At the instance of the Commissioner of Income-tax, the Appellate Tribunal, Bombay, has stated the case under section 66(1) of the Income-tax Act, 1922 and referred to this court for its opinion the following question of law :
'Whether, on the facts and in the circumstances of the case, the managing directors remuneration received by Shri Rajkumar Singh was assessable in his individual hands not in the hands of the assessee Hindu undivided family ?'
The material facts as appearing in the statement of the case are these : The assessment year is 1954-55 the corresponding account year being the one ending on Diwali of 1953 (6th November, 1953). There was a Hindu undivided family carrying on business in the name and style of Sarupchand Hukumchand. A disruption of that family took place on 30th March, 1950. The assessee is a branch of that bigger family. A day after the disruption of the bigger family, on 31st March, 1950, to be more precise, a company called Sarupchand Hukumchand (Private) Ltd. was incorporated. The capital of the company consisted of Rs. 5 crores divided into preference shares of Rs. 1,000 each and ordinary shares of Rs 1,000 each. In the partition, 5,000 shares, each of the face value of Rs. 1000 were allotted to each of the three branches of the bigger undivided family, namely, Sir Hukumchand, Lady Kanchanbai and Rajkumarsingh. Thus the family, represented by its karta, got 5,000 shares. Subsequently, Rajkumar Singh acquired with the aids of the funds of the Hindu undivided family 30 more shares, 10 in his own name, 10 in the name of his wife (Premkumari Devi) and another 10 in the name of his son (Rajabahadur Singh). This company was incorporated for the purpose of acquiring from the bigger Hindu undivided family (Sarupchand Hukumchand) certain managing agencies, businesses, factories and properties. In order to fulfil that purpose the company entered into an agreement with Sarupchand Hukumchand and became managing agent of Rajkumar Mills Ltd., Hukumchand Mills Ltd., and Hira Mills Ltd. and other businesses more particularly mentioned in the memorandum of association of the company. The first directors of the company were (1) Sir Hukumchand Sarupchand, (2) Rajkumar Singh, (3) Lady Kanchanbai Hukumchand, (4) Mrs. Premkumari Devi (wife of Rajkumar Singh), (5) Rajbahadur Singh (son of Rajkumar Singh) and (6) Rustomji Cowasji Jall. According to article 52 of the articles of association of the company, the qualification prescribed for a director was holding of at least 10 shares of the company, either ordinary or preference or partly ordinary and party preference. Article 55 provided that the directors could appoint one or more from amongst themselves to the office of the managing director or manager on terms and conditions to be determined by them. In exercise of those powers, the directors, by their resolution dated 31st March, 1950, appointed Sir Hukumchand, Rajkumar Singh and Rajabahadur as managing directors of the company on a monthly remuneration of Rs. 5,000 for each of them. These managing directors had to work under the control of the board of directors. The 5,030 shares held in the names of Rajkumar Singh, his wife and there son were shown in the books as assessees property. The dividend in respect of these shares were also similarly credited in the account books. for the assessment year 1951-52, 1952-53 and 1953-54, the remuneration of Rs. 5,000 per month received by Rajkumar Singh, was however, treated as his individual income and assessed on that basis. It may be mentioned here that the remuneration received by Sir Hukumchand and Rajabahadur were also similarly treated as their individual income. Even for the relevant assessment year, namely, 1954-55, the Income-tax Officer treated Rajkumar Singhs remuneration of Rs. 60,000 received by him on his account and Rs. 1,420 as his sitting fees as his individual income. On 10th Jan, 1961 the Commissioner of Income-tax, acting under section 33B of the Act, issued a notice to the assessee to show cause why the assessment should not be revised and the two sums of Rs. 60,000 and Rs. 1,420 should not be treated as income of the assessees Hindu joint family. After the assessee submitted his reply dated 17th January, 1961, and was afforded an opportunity of being heard, the Commissioner, by his order dated 28th February, 1961, held that the two sums should be treated as the income of the assessees family and the assessment should be enhanced accordingly. Being aggrieved, the assessee preferred an appeal to the Tribunal, which took a contrary view and held, by its order dated 20th October, 1962 (as amended by the order dated 12th July, 1963 passed under section 35 of the Act), that the two sums could not be included in the income of the assessee (Hindu undivided family) and had to be treated as the individual income of Rajkumar Singh.
For this view taken by the Tribunal, it gave its reasons in paragraph 5 of its order as follows :
'From the facts set out above it is clear that this is not a part and parcel of the same transaction or the same scheme of arrangement. Whatever may be said of the bigger Hindu undivided family, it was sheer accident of circumstances that the smaller Hindu undivided family came to hold these shares. Both Rajkumar and Rajabahadur belong to same branch and both of them are managing directors. The managing directors were appointed by a resolution of the board of directors and they were subject removal by the directors at any time. The appointment of managing director was not conditioned upon either Rajkumar or Rajabahadur acquiring these shares. On the disruption of the larger Hindu undivided family the smaller Hindu undivided family got for its share certain shares. Whatever may be said to the directors fees, that having been now conceded as income of the Hindu undivided family, the same cannot be said of the managing directors remuneration. The managing director holds office by virtue of the resolution of the board of directors. He may not be the servant of the company but still he receives his salary for personal services. The contribution of shares capital may at best be considered as acquiring the qualification of the director. It is not all people who hold shares that could automatically aspire to the managing directors. There is no evidence to show that Rajkumar and Rajabahadur were appointed managing directors on behalf of the family or that the income was earned by utilising the joint family or there was detriment to the family property. There is no material in this case to hold that the acquisition of the business or flotation of the company and the appointment of the managing director were inseparably linked together. As already noticed, right up to the accounting year relevant to the present assessment year, the income was treated as income of Rajkumar in his individual capacity. It is true no doubt that there is no question of res judicata, but this fact has certainly to be taken into consideration. This income has been assessed under section 7. It has been earned by Rajkumar for his services. It has accrued in his hands. It is open to him to give it over to the family and the mere fact that it was included in the familys account or the balance-sheet cannot in any event affect the question at issue. In the case of Commissioner of Income-tax v. L. Armstrong Smith, the Bombay high court had to consider the managing directors remuneration. The facts were, a business carried on by the assessee was taken over by a private limited company. The assessee held most of the shares while two of his nominees held the rest. The articles of association of the company provided that the assessee was to be the chairman and managing director of the company until he resigned office, died or ceased to hold at least one share in the capital of the company and that all the other directors were to be under his control and were bound to conform to his directions in regard to the companys business and that his remuneration was to be voted by the company at its annual general meeting. The assessee devoted his whole time to the management of the companys affairs and received a sum of Rs. 48,000 as his remuneration in the year of account. The High Court held that a director of a company as such is not a servant of the company and the fees he receives are by way of gratuity. But that did not prevent a director or a managing director from entering into a contractual relationship with the company, so that, quite apart from his office of director he becomes entitled to remuneration as an employee of the company. Therefore the remuneration of Rs. 48,000 received by the assessee was for managing the companys business and arose from his contractual relation with the company provided by the articles for performing the services of managing the companys business and therefore its remuneration fell to be taxed under section 7 and not under section 12 of the Income-tax Act. In the case of Kalu Babu Lal Chand, the facts were that one Rohatgi was appointed the managing director. He had the power to assign and he was to be considered the managing director until he resigned or was found guilty of any act or fraud or dishonesty or was removed. Rohatgi was one of the promoter of the company and as such he had carried on the business since then till the incorporation of the company and it was in consideration of that he was appointed the managing director upon the terms and condition mentioned in the agreement. Rohatgis remuneration was being offered for assessment by the family and its income and taxed in its hands. From this it would clear that the act were certainly different from the facts of the present case. Here, as already stated, even the department has accepted the position that this was personal income of Rajkumar and assessed him as such and even in the case of Rajabahadur the income is being treated as his individual income. it is also significant that Lady Kanchanbai was not appointed a managing director and was not given any remuneration. Therefore, whereas Rajkumar and Rajabahadur belonging to other branch get Rs. 5,000 each, the lady does not get anything. This only reinforces the position that the arrangement was not a part and parcel of the disruption of the family and the formation of the company. In the case of Piyare Lal Adishwar Lal v. Commissioner of Income tax the Supreme Court had to consider the case of the member of the Hindu undivided family who was appointed treasurer of the bank. The properties of the Hindu undivided family were furnished by him as security. Looking to the nature of the duties and also to the fact that there was nothing to show that the member received any particular training at the expense of the family funds or that his appointement was the result of any outlay or expenditure of, or detriment to, the family property, the Supreme Court came to the conclusion that his salary was not income of the Hindu undivided family. They observed that the treasureship of the bank was an employment of personal responsibility and ability and mere ability to furnish a substantial security was not the sole or even the main reason for appointment to such a responsible post. The result was that their Lordships held that the emoluments received by the member were in the nature of salary and assessable under section 7 of the Income-tax Act and not profits and gains of business under section 10 and the salary was the income of the individual and not the income of the Hindu undivided family. The facts of this case are more similar to those of the present case. Rajkumar was not appointed as managing director as a result of any outlay or expenditure of or detriment to the family property. The managing directorship was an employment of personal responsibility and ability and the mere fact that certain qualification shares and other shares were property of the Hindu undivided family was not the sole or even the main reason of his appointment to the responsible post of the managing director. We are clearly of they opinion therefore that the remuneration received by Rajkumar was assessable only in his hands as an individual and cannot be considered as, and clubbed with, the income of the Hindu undivided family.'
Thereupon, as already indicated, this reference was made at the instance of the Commissioner.
As stated earlier, the question for our consideration is whether, in the circumstances of this case, the remuneration received by Rajkumar Singh as a managing director of Hukumchand Sarupchand (Private) Ltd. was, or was not, assessable as income of the Hindu undivided family of which he was the karta. The bigger Hindu undivided family known by the name of Sarupchand Hukumchand disrupted on 30th March, 1950. On the following day, the new company named Hukumchand Sarupchand (Private) Ltd., was incorporated and the first directors were : (1) Sir Hukumchand, (ii) his wife, (iii) their son Rajkumar Singh, (iv) the latters wife (v) his son Rajabahadur and (vi) one outsider R.C. Jall and they passed a resolution on the same day appointing Sir Hukumchand, Rajkumar Singh and Rajabahadur as managing directors on a monthly remuneration for each of Rs. 5,000. All male directors of the bigger family were appointed managing directors and the directors, who resolved so to do, were, with one exception, none other than the members of the same family. No doubt the managing directors were excepted to render some service, but unlike the case of Commissioner of income-tax v. L. Armstrong Smith, where the assessee devoted his whole time for management of companys business or the case of Piyare Lal Adishwar Lal v. Commissioner of Income-tax, where the assessee worked as a servant of a bank, nothing in particular has been said about the work they did. Finally, the managing directors remuneration and the sitting fees which Rajkumar Singh received were credited in the books of the family like the dividends received in respect of 5,030 shares, as income of smaller Hindu undivided family headed by him.
Shri Chitale, learned counsel for the assessee, argued that it was a coincidence that the bigger family disrupted only a day before the appointment of the management directors; that it was significant that while Rajkumar Singhs branch gave two managing directors, Sir Hukumchands branch had only one and there was none from Lady Kanchanbais branch; that there was no inseparable link between the shareholding and the appointment as managing director, because the holding of only 10 shares was required for being a director of the company; that Rajkumar Singh received the remuneration for work done by him as managing director and that he did so without doing anything to the detriment of his joint family and that even the department treated this remuneration in the previous 3 years as Rajkumar Singh individual income. Shri Chitale submitted that Haridas Purshottam, In re, Kaniram Hazarimull v. Commissioner of Income-tax, Commissioner of Income-tax v. Kalu Babu Lal Chand, M.D. Dhanwatey v. Commissioner of Income-tax, Commissioner of Income-tax v. S. Rm. Ct. Pl. Palaniappa Chettiar and Lal Girjesh Bahadur Pal v. Commissioner of Income-tax had several distinguishing features and relied upon Commissioner of Income-tax v. L. Armstrong Smith, Commissioner of Income-tax v. S.N.N. Sankaralinga Iyer, Piyari Lal Adishwar Lal v. Commissioer of Income-tax and Gurunath V. Dhakappa v. Commissioner of Income-tax for his contention that in these circumstances, the remuneration could be treated only as Rajkumar Singhs individual income.
Having heard the counsel at some length, we have formed the opinion that the remuneration received by Rajkumar Singh was assessable as a part of the income of the assessee Hindu Undivided family and it should not have been taxed as Rajkumar Singhs individual income. We are not able to accept that it was a mere coincidence that the disruption of the bigger family, the floatation of the new company, the allotment of shares of that company to the coparceners of the bigger family in lieu of their interest in the assets of that family and the appointment of all males of that family (who were first directors) as managing director took place within a short space of two days. In our opinion, the floatation of the new company, the acquisition by that company of certain managing agencies, businesses, factories, and properties from the bigger undivided family and the appointments of the managing directors were inseparably linked together. The fact that female first directors of the bigger family were not appointed as managing directors does detract from the inference drawn by us, more particularly in view of the other facts and the circumstances of the case. It seems to us that, in the instant case, Rajkumar Singh was appointed as a managing director not because he held 10 shares, which made him qualified for being a director, but because of his overall position in the bigger and it was in lieu of his interest in the assets of that family that he was, soon after disruption of the family, given in the new company 5,000 shares and a managing directorship as a part of the one scheme. It may be that an element of work or service is involved in the appointment of Rajkumar Singh as a managing director but this, we think, is not one of those case where Rajkumar Singh could be regarded as owing his appointment solely or mainly to this personal ability. That being so, Rajkumar Singh could not be allowed to claim for himself the pecuniary advantage he obtained by being appointed, in view of this overall position as a managing director only because an element of work or service was involved. In the end, we may point out that the fact that, in the past this remuneration was taxed as Rajkumar Singhs individual income could hardly be regarded as conclusive of the matter. On the other hand it is not without significance that Rajkumar Singh himself treated this remuneration as income of the undivided family and allowed it to be so credited in the books of the family.
Of the cases relied upon by Shri Chitale, Commissioner of Income-tax v. L. Armstrong Smith, and Piyare Lal Adishwar Lal v. Commissioner of Income-tax are easily distinguishable on facts. The third case, Commissioner of Income-tax v. S.N.N. Sankaralinga Iyer, was disapproved by the Supreme Court in Commissioner of Income-tax v. Kala Babu Lal Chand and not followed by the Madras High Court itself in Commissioner of Income-tax v. S. Rm. Ct. Pl. Palaniappa Chettiar. The facts of the fourth case, Gurunath V. Dhakappa v. Commissioner of Income-tax, too have distinguishing features. It is not that the cases relied upon on behalf of the department, and sought to be distinguished by Shri Chitale are all grounded on facts similar to those in the case before us. It is not easy to find two cases having identical facts. The decision of each case must turn upon its own facts. What we have to consider is the principal which would be applied to the case before us. In our opinion this case is governed by the principles laid down by the Supreme Court in Commissioner of Income-tax v. Kalu Babu Lal Chand because here the managing directorship of the company given to Rajkumar Singh and also the 5,000 shares allotted to the smaller family of which he is the karta were obtained as part of one scheme in lieu of the interest which the members of the smaller family had in certain assets of the bigger joint family.
For the reasons given in the foregoing paragraphs, our answer to the question is that the remuneration received by Rajkumar Singh as managing director was assessable as income of the Hindu undivided family of which he was the karta. We direct that the assessee shall pay to the department the costs of this reference. Hearing fee Rs. 150.