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Commissioner of Income-tax Vs. G.V. Rathaiah - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberReferred Case No. 33 of 1981
Judge
Reported in[1986]159ITR945(AP)
ActsIncome-tax Act, 1961 - 256(1); Companies Act
AppellantCommissioner of Income-tax
RespondentG.V. Rathaiah
Appellant AdvocateM. Suryanarayana Murthy, Adv.
Respondent AdvocateA. Satyanarayana, Adv.
Excerpt:
.....managing director (md) of company - assessing authority assessed his remuneration as income of joint family on ground that remuneration received by him was not on account of services rendered by him but by virtue of investments made by family - evidence showed that karta rendered substantial services and not merely routine ones - held, remuneration received by karta from company not assessable as income of joint family. - motor vehicles act (59 of 1988)section 149 (2): [v. gopala gowda & jawad rahim, jj] insurers entitlement to defend the action joint appeal by insured and insurer - held, the language employed in enacting sub-section (2) of section 149 appears to be plain and simple and there is no ambiguity in it. it shows that when an insurer is impleaded and has been given..........the previous years relevant for the income-tax assessment years 1973-74 and 1974-75, the company paid remuneration of rs. 18,000 and rs. 12,000, respectively, to the karta of the assessee-family for the services rendered by him as the managing director of the company. the remuneration paid to the managing director was allowed as deduction in computing the income of the company. 3. the assessee-family filed in the usual course its income-tax returns for the two assessment years 1973-74 and 1974-75. the income-tax officer held that the remuneration of rs. 18,000 and rs. 12,000 paid by the company to the karta of the assessee-family was assessable as the income of the joint family. the income-tax officer rejected the assessee's claim that the remuneration was paid to the karta of the.....
Judgment:

Y.V. Anjaneyulu, J.

1. This reference under section 256(1) of the Income-tax Act, 1961, is at the instance of the Commissioner of Income-tax. It relates to the income-tax assessment years 1973-74 and 1974-75.

2. The assessee is a Hindu undivided family. The assessee family represented by its karta and one M. Seshagiri Rao had been carrying on business in partnership in tobacco for over a period of fifteen years. That partnership was dissolved. On dissolution, the assets and liabilities of the partnership were taken over with effect from January 1, 1972, by a private limited company known as 'M/s. G. V. Rathaiah & Co., Tobacco Exporters (Pvt.) Ltd.', Guntur. In the company, out of 2,155 shares of the value of Rs. 100, the assessee-family owned 1,650 shares of the value of Rs. 1,65,000 and 500 shares of the value of Rs. 50,000 were held by Smt. G. Krishna Kumari, wife of the karta. One P. Harihara Prasad was holding S shares of the value of Rs. 500. As per article 93 of the articles of association of the company, the karta of the assessee-family is the first managing director; the other director is the karta's wife, Smt. G. Krishna Kumari. The said article also provided that the karta of the assessee-family shall be the managing director for a period of five years. The company has been assessed to tax. In the previous years relevant for the income-tax assessment years 1973-74 and 1974-75, the company paid remuneration of Rs. 18,000 and Rs. 12,000, respectively, to the karta of the assessee-family for the services rendered by him as the managing director of the company. The remuneration paid to the managing director was allowed as deduction in computing the income of the company.

3. The assessee-family filed in the usual course its income-tax returns for the two assessment years 1973-74 and 1974-75. The Income-tax Officer held that the remuneration of Rs. 18,000 and Rs. 12,000 paid by the company to the karta of the assessee-family was assessable as the income of the joint family. The Income-tax Officer rejected the assessee's claim that the remuneration was paid to the karta of the assessee-family for the services personally rendered by him as the managing director of the company and, therefore, assessable in the individual hands of the karta. The Income-tax Officer observed that the position of the managing director of the company was acquired by the assessee by virtue of investment of the family funds in the company and the remuneration received by the assessee as managing director was derived to the detriment of the family assets rather than services rendered by the assessee. The Income-tax Officer further observed that, prior to the formation of the company, the karta of the assessee-family had ample experience in the business and it was by virtue of that experience that the family invested a large sum of money in the company and obtained control and management of the company's affairs. Aggrieved by the assessment of the above-referred remuneration in its hands, the assessee filed appeals before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner confirmed the assessment made by the Income-tax Officer. He held that 'the income was primarily earned by utilising the joint family assets or funds and the mere fact that, in the process of gaining the advantage, an element of personal service or skill or labour was involved, did not alter the character of the income'. The Appellate Assistant Commissioner further observed that, although the karta of the assessee-family rendered some services to the company, there was no finding that he possessed any special qualifications and the services rendered by him were of a specialised nature and not of a normal or routine nature. The Appellate Assistant Commissioner felt that these circumstances justified the assessment in the hands of the assessee of the remuneration paid by the company to the karta of the joint family.

4. The assessee carried the matter in second appeal to the Income-tax Appellate Tribunal. The Tribunal reversed the Appellate Assistant Commissioner's decision and accepted the assessee's contention that the remuneration in question was paid to the karta of the joint family for services personally rendered by him. The Tribunal found that the karta of the joint family has vast experience in the line of business carried on by the company and that helped him to become the managing director and the remuneration paid to him was clearly for the services rendered by him to the company and not by way of return for utilisation of the joint family property in the form of shares in the business. The Tribunal referred to the principles of law governing the matter under consideration and held that on the application of settled principles, it must be held that the remuneration represented the income of the karta of the assessee-family assessable in his individual hands. In that view, the Tribunal allowed the appeals filed by the assessee and directed the exclusion of the remuneration paid to the karta by the company from the assessment of the assessee.

5. The Commissioner of Income-tax applied for and secured the present reference to this court under section 256(1) of the Income-tax Act, 1961, questioning the correctness of the Tribunal's decision. The Tribunal referred the following question of law for the opinion of this court :

'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in coming to the conclusion that the remuneration paid to the karta of the assessee by the company, M/s. G. V. Rathaiah & Co. Pvt. Ltd., for the assessment years 1973-74 and 1974-75 was assessable in his 'individual' status and not in the hands of the Hindu undivided family for the assessment years 1973-74 and 1974-75 ?'

6. Learned standing counsel for the Revenue, Sri M. Suryanarayana Murthy, contended that, on the facts of the case, the karta of the joint family became the managing director pursuant to the investment by the family of its funds in the company. It is submitted that the karta of the joint family was not appointed as managing director pursuant to his personal qualifications. It was pointed out that the company was, in reality, a family concern and the family had complete control over the management of the affairs of the company. The appointment of the karta of the joint family as managing director was in pursuance of the control exercised by the family on the company in the management. Learned standing counsel also pointed out that the karta did not possess any special skill or technical qualifications for appointment as managing director. Whatever services rendered by him were of a routine character. It is urged that the payment of remuneration to the karta had direct nexus to the investment made by the family in the company. The remuneration paid to the karta was referable to the investment of the family in the company and was earned by the karta with the aid or assistance of the funds invested by the family. These facts would indicate that the remuneration received by the karta was derived to the detriment of the family assets and, consequently, the remuneration received by the karta was assessable as the income of the joint family, contended the learned standing counsel.

7. Learned counsel for the assessee, Sri A. Satyanarayana, urged that the company paid remuneration to the karta as managing director for the services rendered by him personally. It is pointed out that the karta had over fifteen years of experience in that line of business and possessed rich experience and skill. It is pointed out that, while engaged in business, the karta had to visit several foreign countries to which Indian tobacco was exported and became conversant with the export market which accounted for the growth of the business which was eventually taken over by a limited company. It is urged that the performance of duties as managing director required skill, experience and knowledge and there was no dispute that the karta rendered services to the company as its managing director. Learned counsel submitted that this is not a case where remuneration was paid to the karta of the joint family because of the investment of funds by the family in the company. It is claimed that it is not the Revenue's contention that the managerial affairs of the company were performed by any person or persons other than the karta and that the karta was a nominal head of the company as managing director without rendering active services to the company. It is further pointed out that, in the assessment of the company, there was no dispute that the karta rendered services entitling him to receive salary or remuneration. Learned counsel also pointed out that, apart from vaguely observing that the remuneration paid to the karta was to the detriment of the interests of the family, no material whatsoever was indicated as to how the payment of remuneration to the karta of the joint family caused any detriment to the interests of the family. Learned counsel urged that, if services are rendered personally and remuneration is paid in relation to such services, no inference of detriment to the family can be drawn. If the karta of the joint family did not act as the managing director, somebody else would have performed those services and remuneration has necessarily to be paid. Just because those services were rendered by the karta of the family who possessed vast experience, knowledge and skill, it cannot be said that any detriment was caused to the family. It is further submitted that there is no connection between the remuneration paid to and received by the karta for the services rendered by him and the investment of capital by the family in the company. It is also submitted that the Tribunal recorded a clear finding that the karta possessed vast experience and the remuneration was paid to him for the services rendered by him personally. There was no finding to the effect that there was any detriment to the family by payment of remuneration to the karta of the family. Learned counsel urged that the above findings of fact were not challenged by the Revenue and it is, therefore, not open to the Revenue to urge that the remuneration paid to the karta is relatable to the investment made by the family in the company. On these facts, learned counsel for the assessee urged that the Tribunal was justified in coming to the conclusion that the remuneration paid by the company to the karta was not assessable as the income of the assessee-family.

8. Learned standing counsel for the Revenue as well as the learned counsel for the assessee have relied on a large number of cases to support their respective pleas. It is not necessary to deal with each one of those cases, as we find that the principles governing the matter under consideration are fairly settled. All that is required is to apply the settled principles to the facts found in the present case and arrive at a proper conclusion. We shall, however, refer to some of the cases cited which have a bearing on the issue.

9. The Supreme Court had occasion to consider the same question as the one raised in the present reference in Raj Kumar Singh Hukam Chandji v. CIT' : [1970]78ITR33(SC) . After an exhaustive review of several cases bearing on the point, the Supreme Court enumerated the following tests (at pages 43-44) :

'(1) whether the income received by a coparcener of a Hindu undivided family as remuneration had any real connection with the investment of the joint family funds;

(2) whether the income received was directly related to any utilisation of family assets;

(3) whether the family had suffered any detriment in the process of realization of the income; and

(4) whether the income was received with the aid and assistance of the family funds.

In our opinion, from these subsidiary principles, 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 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 on 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.'

10. The above tests have been applied in several cases by the High Courts.

11. We may refer to the decision of the Delhi High Court in CIT v. P. S. Jain Motor Co. [1980] 124 ITR 880. In this case, the joint family was holding the majority of shares in three newly formed companies. The karta of the Hindu undivided family received remuneration from the companies ranging between Rs. 9,300 and Rs. 15,600 per annum, while the joint family received only Rs. 3,000 by way of dividend in respect of its investments. The tax authorities included the remuneration received by the karta of the family in the assessments of the joint family holding that the remuneration received by the karta is referable to the investments made by the joint family. The Tribunal, dealing with the appeals in that case, held that the karta had considerable experience in the line of business in which the companies were engaged and the shares held by the family in the companies had nothing to do with the appointment of the karta in those companies. In that view, the Tribunal directed the exclusion of the remuneration received by the karta from the assessments of the joint family. The Commissioner carried the matter in reference to the High Court. The High Court held that even where a joint family is running its own business, it is entitled to pay the karta of the family or some other member who attends to the business of the family a remuneration and such income will be the individual income of the karta. Where the family does not own the business itself, but only holds the majority of shares, it does not necessarily follow that the remuneration paid to the karta of the family would be a form of return for the investments made by the family especially when the karta has rendered services and deserves the remuneration for such services.

12. We may also refer to the decision of the Bombay High Court in CIT v. C.D. Sanghavi : [1979]119ITR863(Bom) . In that case also, the joint family was holding shares in a company and the karta, who was appointed as managing director, was paid remuneration for the services rendered by him as managing director. The tax authorities claimed that there was a direct link between the shareholdings of the joint family and the appointment of the karta as the managing director. Consequently, the remuneration paid to the karta for rendering services as managing director of the company was assessed in the hands of the joint family as its income. When the matter came before the Tribunal on appeal, the remuneration was excluded from the assessments of the joint family holding that, merely because the joint family held some shares in a limited company and the karta of the family was appointed as a managing director, it could not be said that he was so appointed because of the holding of his shares. It was held that the remuneration received by the karta of the family should be considered to be his personal income and not that of the joint family. The Commissioner carried the matter in reference to the High Court. The High Court held that there was no evidence to show that the karta was appointed as a director on behalf of the family or to the detriment of the family property. There was also no material to show that there was any direct link between the shareholdings of the joint family and the appointment of the karta as a director. The High Court, therefore, upheld the Tribunal's view that the remuneration received by the karta from the limited company could not be taxed as the income of the joint family.

13. In Shankerlal H. Dave v. CIT : [1980]124ITR733(Guj) , the question arose whether remuneration paid by the joint family to its karta for looking after the affairs and interests of the joint family in various businesses could be allowed as a deduction in computing the income of the joint family. In that case, the joint family held interest in several partnership firms. The karta of the joint family was managing and looking after the affairs and interests of the joint family in various businesses. There was an agreement between the family represented by the karta, his wife and minor children on the one hand and the karta in his individual capacity on the other, according to which the karta was to be paid a remuneration of Rs. 24,000 per annum from out of the income of the joint family for managing and looking after the affairs and interests of the family in various businesses. It was specifically agreed that the remuneration payable to the karta not intended to cover any services rendered by him to the businesses apart from whatever he has required to do for managing and looking after the affairs and interests of the joint family in the various businesses. The joint family claimed deduction of the sum of Rs. 24,000, which was paid to its karta. The Income-tax Officer rejected the claim for deduction; but, on appeal, the Appellate Assistant Commissioner allowed it. On further appeal, the Appellate Tribunal rejected the claim of the assessee. On a reference, the Gujarat High Court held that the agreement was categorical that the remuneration of Rs. 24,000 per annum was paid to the karta for rendering services to the joint family in the various businesses of the family, that the claim for remuneration was only for services rendered to the joint family by its karta for managing and looking after the affairs and interests of the joint family in those various partnership businesses and that the remuneration paid by the family to its karta was allowable.

14. We may also refer to the decision of a Division Bench of this court in CIT v. K. S. Subbiah Pillai : [1981]127ITR505(AP) . In that case also, the joint family subscribed to the capital of a private limited company and the karta of the family was appointed as its managing director. The remuneration paid by the company to the karta as managing director was assessed as the income of the joint family. The Tribunal upheld the contention of the joint family that the income was not assessable in its hands. In the reference filed by the Commissioner, this court held that the remuneration received by the karta of the family could not be termed as a mode of return to the joint family merely on account of the latter's investment in the company managed by its karta. This court observed that there was no material to move that the payment of remuneration was connected with the investment of the joint family in the company. It was held that the remuneration constituted the individual income of the karta and could not be assessed in the hands of the joint family.

15. The principles emerging from the cases above referred clearly support the claim made in the assessee's case that the remuneration received by the karta from the company is not assessable as the income of the joint family.

16. Learned standing counsel for the Revenue relied on the decision of the Supreme Court in P. N. Krishna Iyer v. CIT : [1969]73ITR539(SC) . Learned standing counsel also relied on two judgments of the Allahabad High Court in Bimal Kumar Jain v. CIT : [1974]93ITR225(All) and Pratap Veer Kakkar v. CIT : [1977]107ITR435(All) . Learned standing counsel also invited our attention to the decision of the Supreme Court in V. D. Dhanwatey v. CIT : [1968]68ITR365(SC) . In P. N. Krishna Iyer v. CIT : [1969]73ITR539(SC) , the following observations at page 546 of the Report bring out the real distinction of that case from the assessee's case :

'The shares which qualified the assessee to become a member of the the company were purchased with the aid of joint family funds. The shares which were allotted to the assessee in lieu of his services were also treated as shares belonging to the joint family. The entire capital assets of the company originally belonged to the joint family and were made available to the company in consideration of a mere promise to pay the amount for which the assets were valued. The income. was primarily earned by utilising the joint family assets or funds and the mere fact that in the process of gaining the advantage an element of personal service or skill or labour was involved did not alter the character of the income. In cases of this class, the character of the receipt must be determined by reference to its source, its relation to the assets of the family of which the recipient was the member, and the primary object with which the benefit received was disbursed.'

17. In Bimal Kumar Jain v. CIT : [1974]93ITR225(All) and Pratap Veer Kakkar v. CIT : [1977]107ITR435(All) , there was no evidence of any personal services rendered by the karta of the joint family. In V. D. Dhanwatey v. CIT : [1968]68ITR365(SC) , there was a finding that the remuneration paid to the karta of the joint family directly related to the investment in the partnership business from the assets of the family. It was also found that the karta became a partner on account of the investments of the joint family assets in the capital of the partnership. In view of these findings, it was held that the remuneration paid by the firm to the karta of the joint family could be assessed as the income of the joint family.

18. Having perused the above decisions relied on by the learned standing counsel, we consider that they are clearly distinguishable. In those cases, there was material to indicate that the remuneration paid to the karta was one of the modes of return for the investments made by the family in the business. There was no finding in those cases that the remuneration was paid for the services rendered by the member of the family. In the present case, from the investment of the joint family of its funds in the company, it is not possible to draw an inference that the remuneration paid to the karta of the joint family for the services rendered by him as managing director was one of the modes of return for the investment made by the family in the company. There was absolutely no material to prove that the payments were connected with the investment made by the family in the company. On the contrary, there is clear evidence in the present case that the karta of the joint family had rich experience in the line of business carried on by the company for over fifteen years. It would appear that the karta had visited several foreign countries in connection with the tobacco exports and acquired substantial experience in the export market. It cannot, therefore, be said that the services rendered by the karta as the managing director of the company were of a routine character. The services rendered by the karta required managerial ability and considerable skill in arranging commercial and financial transactions in the domestic as well as international markets. Learned standing counsel's contention that the services rendered by the karta as the managing director were of a routine character is based on no material whatsoever. Surely, the managing director is a highly responsible executive of the company who has to perform important functions statutorily under the Companies Act and otherwise. A managing director of the company is the head of the company and the affairs of the company are organised and regulated by the managing director through his ability and skill. We are unable to accept the contention of the] earned standing counsel that the services rendered by the karta as the managing director did not call for any experience, skill or knowledge. Even otherwise, we do not see the relevancy of the argument that the services rendered by the karta or a member of the family should be of a specialised nature in order to admit that the income related to the individual performing the services. All that is required is to find out whether the karta or any member of the family performed services to the company and the remuneration paid by the company was relatable to such services. Unless it is shown that the remuneration was essentially earned as a result of the funds invested by the joint family, it is not possible to ignore the fact that the karta or any member of the joint family had rendered services to the company. If, in a given case, evidence is forthcoming to establish the contention that the remuneration was essentially earned as a result of the funds invested by the joint family, then, in such a case, the question whether the karta or a member of the joint family rendered some services may not assume importance. Where, however, there is no connection between the investment of the funds by the family and the remuneration paid to the karta or a member of the family, it is not possible to consider the remuneration received by the karta or the member of the family as the income of the joint family. As observed by the Supreme Court in Rajkumar Singh Hukam Chandji v. CIT : [1970]78ITR33(SC) 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.

19. The evidence in the present case conclusively established that the remuneration was paid to the karta of the family by the company for services personally rendered by him a managing director. Apart from vaguely suggesting that, because of the payment of remuneration to the karta, there is a detriment to the family, there is no material on record, much less a finding by the Tribunal, that there was any detriment caused to the joint family by reason of the payment of remuneration to the karta. Indeed, the remuneration paid by a company to the karta or any member of the family for services personally rendered without any connection with the investment by the family of its funds in the company can never be regarded as a detriment to the interests of the family. On a consideration of the entire evidence on record, we are satisfied that the Tribunal collectively came to the Conclusion that the remuneration paid to the karta of the joint family by the company constituted his individual income and is consequently not liable to be assessed in the hands of the joint family. We accordingly answer the question referred in the affirmative, that is to say, in favour of the assessee and against the Revenue, The Revenue shall pay costs to the assessee. Advocate's fee Rs. 500.


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