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Commissioner of Income-tax Vs. Partap Veer Kakkar - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference Nos. 314 of 1977 and 913 of 1978
Judge
Reported in(1980)18CTR(All)289; [1980]125ITR598(All)
AppellantCommissioner of Income-tax
RespondentPartap Veer Kakkar
Appellant AdvocateR.K. Gulati, Adv.
Respondent AdvocateA. Gupta, Adv.
Cases ReferredKanpur v. Sri Partap Veer Kakkar
Excerpt:
- - appeals filed against the order failed. for, the finding of the tribunal clearly establishes that the payment was for special services rendered and on account of qualification, experience and technical knowledge which the assessee possessed......pratap veer kakkar v. cit : [1977]107itr435(all) . in that case, the tribunal had found that the assessee had rendered some service to the company, and there was no finding that the assessee possessed any special qualification, nor the services rendered by him were of a superior nature, and not a formal one. in view of these findings this court held that the amount of remuneration paid to the assessee was relatable to the shares held by the family and not on account of the personal qualifications, even though he rendered some service of a general nature. such is not the position in this year. for, the finding of the tribunal clearly establishes that the payment was for special services rendered and on account of qualification, experience and technical knowledge which the assessee.....
Judgment:

C.S.P. Singh, J.

1. The Tribunal has referred the following question of law for our opinion :

' Whether, on the facts and in the circumstances of the case, the Tribunal was right in confirming the order of the Appellate Assistant Commissioner and dismissing the departmental appeal, thereby holding that salaries of the directors were not earned by detriment to join^ family assets and were not assessable as the income of the Hindu undivided family '

2. The assessee is a joint Hindu family carrying on business in the name and style of ' Kohinoor General Industries '. Earlier, up to the assessment year 1959-60, the business was carried on by a bigger HUF consisting of Sri Ram Lal Kakkar, his two sons, Basant Veer Kakkar and Pratap Veer Kakkar. Thereafter, a partial partition took place in the family and the business was taken over by a partnership firm which carried on the business in the same name in the accounting year relating to the assessment year 1960-61. In July, 1961, the partnership was taken over by a private limited company. The share capital of Rs. 5,00,000 was divided into 5,000 equity shares of Rs. 100 each. The three erstwhile partners, Sri Ram Lal Kakkar, Sri Basant Veer Kakkar and Sri Pratap Veer Kakkar, became permanent directors of the company by virtue of Article 11 of the articles of association. They were allotted 600 equity shares of Rs. 100 each. Under Article 13 of the articles of association the remuneration of the directors wasto be determined by the board of directors, which could be in the form of monthly salary, allowance or fixed by reference to the frequency of the board's meeting. The directors were, under this provision, entitled to charges, travelling expenses and allowance which had to be fixed by the board of directors from time to time. They were also given a sitting fee for attending the board's meeting up to a maximum of Rs. 860 for each meeting. In the event of a director being called upon by the company to perform extra services, the company was to remunerate the director by paying his expenses and a fixed sum referable to the percentage of profit, or, by fixing a monthly allowance, or otherwise as was determined by the directors. Articles 13, 14 and 15 of the articles of association dealt with these matters. In the assessment year 1962-63, the ITO held that, as the shares had been acquired with the help of the HUF funds, the salary which had accrued to the assessee by virtue of his shareholding had to be included in the income of the HUF. Appeals filed against the order failed. Thereupon an application for reference was made by the assessee, and the Tribunal referred the following question to this court:

' Whether the Tribunal, on the facts and in the circumstances of the case, was right in holding that the salary received by the assessee was the income of the Hindu undivided family of which the assessee was the karta and not his individual income '

3. This court by its order dated May 2, 1975 (Pratap Veer Kakkar v. CIT : [1977]107ITR435(All) answered the question in the affirmative and in favour of the department. The controversy subsided for a short time, but it again surfaced in the assessment years 1967-68, 1969-70 and 1971-72. On the ITO holding that the salary of the directors had to be included in the income of the respective HUFs, the assessee filed appeals. The AAC allowed the appeals holding that the salary income was the individual income of the directors. The department preferred an appeal against this order but that was dismissed. The reference applications filed against the appellate order were rejected. It does not appear that the department brought this matter to this court by filing a reference for those years. In the assessment year 1971-72, which is the pertinent year for this reference, the ITO again added the salary income in the income of the HUF. The amount added in the case of this assessee was Rs. 13,200. The assessee filed an appeal before the AAC, who, relying on the Tribunal's decision dated August 2, 1974, for the assessment years 1967-68, 1969-70 and 1971-72, knocked off the addition. The Tribunal dismissed the appeal filed by the department, following its decision in the earlier years.

4. Inasmuch as the Tribunal has decided the appeal on the basis of its decision in the earlier year which forms the subject-matter of I.T.R. No. 913 of 1978, it is necessary to refer to that judgment. The Tribunal has heldthat the consideration for the allotment of prepaid shares to the assessee in the private limited company was the transfer of the assets of the firm. It further found, on a consideration of the evidence, that the shares were purchased with the aid of joint family funds, but it held in favour of the assessee on the finding that the amounts received by him were the result of services rendered to the company in his individual capacity, and on the basis of their qualification, experience and technical knowledge. It found that Basant Veer Kakkar was conducting, managing and supervising all work connected with the purchase of raw material and sale of products manufactured by the company. He also looked after the secretarial jobs and managed the office and looked after legal matters including taxation.

5. So far as the assessee, Sri Pratap Veer Kakkar, was concerned, he was appointed as works manager, and made in-charge of production, appointment of workmen and their deployment on jobs. He also worked as liaison officer on behalf of the company, and kept watch on the sufficiency of stocks and raw materials. The company had also issued a certificate to these two directors that they had actually rendered service. It further found that the other employees in the company were low-paid employees, and were not capable of discharging any supervisory duty. The company, in the circumstances, needed persons who could manage and supervise the business of the company, and assigned those duties as to directors in pursuance of Article 15 of the articles of association. Taking into account the fact that the HUF of these two directors were being paid dividends in respect of investments made by them in the shares, it held that the payments made to the assessee were not to the detriment of the HUF, and as such the amount in question could not be taxed in the hands of the HUF.

6. The test to be applied to determine as to whether the remuneration received from a company or firm by the karta of an HUF, who has become a director of the company on account of the investment made by the HUF, has been considered by the Supreme Court in a number of cases, but we think that it will be profitable to refer to the case of Raj Kumar Singh Hukam Chandji v. CIT : [1970]78ITR33(SC) , as in that case the earlier decisions of the Supreme Court have been considered, and the test to be applied in such cases has been reformulated. The Supreme Court on page 43 of the report has observed :

' The line that demarcates these two lines of decisions is not very distinct but on a closer examination that line can be located. In order to find out whether a given income is that of the person to whom it was purported to have been given or that of his family, several tests have been enumerated in the aforementioned decisions but none of them, exceptingKalu Babu's case : [1959]37ITR123(SC) , makes reference to the observations of Lord Sumner in Gokul Chand's case [1921] AIR 1921 PC 35, that 'in considering whether gains are partible, there is no valid distinction between the direct use of the joint family funds and a use which qualifies the member to make the gains by his own efforts'. We think that principle is no more valid. The other tests enumerated are :

(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 utiliastion 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 the 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. '

7. Now, the Tribunal has recorded a categorical finding of fact that the remuneration paid to the assessee was on account of the services rendered by him in his individual capacity, on the basis of his qualification, experience and technical know-how. As has been seen, the assessee was working as works-manager and in-charge of production and looking after appointment of workmen in the employment of the company. He also worked as liaison officer on behalf of the company and kept watch on the stocks and raw materials. It has also found that the payments made were not to the detriment of the interest of HUF as the HUF was getting dividends on its shares. These findings bring the case within the dictum of Hukam Chand's case : [1970]78ITR33(SC) , but counsel for the revenue has urged that thisis not. He relied upon the decision of this court given in the case of this very assessee, for an earlier year, Pratap Veer Kakkar v. CIT : [1977]107ITR435(All) . In that case, the Tribunal had found that the assessee had rendered some service to the company, and there was no finding that the assessee possessed any special qualification, nor the services rendered by him were of a superior nature, and not a formal one. In view of these findings this court held that the amount of remuneration paid to the assessee was relatable to the shares held by the family and not on account of the personal qualifications, even though he rendered some service of a general nature. Such is not the position in this year. For, the finding of the Tribunal clearly establishes that the payment was for special services rendered and on account of qualification, experience and technical knowledge which the assessee possessed. Thus, the case falls in line with Raj Kumar Hukam Chand's case : [1970]78ITR33(SC) , and we must hold that the Tribunal was right in taking the view that the amount in question was not exigible to tax in the hands of the HUF.

8. We, accordingly, answer the question in the affirmative, in favour of the assessee and against the department. The assessee is entitled to his costs, which are assessed at Rs. 200.

9. This order will govern I.T.R. No. 913 of 1978, Commissioner of Income-tax, Kanpur v. Sri Partap Veer Kakkar, Ghaziabad.


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