The judgment of the court was delivered by
R. S. PATHAK J. - This reference has been made by the Income-tax Appellate Tribunal under section 66(1) of the Indian Income-tax Act.
The Madho Kanhaiya Mahesh Gauri Sugar Mills Ltd., Munderwa, is a private limited company. The original subscribers to the memorandum of association became the first directors of the company, by virtue of article 74 of the articles of association, and were entitled to hold that office for life. The qualification for being a director was, by article 75, the holding of atleast 12 shares in the company. The life directors subscribed Rs. 8 lakhs out of Rs. 11 lakhs which represented the nominal capital of the company. Under article 78, the first directors were also to be the managing directors of the company. The remuneration of the managing directors was fixed by article 78, at 15% of the profits of the company, to be apportioned between them according to their respective shareholdings.
The assessee is a Hindu undivided family and Lal Girjesh Bahadur Pal it its karta. The company allotted 220 shares in his name, and the consideration therefore was paid from out of the Hindu undivided family funds. Lal Girjesh Bahadur Lal was one of the original subscribers to the memorandum of association, and, therefore, became one of the first directors of the company and, in accordance with article 78, a managing director.
During the previous year 1949-50, corresponding to the assessment year 1950-51, the company paid Lal Girjesh Bahadur Pal a sum of Rs. 2,357 as managing directors remuneration and Rs. 1,453 as directors fee. The Income-tax Officer included these amounts in the taxable income of Lal Girjesh Bahadur Pal in his status as individual, but upon appeal the Appellate Assistant Commissioner altered the status to that of a Hindu undivided family. The Hindu undivided family appealed to the Income-tax Appellate Tribunal and contended that neither of the two aforesaid amounts constituted the familys income and they were, therefore, liable to be excluded from its assessment. The Appellate Tribunal held that the directors fee constituted the independent income of Lal Girjesh Bahadur Pal but the sum of Rs. 2,357 paid to him as managing directors remuneration constituted the income of the family. Upon these facts, the following question has been referred to this court :
'Whether the managing directors remuneration of Rs. 2,357 received by Lal Girjesh Bahadur Pal was liable to inclusion in the total income of the assessee-family ?'
From an examination of the articles of association and the facts before us, it is apparent that the assessee-family was intimately associated with the company from its inception. The bulk of the total nominal share capital of the company was provided by the original subscribers, that contributed in the name of Lal Girjesh Bahadur Pal being paid by the assessee family. It seems to us that the remuneration of the managing directors amounting to as much as 15% of the profits of the company, must be held to be nothing but a distribution of a substantial share of the profits to those who had provided the initial capital. The case falls within the rule laid down by the Supreme Court in Commissioner of Income-tax v. Kalu Babu Lal Chand. Learned counsel for the assessee relies upon Commissioner of Income-tax v. Darsanram and Commissioner of Income-tax v. S. N. N. Sankaralinga Iyer. So far as the latter decision, which was delivered by a Bench of the Madras High Court, is concerned, another Bench of the same High Court held that the view taken in the earlier decision was incorrect. The subsequent decision is reported in Commissioner of Income-tax v. S. RM. CT. PL. Palaniappa Chettiar. The Patna High Court in Sri Mohan Tayal v. Commissioner of Income-tax also took the view that the decision in Commissioner of Income-tax v. S. N. N. Sankaralinga Iyer did not lay down the correct law. It is not necessary for us to go the entire length to which the learned judges of the Patna High Court and of the Madras High Court have gone, because as we have pointed out the rule in Commissioner of Income-tax v. Kalu Babu Lal Chand fully covers the facts of the instant case. We are of the view that the remuneration paid to Lal Girjesh Bahadur Pal as managing director was received not because of his personal skill, merit or individual qualification.
It was received because he occupied that office by virtue of his being the karta of a Hindu undivided family which had contributed substantially to the capital of the company. Accordingly, the sum of Rs. 2,357 received by him as managing directors remuneration was liable to be included in the total income of the assessee-family. We, therefore, answer the question in the affirmative.
We direct that a copy of this judgment shall be sent under the seal of the court and the signature of the Registrar to the Income-tax Appellate Tribunal. We further direct that the commissioner of Income-tax shall get this costs, which we assess at Rs. 200. Counsels fee is assessed at Rs. 200.
Question answered in the affirmative.