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D.V. Dasappa Vs. Commissioner of Income-tax, Mysore - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKarnataka High Court
Decided On
Case NumberI.T.R. Cs. Nos. 8 and 9 of 1972
Judge
Reported in[1974]96ITR523(KAR); [1974]96ITR523(Karn)
ActsConstitution of India - Article 83; Income-tax Act, 1961 - Sections 256(1)
AppellantD.V. Dasappa
RespondentCommissioner of Income-tax, Mysore
Appellant AdvocateG. Sarangan, Adv.
Respondent AdvocateS.R. Rajsekhara Murthy, Adv.
Excerpt:
.....the said period of 12 years, the courts below were right in holding that the suit of plaintiff is barred by limitation. regular second appeal is dismissed. - he held that the commission received as well as the sitting fee was out of investment made from the joint family fund and, in view of judicial opinion, these two items are to be correctly included in the income of the hindu undivided family and completed the assessment for 1965-66 accordingly, including these amounts. 12,375 are liable to be included in the total income of the hindu undivided family for the assessment year 1965-66 ?' 8. having considered the submissions made and the arguments advanced, in our opinion, the tribunal has not correctly appreciated the principles enunciated in the decisions referred to by it and..........that the sums of rs. 1,000 and rs. 10,348 are liable to be included in the total income of the hindu undivided family for the assessment year 1965-66 whether, on the facts and circumstances of the case, the appellate tribunal was right in holding that the sums of rs. 14,750 and rs. 11,348 are liable to be included in the total income of the hindu undivided family for the assessment year 1966-67 ?' 2. the matters relate to the assessments for 1965-66 and 1966-67 of a hindu undivided family assessed in the name of d. v. dasappa. the relevant accounting years are the ones ended march 31, 1965, and march 31, 1966. the said d. v. dasappa was the karta of the hindu undivided family. he was a director in the consolidated coffee estates ltd. for the assessment years 1965-66 and 1966-67, he.....
Judgment:

Srinivasa Iyengar, J.

1. The Income-tax Appellate Tribunal, Bangalore Bench, has stated a case a referred under section 256(1) of the Income-tax Act, 1961, the following question of law as arising out of its order dated March 5, 1970, in Income-tax Appeals Nos. 186 and 187 (Bangalore) of 1969-70.

'Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in holding that the sums of Rs. 1,000 and Rs. 10,348 are liable to be included in the total income of the Hindu undivided family for the assessment year 1965-66

Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in holding that the sums of Rs. 14,750 and Rs. 11,348 are liable to be included in the total income of the Hindu undivided family for the assessment year 1966-67 ?'

2. The matters relate to the assessments for 1965-66 and 1966-67 of a Hindu undivided family assessed in the name of D. V. Dasappa. The relevant accounting years are the ones ended March 31, 1965, and March 31, 1966. The said D. V. Dasappa was the karta of the Hindu undivided family. He was a director in the Consolidated Coffee Estates Ltd. For the assessment years 1965-66 and 1966-67, he had received sums of Rs. 2,375 and Rs. 12,375, respectively, as director's sitting fees and commission. The amounts so received for the assessment year 1966-67 were Rs. 1,000 and Rs. 10,348. In the return submitted by the assessee for 1965-66, the amounts received relating to that year had been included. But, by a letter dated October 10, 1966, addressed to the Income-tax Officer, it was contended that the amounts received as director's sitting fee and commission were not includible in the assessment of the Hindu undivided family and a revised return was submitted. A separate return was also filed in his individual states showing therein these two amount as being assessable as his individual income. Similarly, for 1966-67, a separate return was filed showing such receipts as individual income and contending that they were not includible in the total income of the Hindu undivided family. The assessments for both the years came to be made on December 20, 1966.

3. It was contended before the Income-tax Officer that the said income arose by employment of personal skill and ability without detriment to any part of the joint family property. Five hundred shares of the Consolidated Coffee Estates Ltd., had been purchased in the name of D. V. Dasappa in May, 1954, and on issue of bonus shares, the number of shares held increased to 750. It was admitted that the investment in the shares out of the family funds. It was, however, argued that though the said D. V. Dasappa received the sitting fee and commission as director of the company by virtue of the shares belonging to the joint family, the said receipt flowed from personal services rendered by him to the company and were his individual income. The Income-tax Officer did not accept the contention for the assessee. He held that the commission received as well as the sitting fee was out of investment made from the joint family fund and, in view of judicial opinion, these two items are to be correctly included in the income of the Hindu undivided family and completed the assessment for 1965-66 accordingly, including these amounts. Following the said reasoning in his order for 1965-66, he included similar amounts received in the computation of the total income of the Hindu undivided family for 1966-67 also.

4. The assessee appealed to the Appellate Assistant Commissioner of Income-tax contending against the inclusion of these amounts. He considered the matter in a common order for both the years. He noted that up to 1956, the directors were being paid only sitting fees by the company and when the company approached the Central Government for enhancement of the fees payable to the directors, the Government of India permitted payment of commission on the gross income of the company in addition to sitting fees and, accordingly, from 1960 onwards commission was paid to the directors. Sri Dasappa was paid a commission of 1% on the gross income apart from the sitting fees. Under article 83 of the articles of association of the company it was provided that a director should hold shares of the nominal or face value of Rs. 3,000 for being qualified to be a director. It was argued before the Appellate Assistant Commissioner that the shareholding of the family was an insignificant proportion of the total issued share capital of the company (13,41,562 shares) and although the income from the shares was income of the family and the shares were necessary for acquiring qualification as director, there was no detriment to the joint family funds and no part of the joint family funds were spent or utilised for acquiring the director's commission and the sitting fees and these amounts could be included in the total income of the Hindu undivided family. Several ruling were relied upon for the assessee in regard to the principle to be applied and in particular the decision of the Supreme Court in S.R.M.CT.PL. Palaniappa Chettiar v. Commissioner of Income-tax. The Appellate Assistant Commissioner was of opinion that the facts and circumstances in the cases relied on for the assessee were distinguishable from those in the instant cases. He referred to the decision of the Supreme Court in V. D. Dhanwatey v. Commissioner of Income-tax and P. N. Krishna Iyer v. Commissioner of Income-tax and held that, although the two items of income can be traced to the individual skill and experience of the karta as a coffee planter, they were taxable as the income of the Hindu undivided family as it was earned by the karta in his capacity as the director for which the qualification shares were acquired with the aid or assistance of the family funds. He thus confirmed the assessments made.

5. On further appeal to the Tribunal, the orders of the authorities below were upheld. The Appellate Tribunal referred to the rulings in V. D. Dhanwatey v. Commissioner of Income-tax and P. N. Krishna Iyer v. Commissioner of Income-tax and observed that applying the principle enunciated in those cases, both the sitting fees and the commission were to be included in the assessment of the Hindu undivided family. It observed that these items of income had been received by the assessee in his capacity as a director of the company and his directorship was secured with the aid of family funds. For the assessee the case in P. N. Krishna Iyer v. Commissioner of Income-tax was sought to be distinguished on the ground that in that case the business which originally belonged to the Hindu undivided family was taken over by a limited company and the karta was appointed as the governing director by virtue of the qualifying shares which were purchases with the aid of the family funds. But the Tribunal held that from a reading of the judgment it was clear that the conversion of Hindu undivided family business into a limited company did not weight with the court and it was the fact that the qualifying shares were purchased with the aid of the family funds which was considered as decisive of the issue. The argument advanced that the minimum number of qualifying shares required to be held by a directors was negligible being only 300 shares out of the total issue of 13,41,562 shares was held to lack substance. The Tribunal held :

'The number of qualifying shares prescribed is immaterial. Whatever maybe the number of qualifying shares, the test is to see whether those shares were acquired by detriment to or with the aid or assistance of family funds. Once this is established, the income becomes the income of the family.'

6. It is contended for the assessee before us that the reasoning of the Tribunal is not correct and the correct principle of law has not been applied to the facts and circumstances of the case. Reliance is placed on the ruling of the Supreme Court in Raj Kumar Singh Hukam Chandji v. Commissioner of Income-tax and the decision of this court in V. C. Rajarathnam v. Commissioner of Income-tax, and it is urged that the conclusion reached that the income by way of sitting fees and commission was includible in the total income of the Hindu undivided family merely on the ground that the qualifying shares were purchased out of the family funds is not tenable. For the department it is argued that the facts and circumstances in the instant cases are similar to those in P. N. Krishna Iyer v. Commissioner of Income-tax and the conclusion reached is correct.

7. Before proceeding further, we should point out that in the questions as framed by the Tribunal there has been a mix up of the amounts in relation to which they have been referred. The receipts by way of sitting fees in the two years 1965-66 and 1966-67, respectively, were Rs. 2,375 and Rs. 1,000 and by way of commission, Rs. 12,375 and Rs. 10,348. Only the total of the two items in the respective two years was Rs. 14,750 and Rs. 11,348. Therefore, the questions referred obviously relate to a sum of Rs. 1,000 and Rs. 10,348 in respect of the assessment year 1966-67 and to a sum of Rs. 2,375 and Rs. 12,375 in respect of the assessment year 1965-66. It is agreed before us by the parties that the questions maybe recast accordingly. Therefore, the questions are recast in both these matters as follows :

'1. Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in holding that the sums of Rs. 1,000 and Rs. 10,348 are liable to be included in the total income of the Hindu undivided family for the assessment year 1966-67

2. Whether, on the facts and circumstances of the case, the Appellate Tribunal was right in holding that the sums of Rs. 2,375 and Rs. 12,375 are liable to be included in the total income of the Hindu undivided family for the assessment year 1965-66 ?'

8. Having considered the submissions made and the arguments advanced, in our opinion, the Tribunal has not correctly appreciated the principles enunciated in the decisions referred to by it and the conclusions reached are clearly contrary to law.

9. There is no dispute that the acquisition of the shares was out of family funds. But this by itself is not conclusive in regard to the issue involved. The finding of the Appellate Assistant Commissioner was that the two items of income can be traced to the individual skill and experience of the karta as a coffee planter. This was no disturbed by the Tribunal and there was no contrary finding. Except the fact that the shares were acquired out of the family funds, there was no other material showing that there was any detriment to the family in relation to the acquiring of the two items of income. These items of income did not arise out of this investment made or on account of the said investment. The qualification prescribed for a director under the articles of association of the company was the holding of 300 shares. This was negligible in comparison to the total issued capital. The Tribunal was of opinion that this factory was not relevant and the only test was to see whether the shares had been acquired by detriment to or with the aid or assistance of family funds. There is no warrant for this proposition from the decided cases.

10. In V. C. Rajarathnam v. Commissioner of Income-tax, decided on July 15, 1970, this court, after referring to several decisions including P. N. Krishna Iyer's case, held :

'One principle that is clear from all the decisions of the Supreme Court is that the fees or other remuneration received by the karta as a director of a company should not be necessarily treated as joint family income merely because the qualifying shares had been purchased out of the family funds; but in such cases, the fee, salary or other remuneration received by the karta as a director or partner, though it may be partially traceable to the personal exertions of the member, should beheld taxable as the income of the family if : (1) it is earned by detriment to the family funds; (2) it is earned with the aid or assistance of those funds; or (3) there is a real connection between the income and the investment of the family funds. From the facts in Dhanwatey's case and Krishna Iyer's case it is apparent that there was a real connection between the income received by the karta as a director or partner and the investment of the family funds and, therefore, it was held that the income of the director or partner should be held taxable as the income of the family. In Palaniappa Chettiar's case there was no such connection.'

11. The decision of the Supreme Court in Raj Kumar Singh Hukam Chandji's case was rendered on August 1, 1970. Therein, after noticing the earlier rulings and discussing the facts and circumstances in those cases, it was laid down :

'.... the broader principle that emerges is whether the remuneration received by the coparcener 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 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, on the other hand, if 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.'

12. With regard to the decision in V. D. Danwatey's case, it was observed :

'This court held that the remuneration paid by the firm to V. D. Dhanwatey directly related to the investments in the partnership business from the assets of the family and that there was real and sufficient connection between the investments from the joint family funds and the remuneration paid to him.'

13. Referring to the decision in P. N. Krishna Iyer's case, the Supreme Court observed :

'Therein this court further observed that in cases of this class the character of the receipt had to be determined by reference to its source, its relation to the assets of the family of which the recipient was a member and the primary objects with which the benefit received was disbursed.'

14. From the elucidation made in the two decisions referred to above, it is clear that the Tribunal was wrong in proceeding on the basis that the test was to see whether the qualifying shares had been purchased out of the family funds and if so the two items of income should be treated as the income of the Hindu undivided family. The number of shares required for qualifying to be a director was negligible compared to the total issued capital and the receipts as sitting fee and commission had no real connection to the investment made. An investment out of the family funds in the shares of a company of stability and standing cannot be said to be to the detriment of the family funds where no risk is involved. Dividend was received in respect of the shares and there was no dispute that it belonged to the Hindu undivided family as it was directly traceable to the investment of the Hindu undivided family. On the facts and circumstances of the case, it cannot be said that the source of receipt of the sitting fees and commission was the investment. The source was the individual skill and experience of the karta as a coffee planter. These receipts were essentially a remuneration for the service rendered by the karta and his individual income and the mere fact that the qualifying shares were acquired from out of the family funds would not change their character. The reliance sought to be placed on the decision in P. N. Krishna Iyer v. Commissioner of Income-tax for the department can be of no avail. The facts and circumstances in that case were entirely different and distinguishable from those in the instance cases.

15. We, therefore, hold that the Tribunal was wrong in holding on the facts and circumstances in the case that the sitting fees and commission received by the karta were liable to be included in the total income of the Hindu undivided family and answer the questions referred (as re-case above) in the negative and in favour of the assessee. The assessee shall be entitled to the costs of these references. Advocate's fee Rs. 250 (one set).


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