42,000/- and by way of bonus a sum of Rs. 14,000/-. He also received a remuneration for attending the meetings of Directors. Up to the assessment year 1954-55 the amounts received by K. K. Shah as Director of Gill and Company by way of salary, bonus and Directors fees were entered into the books of account of the Hindu Undivided Family; and they were assessed as such. For the two assessment years in question, however, the remuneration received by K. K. Shah as Director of the Private Limited Company was not shown in the books of the Hindu Undivided Family nor was it shown as income of the Hindu Undivided Family in the returns filed for the two respective years. It was claimed that the directors remuneration should be assessed in the hands of K. K. Shah personally and not in the hands of Hindu Undivided Family. This claim was accepted by the Income-tax Officer. However, later on re-assessment proceedings under section 34 (1) (b) of the Income-tax Act, 1922 were commenced for these two assessment years. The assessee challenged the validity of the re-assessment proceedings on the ground that the condition laid down in section 34 (1) (b) was not fulfilled. On merits it was contended that the remuneration received by K. K. Shah was his personal income and could not be taxed in the hands of the Hindu Undivided Family. These contentions were rejected by the Income-tax Officer and the amounts were brought to tax. The assessee thereafter appealed to the Appellate Assistant Commissioner and the Appellate Assistant Comm. allowed the appeal. Various findings are to be seen in the order of the Appellate Assistant Commissioner and it was on the basis of these findings that the Appellate Assistant Commissioner was persuaded to accept the contentions on merits urged on behalf of the assessee. The Income-tax Officer being aggrieved by the order of the Appellate Assistant Commissioner preferred further appeal to the Income-tax Tribunal and it was contended before the Tribunal that this was a case where the family was taxable as the basic fact was that the family's assets, viz. shares represented the qualification for Directorship. The Tribunal by its order dated 12th February, 1964 upheld the application of section 34 (1) (b) but on the merits, after considering the decisions cited at the bar, viz. Commissioner of Income-tax vs . Kalu Babu Lal Chand : 37ITR123(SC) and Piyare Lal Adishwar Lal vs . Commissioner of Income-tax, : (1966)IILLJ759SC , held that in the case before it there was nothing to show that the Directorship (of K. K. Shah) owed its origin to any personal qualifications. It went on further to conclude that
'In the absence of any evidence to show that Shri K. K. Shah was appointed as a Director by reference to any of his personal qualification, and in view of the fact that under the Article holding of a minimum number of shares is the only qualification for directorship, in our opinion the rule in Kalu Babu Lal Chand applies and not that found in Piyarelal Adishwar Lal vs. Commissioner of Income-tax.'
Accordingly the Tribunal reversed the decision of the Appellate Assistant Commissioner and upheld the assessment made by the Income-tax Officer for the two years.
2. A reference has been thereafter made at the instance of the assessee and the following question has been referred to us by the Tribunal under section 66 (1) of the Indian Income-tax Act, 1922 :
'Whether on the facts and in the circumstances of the case, the remuneration and bonus as a Director of Gill & Co. Pvt. Ltd., and sitting fees as a Director from that and other companies represented the income of the H.U.F. of which Shri K. K. Shah was the Karta or his individual income ?
3. Last year the reference came up for hearing before another Bench consisting of the learned Chief Justice and Tulzapurkar J. and by an order the learned Chief Justice speaking on behalf of the Bench referred to a further decision of the Supreme Court in Raj Kumar Singh Hukam Chandji vs . Commissioner of Income-tax, M.P. : 78ITR33(SC) , where the Supreme Court had laid down the test for determining whether the remuneration received by an individual is the income of the individual to whom it is purported to have been give or that of the Hindu Undivided Family of which he is a co-parcener. In the opinion of that Bench, that test to which reference will be made hereinafter would be required to be applied for determination of the question referred to in this reference. It was found further considering the statement of case originally submitted and the appellate order of the Tribunal that all necessary facts required to decide this question and for the application of the test were not to be found therein and accordingly a supplemental statement of case was sought for from the Tribunal. The Tribunal was required by the said order to state facts necessary to determine the following points :
'(1) Whether the remuneration received by K. K. Shah as a director in substance though not in form was but one of the modes of return made to the family because of the investment of the family funds in the business of Gill & Company Private Limited or in purchasing the shares thereof
(2) Whether the remuneration received by K. K. Shah was a compensation made for the services rendered by him as an individual co-parcener ?'
It was further indicated that whilst stating facts on these points, facts for the following subsidiary points also should be stated and these subsidiary points were indicated as :
(1) Whether the income received by K. K. Shah as remuneration has any real connection with the investment of the Hindu Joint Undivided Family Funds ?
(2) Whether the income received by K. K. Shah was directly related to any utilisation of family assets ?
(3) Whether the Hindu Undivided Family had suffered any detriment in the process of realisation of income, and
(4) Whether the income was received with the aid and assistance of the family funds ?
It may be mentioned that the supplemental statement of case had been submitted by the Tribunal pursuant to the above directions.
4. Before considering the further facts found by the Tribunal from the record before it (as was directed by the learned Chief Justice) on the above points, a brief reference may be made to the decision reported in Raj Kumar Singh Hukam Chandji vs. Commissioner of Income-tax, M.P. (1970) I.T.R. 33. At page 43 of the said report it is observed that :
'The broader principle that emerges is whether the remuneration received by the co-parcener in substance though not in form 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 compensation made for the services rendered by the individual co-parcener. 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 co-parcener. If the income was essentially earned as a result of the funds invested the fact that a co-parcener has rendered some service would not change the character of the receipt. But if on the other hand it is essentially a remuneration for the services rendered by a co-parcener, 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 the 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.'
5. In paragraphs 5, 6 and 7 of the statement of case, various relevant facts required for applying the above test are to be found. To the statement of case has been annexed a letter dated 9th February, 1960, which had been addressed by the assessee to the 1st Income Tax Officer, before the re-assessment was made (Annex. J), as also a further letter dated 8th July, 1961, which had been addressed by the assessee to the Appellate Assistant Commissioner pursuant to the Appellate Assistant Commissioners request for further facts (Annexure K). There is also to be found attached to the supplemental statement of case a further statement (Annexure L) which would indicate the return received by way of dividend on the family's investment in the shares of Gill and Co. Ltd. in order to dispel any criticism that the remuneration as director was received by K. K. Shah as a result of any detriment suffered by the joint family.
6. It has been found by the Tribunal that Gill and Company Private Limited was not promoted by Khushal K. Shah. It was an old firm which converted itself into a limited Company in 1948 and he had no controlling interest in the share-holding. The total investment by the Hindu Undivided Family was of 340 shares of Rs. 500/- each out of 5,000 shares in the aggregate. By the time he had been appointed as a director of this Company K. K. Shah had gathered great experience regarding dealings in cotton by spending all his life in the cotton business and it his personal experience, qualifications and equipment that fitted him for the appointment as the Director of Gill and Company. The statement Annexure L makes it clear that there was no detriment whatever to the Hindu undivided family. In the letter to the Appellate Assistant Commissioner various duties performed by K. K. Shah as Director of Gill and Company Ltd. have been set out and those duties have been reproduced in paragraph 6 of the Supplemental statement of case. This was not challenged by the Revenue (see para 8 of the supplemental statement of case). Annexure L shows that on investment of Rs. 1,70,000 the family has been receiving dividends and the return on the investment is throughout in excess of 20 per cent.
7. In these circumstances, it is impossible to hold that the remuneration which was received by K. K. Shah as Director had not been earned by reason of his personal experience, qualifications and equipment that fitted him for the appointment as Director of Messers. Gill and Company Ltd. or that it was one of the modes of return made to the family because of the investment of the family funds in the business. Applying the test laid down by the Supreme Court in Raj Kumar Singh Hukum Chandji : 78ITR33(SC) . It is clear, in my opinion, that it will have to be held that the remuneration and bonus paid to K. K. Shah as Director of Gill and Company Private Limited as well as sitting fees as Director from that the other companies did not represent the income of the Hindu Undivided Family of which K. K. Shah was the karta but constituted his individual income. In addition to the amount of Rs. 56,300, which was sought to be taxed in the hands of the Hindu Undivided Family being the Directors remuneration, including bonus and sitting fees received by K. K. Shah from Gill and Company Ltd., there were further amounts of Rs. 810/- and Rs. 820/- respectively which represented Directors fees received by K. K. Shah from Companies other than Gill and Company Ltd. It has been observed by the Tribunal that 'It is not disputed that any conclusion arrived at with reference to Rs. 56,000/- also applied to the other amount taxed' which would include the amount received by K. K. Shah from the other Companies. In view of this observation & in view of the conclusions reached by me as regards the remuneration and bonus received by K. K. Shah from Gill and Company Ltd., it will have to be held that remuneration, bonus and sitting fees received by K. K. Shah from Gill and Company Ltd., it will have to be held that the remuneration, bonus and sitting fees received by K. K. Shah as Director of Gill and Company Private Limited and other Companies did not represent the income of the H.U.F. of which he was the karta but his individual income.
Per Vimadalal J. :- I agree. I have nothing to add.
By the Court :- The question referred to us is answered as follows :
On the facts and in the circumstances of the case, remuneration and bonus received by K. K. Shah as Director of Gill and Company Private Limited and sitting fees received by him as a Director from that and other companies constituted his individual income and did not represent the income of the Hindu Undivided Family of which he was the karta. The Commissioner shall pay to the assessee the costs of this reference and bear his own costs.