R.S. PATHAK J. - The Income-tax Appellate Tribunal has invited the opinion of this court on the following question :
'Whether, on the facts and in the circumstances of the case, salary and allowances of Rs. 38,918, Rs. 35,184 and Rs. 38,300 drawn by B.N. Talwar for the assessment years 1958-59, 1959-60, and 1960-61, respectively, in terms of the agreement made on May 16, 1965, between him and the Allied Motors Private Ltd. is assessable in the hands of the assessee Hindu undivided family consisting of B.N. Talwar and his son ?'
The assessee is a Hindu undivided family consisting of B.N. Talwar and his sons.
Rai Bahadur Parmanand Talwar had six sons, of whom B.N. Talwar is the eldest. The father carried on a prosperous automobile business at Peshawar under the name 'Khyber Automobiles'. In September, 1942, he made a settlement of varying amounts in favour of each of the six sons and also made over the automobile business to the sons on condition that they carried it on in partnership. The automobile business was, in accordance with the wishes of the father, carried on by the six brothers as a partnership firm. The father died in April, 1944, and his property was apportioned between his widow and his sons. Upon partition of the country in August, 1947, the sons migrated to India. They entered into partnership and set up a business 'Khyber Automobiles' at Delhi and a business 'National Automobile' at Lucknow. In April, 1951, B.N. Talwar and his brother joined the board of directors of Allied Motors Private Limited, a private limited company of which one E. Birkett was the managing director. At that time, neither B.N. Talwar nor his brothers held any share in the company. It is conceded that there was nothing in the articles of association requiring that a person appointed as a director should hold any share in the company by way of qualification. On the contrary, article 115 provided : 'Until otherwise determined by the company in general meeting, a director shall not require any qualification...' On October 8, 1951, B.N. Talwar purchased 5,750 shares of Allied Motors Ltd. on behalf of him self and his brothers out of the partnership funds. In March, 1955, Birkett expressed a desire to retire and thereupon, his holding of 29,125 shares out of the issued capital of 68,120 shares was purchased by the brothers under an agreement dated March 26, 1955. Under that agreement the goodwill of the partnership business carried on by the brothers was purchased by Allied Motors Ltd. along with the entire assets of the partnership business. Out of Birketts holding, B.N. Talwar acquired 1,995 shares.
On May 16, 1955, an agreement was entered into between Allied Motors Ltd. and B.N. Talwar. The agreement plays a prominent part in the case and some of its conditions may be set out. Under clause 1, B.N. Talwar was appointed to the office of deputy chairman of the company for the purpose of looking after the interest of the company in general and in Uttar Pradesh in particular. The appointment was for a period of 20 years commencing April 1, 1955. Paragraph 6, which is of immediate relevance, provided :
'For his services as the deputy chairman of the company now at Lucknow or any other subsequent office to which he will be transferred the said B.N. Talwar shall be entitled to a monthly remuneration of Rs. 2,150 nett (income-tax being payable on his salary to the Government by the company), and entertainment allowance of Rs. 350 and car allowance of Rs. 200 per month. The salary and allowance will be renewable from time to time in accordance with the progress made by the company and depending upon the position the said B.N. Talwar holds in the company.'
Some time after this agreement was executed, the articles of association of the company were altered and article 113 now stated that the brothers including B.N. Talwar would be entitled to hold office as permanent directors for life and would hold at least 2,500 shares in the company. This agreement was effected on January 16, 1956. Article 115 continued as before. In 1956, B.N. Talwar was appointed chairman of the board of directors of the company and continues in that capacity.
For the assessment years 1958-59, 1959-60 and 1960-61, the Income-tax Officer assessed the assessee Hindu undivided family, of which B.N. Talwar is karta, in respect of the salary and allowances received by B.N. Talwar under the agreement of May 16, 1955.
The Appellate Assistant Commissioner on appeal upheld the claim of the assessee that the salary and allowances constituted the individual income of B.N. Talwar and could not be taxed in the hands of the assessee. The Income-tax Appellate Tribunal confirmed the finding of the Appellate Assistant Commissioner. At the instance of the Commissioner of Income-tax the Tribunal has now made this reference.
The question referred by Tribunal mentions three figures of Rs. 38,918, Rs. 35,184 and Rs. 38,300 as the salary and allowances assessed for the assessment years 1958-59, 1959-60 and 1960-61, respectively. The assessment order relating to the assessment year 1958-59 has alone been made part of the statement of the case and we do not have the assessment orders for the remaining two years. From a perusal of that assessment order, it appears that the figure Rs. 38,918 is made up of the salary, income-tax paid on the salary, bonus received and add-backs on account of a part of the car allowance and entertainment allowance not allowed. Learned counsels for the parties are agreed that the figure of Rs. 38,918 is composed of these five items.
It is now well settled that property acquired by a karta or other coparcener of a Hindu undivided family with the aid or assistance of the Hindu undivided family is impressed with the character of Hindu undivided family property. To establish that the property acquired is the self acquisition by the karta or other coparcener, it is necessary to show that it was without detriment to the Hindu undivided family estate and that it was made without any aid or assistance from the Hindu undivided family property. This principal of the Hindu law arises for consideration often in cases where the question is whether the remuneration received by a karta or other coparcener of a Hindu undivided family in respect of an office occupied by him in a company or partnership firm is liable to income-tax in the hands of the individual or the Hindu undivided family. Where the karta or other coparcener was appointed to the office by reason of Hindu undivided family funds invested in the company or partnership firm, it has been held that the remuneration received in respect of that office must be included in the taxable income of the Hindu undivided family. Such a case was Commissioner of Income-tax v. Kalu Babu Lal Chand. A recent decision of the Supreme Court to the same effect is V.D. Dhanwatey v. Commissioner of Income-tax, where emphasis was laid on the real and sufficient connection between the investment from the Hindu undivided family funds in the partnership business and the remuneration paid to V. D. Dhanwatey under the partnership deed on account of the general management and supervision of the partnership business. On the other side of the line is the decision delivered, on the same date, by the Supreme Court in S. RM. CT. PL. Palaniappa Chettiar v. Commissioner of Income-tax where on the finding that the Hindu undivided family purchased shares not with the object that the karta should become the managing director but in the ordinary course of investment, and that there was no connection between the investment of the Hindu undivided family funds for the purchase of shares and the appointment of the karta as managing director of the company, it was held that the remuneration of the managing director was not earned by any detriment to the Hindu undivided family assets and, therefore, it was not liable to tax in the hands of the Hindu undivided family.
Turning to the facts found in the instant case, it is clear that B.N. Talwar became a director of Allied Motors Ltd. in 1951, when the assessee Hindu undivided family did not hold any shares in the company. There was no requirement in the articles of association that eligibility for the office of director turned upon the holding of a number of shares of the company. Article 115 in fact specifically stated that a director did not require any qualification until otherwise determined by the company in general meeting and there is no material that the holding shares was made a condition requisite for appointment to the office of director. The Tribunal has found that in acquiring the shares of the company the investment had nothing to do with the appointment of B.N. Talwar as director. The Tribunal noted that his appointment was attributable to his previous experience in the automobile industry and that he was chosen for the office by virtue of his long experience and capabilities. On May 16, 1955, when the agreement was executed appointing B.N. Talwar as deputy chairman of the company, although the Hindu undivided family had meanwhile acquired a large number of shares in the company, there was no requirement in the articles of association or in the agreement making the holding of shares a qualification for eligibility to the office of deputy chairman. It was only subsequently, on January 16, 1956, that article 113 was amended under which the brother became permanent directors and were to hold at least 2,500 shares each. The Tribunal has found that the personal qualifications of B.N. Talwar were responsible for his selection and appointment to the post and categorically held that the remuneration received by him should be treated as quid pro quo for the services rendered by him under the agreement. It did not find any nexus between the shares held by the Hindu undivided family and the remuneration earned by B.N. Talwar, and concluded that the salary and allowances received by B.N. Talwar as deputy chairman were not earned by any detriment to the Hindu undivided family estate. Upon the facts found by the Tribunal we are unable to hold that there was any real connection between the investment of the Hindu undivided family funds in the shares of the company and the appointment of B.N. Talwar by virtue of which he received the salary and allowances in question here.
Upon this, we are of opinion that the salary and allowances of Rs. 38,918, Rs. 35,184, and Rs. 38,300 under the agreement of May 16, 1955, between him and Allied Motors Private Ltd., constituted his individual income and cannot be taxed in the hands of the assessee Hindu undivided family.
We answer the question referred by the Tribunal in the negative.
The assessee is entitled to his costs which we assess at Rs. 200. Counsels fee is also assessed at Rs. 200
Question answered in the negative.