Gulati J. - This is a consolidated reference under section 256(1) of the Income-tax Act, 1961 relating to the assessment years 1958-59, 1959-60 and 1960-61.
2. The assessee is a Hindu undivided family of which Seth Banarasi is the Karta. During the relevant accounting periods, the assessee family derived income from various sources, including an Agriculture Farm, known as Mohan Farm. On this farm sugarcane was grown and the Gur was manufactured from the sugarcane. The assessee claimed exemption from income-tax in respect of the income arising from the sale of Gur on the ground that is represented agricultural income. This contention has been rejected by the Income-tax Authorities as also by the Income-tax Appellate Tribunal.
3. There is a company known as M/s. Jaswant Sugar Mills Ltd. at Meerut in January, 1952 the assessee family purchased a large number of share of Jaswant Sugar Mills Ltd. (hereinafter referred to as the Company). The total shareholdings of the assessee family came to be 66.37 percent of the total subscribed capital of the Company. For acquiring these shares the assessee had to take certain loans. On 4th January, 1952 the Board of Directors of the Company appointed Seth Banarsi Das as a Director in a casual vacancy. Later, on 7th February, 1952 by another resolution, the Company appointed Seth Banarsi Das as Chairman of the Board of Directors. There was no stipulation in the resolution with regard to the renumeration to be paid to Seth Banarsi Das. More than 3 1/2 years later on 8th December, 1955 Seth Banarsi Das wrote to the Company demanding remuneration on the ground that he had devoted his whole time to the affairs of the Company, as a result of which the Company had flourished and had earned huge profits. On the some days the Board of Directors of the Company passed a resolution sanctioning as remuneration to Seth Banarsi Das 10 per cent of the net annual profits of the Company, as defined in Section 87(c) of the Indian Companies Act. It appears that the Government of India did not accept remuneration proposed to be given to Seth Banarsi Das and it reduced the renumeration. The Company passed another resolution modifying its earlier resolution and accepting the recommendations made by the Government of India. As a result of this resolution, Seth Banarsi Das received a large sum of money for each of the three assessment years in question as remuneration, besides a sum of Rs. 600/- on account of the Directors fee. The assessee-family did not include this income in its return on the ground that the renumeration paid to Seth Banarsi Das belonged to him in his individual capacity and did not belong to the family. This claim of the assessee was not accepted by the income-tax authorities but was accepted finally by the Income-tax Appellate Tribunal. The the Department both being aggrieved, asked for a reference assessee and to the High Court. The Income Tax Appellate Tribunal has accordingly referred the following two questions of law for our opinion :-
'1. Whether on the facts and in the circumstances of the case, the income from the sale of Gur manufactured by the assessee out of sugarcane produced at its Mohan Farm was an agricultural incomes and therefore not liable to be charged to income-tax.
2. Whether on the facts and circumstances of the case the Appellate Tribunal was justifying in directing that the renumeration, Directorss fee or value or perquisites received by Seth Banarsi Das Gupta, Karta of the Hindu undivided family from M/s. Jaswant Sugar Mills. Ltd. be excluded from the assessment of the Hindu undivided family.'
4. So far as question No. 1 is concerned, the learned counsel for the parties are agreed that the same is covered by a decision of this Court in I.T.R. No. 11 of 1968, decided on 5th May, 1972 in the name of this very assessee where a similar question relating to the assessment year 1956-57 was answered against the assessee by holding that the income from sale of Gur did not represent agricultural income. We accordingly answer question No. 1 in the Negative in favour of the Department and against the assessee;
5. As regards question No. 2, the Tribunal has found that the remuneration paid to Seth Banarsi Das as the Chairman of the Board of Directors was on account of the Specialised services rendered by him to the Company did not as a return to the assessee of its investment in the purchase of shares. This finding of the Tribunal is based upon cogent material. The Tribunal has taken into account the fact that Seth Banarsi Das renumerated in respect of his services as Chairman of the Board of Directors immediately after the assessee had purchased shares of the Company. There was an interval of 3 1/2 years between the date of the investment and the date on which the remuneration was sanctioned by the Company. Secondly, Seth Banarsi Das made a representation drawing the attention of the Board that due to his efforts the Company had made progress and earned profits. On this representation the Board of Directors resolved that a remuneration should be paid to Seth Banarsi Das. The Tribunal has further observed that there is no evidence that the family suffered and detriment in the process of the appointment of Seth Banarsi Das as the Chairman. The Tribunal has also relied upon the experience of Seth Banarsi Das in the management of sugar mills. From 1932 to 1934 he was activity participating in the management of Laxmi Sugar Mills, Mohali. In 1934 alongwith his brother, he set up a Sugar Mill at Bijnor and upto 1944 he was managing the said mills either as a Managing Partner or as a Superintending partner. In September, 1946 he obtained on lease S.B. Sugar Mills Bijnor for a period of five years from the Receiver appointed by the Civil Court, Lahore. Again, in 1937 alongwith his brother he established another big sugar mill at Saharanpur known as Lord Krishna Sugar Mills. The Tribunal has observed :-
'Having regard to these facts, which are uncontroverted, it is clear that it was due to his efforts that Jaswant Sugar Mills had made progress and earned profits. Moreover, for several years past and also subsequently, the salary etc. received by Seth Banarsi Das was assessed year after year by the Department only as his individual income.'
Having regard to these findings of the Tribunal, it cannot be said that the Tribunal in any way, misdirected itself. The findings recorded by the Tribunal are essentially findings of fact duly supported by the material on record and it is not open to us to record a different findings.
6. In Raj Kumar Singh Hukum Chandji vs . Commissioner of Income-tax : 78ITR33(SC) , the Supreme Court after a review of the earlier cases observed :-
'The broader principles that emerges is whether the remuneration received by the coparcener in substance through 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 Hindu undivided family but if it is the latter than 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 their receipt the income of the Hindu undivided family.'
7. The cases of Pratapveer Kakkar and Basantveer Kakkar vs. The Commissioner of Income-tax 1975 U.P.T.C. 329 : 1975 CTR All. 178 is also distinguishable. There the assessee were two brothers who, at one time had constituted a Joint Hindu Family with there father. The Joint Hindu family had a business. The business was first converted into a partnership and later into a private limited Company. The assessees and their father were appointed the life time directors of the company under the Articles of Association and not by the Board of Directors subsequently after the formation of the company. The assessees did not contribute any amount towards the share capital of the Company. No contract of service between the Company and the assessees was produced to show the nature and extent of services rendered by the assessee to the company. Except for the finding that the assessees rendered some service to the company, there was no finding that the assessees possessed many special qualifications and the services rendered by them very of a specialised nature and not of a normal or routine nature, the remuneration payable to them was determined by the Board of Directors consisting of themselves and their father. On these facts this court held that the remuneration received by the assessees was because of the shares held by the family and not on account of their personal qualification even though they rendered some service of a general nature.
8. The facts of the present case are entirely different. Here the business of the company did not, at any time, belong to the family of Seth Banarsi Das. Seth Banarsi Das was appointed as Chairman of the Board of Directors not under the Articles of the Associated but by the Board of Director later on. He had rendered specialised service in the management of the affairs of the Company as a result whereof the company flourished. There was no determent caused to the assessee family as a result of the appointment of Seth Banarsi Das as Chairman of the Company.
9. We accordingly answer the second question in the affirmative in favour of the assessee and against the Department.
10. As the assessee and the Department have both succeeded in part, we make no order as to the costs.