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Nalinikant D. Dalal Vs. Twelfth Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Mumbai
Decided On
Judge
Reported in(1982)1ITD861(Mum.)
AppellantNalinikant D. Dalal
RespondentTwelfth Income-tax Officer
Excerpt:
.....of the assessee. this sum of rs. 51,882 represented remuneration received by the assessee as managing director from khatau junker limited. the case of the assessee before the ito was that the remuneration received by the assessee as managing director did not accrue to him in his individual capacity but it represented the income of the huf of which he was the karta. the ito did not agree with the contention of the assessee and held that the remuneration received by the assessee as managing director actually represented the income of the assessee in his individual capacity. he completed the assessment accordingly. the ito gave five reasons enumerated in his order in support of his conclusion and also derived support from the decision of the supreme court in the case of raj kumar.....
Judgment:
1. This appeal has been filed by the assessee against the order dated 2-8-1980 of the Commissioner (Appeals) relating to the assessment year 1977-78. The assessee before us has been assessed in the status of an individual. In the assessment made by the ITO, he included a sum of Rs. 51,822 in the total income of the assessee. This sum of Rs. 51,882 represented remuneration received by the assessee as managing director from Khatau Junker Limited. The case of the assessee before the ITO was that the remuneration received by the assessee as managing director did not accrue to him in his individual capacity but it represented the income of the HUF of which he was the karta. The ITO did not agree with the contention of the assessee and held that the remuneration received by the assessee as managing director actually represented the income of the assessee in his individual capacity. He completed the assessment accordingly. The ITO gave five reasons enumerated in his order in support of his conclusion and also derived support from the decision of the Supreme Court in the case of Raj Kumar Singh Hukam Chandji v. CIT [1970] 78 ITR 33.

2. The assessee appealed to the Commissioner (Appeals) and contended that the action of the ITO was erroneous. It was urged that the assessee joined as managing director of the aforesaid company only because the said company needed funds which was supplied by the HUF, of which the assessee was the karta, in the form of investments in 500 shares of the said company of the face value of Rs. 50,000. This investment was made in the assessment year 1969-70. The shareholdings of the family increased to Rs. 73,275 during the assessment year 1977-78, which is the year under appeal. Apart from the above, the aforesaid HUF advanced a loan of about Rs. 16,000 in the assessment year 1969-70, which was, however, repaid by the company in the following year. It was pointed out that the remuneration from the aforesaid company was being assessed in the hands of the HUF right from the assessment year 1969-70 onwards and there was no reason to change that practice during the year under consideration. The case of the assessee was that the remuneration was paid because of the investments made by the HUF and so it was assessable in the hands of the HUF. The Commissioner (Appeals) did not agree with the above contentions. He found that the investments made by the HUF in the aforesaid company was a small part of the total paid-up capital of the aforesaid company and so the remuneration could not be said to have been given in consideration of the said investments. On the other hand, the Commissioner (Appeals) found that the remuneration was given for the personal services rendered by the assessee in his individual capacity as managing director as was clear from the service agreement entered into between the assessee and the aforesaid company. In particular, he referred to the increments given in the subsequent years and the perquisites given to the assessee, which was consistent only with remunerating the personal services of the assessee. He referred to the decision in the case of Raj Kumar Singh (supra) and some other decisions enumerated in his order in support of his conclusion. In this view of the matter, he confirmed the action of the ITO and dismissed the appeal.

3. In this second appeal before us, Shri S.P. Mehta, the learned counsel for the assessee, urged before us that the decision of the authorities below was not justified. He pointed out that by an agreement dated 23-1-1968 between the father of the assessee and Shri K.D. Khatau, it was agreed that the former would invest some funds in the aforesaid company and in consideration of the same the assessee was to be taken as the managing director on the terms and conditions laid down therein. Further, he pointed to the minutes dated 31-1-1968 recorded in the meeting between the person representing the Khataus and the assessee and his father, wherein it was agreed that the assessee and his father were to provide certain funds to the Khatau group in return for which the assessee was to be appointed as managing director of the aforesaid company on remuneration of Rs. 1,500 per month plus certain other perquisites. This minute also lays down that the assessee would function as managing director and will have all the residuary powers. Shri Mehta emphasises the fact that the aforesaid company was in need of funds which was provided by the HUF of which the assessee was the karta and the remuneration received by the assessee was in return for the said financial accommodation. Consequently, he urged that the remuneration under consideration should have been taxed in the hands of the HUF as was done all along from the assessment year 1968-69 onwards. He referred to the Commentary of Kanga & Palkhivala "Law and Practice of Income-tax" at pages 64 and 65, Vol. I, 7th edn. for the law on the subject. Referring to the assessment order for the year 1969-70, he stated that the ITO, after applying his mind to the question, decided to assess the sum in the hands of the HUF though as a protective measure, and there has been no change in the situation to call for a different decision during the year under consideration. He further stated that the assessee, who was aged 31 years in 1968, was a commerce graduate and had no special qualification for acting as a managing director.

4. Shri G.S. Bhargava, the learned representative for the department, on the other hand, supported the order of the Commissioner (Appeals).

He stated that the agreement dated 23-1-1968 and the minutes dated 31-1-1968 were not before the ITO or the Commissioner (Appeals) and so they have not considered those documents in the light in which the assessee now wanted them to be considered. In any case, he stated that those papers were not relevant because the agreement entered into in ] 968 expired after five years and a fresh agreement dated 23-2-1973, but effective from 1-1-1973, was entered into which was in force during the year under consideration. Referring to this agreement dated 23-2-1973, he pointed to a clause therein which states that the assessee in his capacity as managing director would be under the superintendence and control of the board of directors, which showed that he was an employee of the company. He referred to the decision in the case of Ram Prashad v. CIT[1972] 86 ITR 122 (SC) in support of this proposition. Next, he pointed out that the investment made by the HUF formed a very small part of the total paid-up capital of the company and so the substantial remuneration paid at increasing rates year after year to the assessee could not be said to be a return on the funds invested by the HUF. He urged that the HUF had after all purchased equity shares on which it will get dividends as and when declared and so no further remuneration was necessary to compensate for that investment. The assessee was a commerce graduate and had experience in business and in fact he had already acted as managing director from 1968 to 1976. He explained that in the assessment year 1969-70, the ITO assessing the HUF was different from the ITO assessing the individual and so there was no co-ordination between the two files. When both the files were consolidated with one officer during the year under consideration, the ITO applied his mind for the first time to the issue and considering all the facts and circumstances of the case and the law on the subject, came to the conclusion that the remuneration under consideration belonged to the assessee in his individual capacity. He stated that each assessment year is separate and the principle of resjudicata did not apply to income-tax proceedings. He relied on the decision in the case of Raj Kumar Singh (supra) and CIT v. Dineshchandra Sumatilal [1978] 112 ITR 758 (Guj.) in support of his contention.

5 We have considered the contentions of both the parties as well as the facts on record. The question that is raised in this appeal is whether the remuneration of Rs. 51.822 received by the assessee for acting as managing director of the aforesaid company is assessable in his hands in his individual capacity or in the hands of the HUF of which he is the karta. The law on this point is quite settled by the Supreme Court decision in the case of Raj Kumar Singh (supra). In such cases, the test that has to be applied is as follows : In determining whether the remuneration received by an individual is the income of the individual to whom it is purported to have been given or that of the Hindu undivided family of which he is coparcener, the test is whether the remuneration received by the coparcener in 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. (p. 33) 6. It is, therefore, necessary to see whether the remuneration under consideration paid to the assessee was one of the modes of return made to the family because of the investment or it was a compensation made for the services rendered by the assessee in his individual capacity.

We find that during the year under consideration the paid-up capital of the company was Rs. 7,79,300 and the shareholding of the HUF of which the assessee was the karta was Rs. 73,275 which comes to nearly 11 per cent of the former. Even if we take the sum of Rs. 1,11,112 as the investment of the HUF in the shares, as mentioned by the ITO in his order, yet it comes to about 14 per cent of the total paid-up share capital, which is certainly not a significant or substantial investment in the company. There was no further loans made by the HUF to the company. Investment in shares is normally remunerated by the dividend declared on the shares and so it cannot be said that the investments of the HUF in the shares required compensation in the form of something over and above the dividend to be declared. The investment of the HUF in the shares of the company formed only a small part of the total paid-up capital of the company. These two factors, in our opinion, point to the fact that the remuneration paid to the assessee as managing director cannot be regarded as a mode of return to the family for its investments in shares of the company. On the contrary, we find that there is a regular service agreement between the assessee and the limited company by which the assessee was to act as managing director and was to perform all the duties of a managing director and was to receive remuneration and perquisites, which is normally given to a managing director for personal services rendered to the company. The assessee was a commerce graduate, had considerable experience in the business management as managing director during the previous year under consideration and was in fact acting as managing director of the aforesaid company. It may be stated that he was the only managing director of the company. Hence, we come to the conclusion that the remuneration under consideration was paid primarily in return for the personal services rendered by the assessee as its managing director.

The mere fact that the HUF of which the assessee was the karta had some investment in the shares of the company would not make any difference to the above conclusion, vide the decision in the case of Raj Kumar Singh (supra). Once we come to the factual conclusion that the remuneration under consideration was paid primarily for the personal services rendered by the assessee, it follows, on the authority of the decision in the case of Raj Kumar Singh (supra), that the remuneration is assessable in the hands of the assessee in his individual capacity.

This has been rightly done by the revenue authorities. We agree with the learned representative for the department that the principle of resjudicata does not apply to the income-tax proceedings and each assessment year is separate. For the above reasons, we uphold the order of the Commissioner (Appeals).


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