1. The assessed in both (sic) these income-tax references is an HUF. It originally consisted of Lala Sharan Bihari Lal and his son, Rajeshwar Pershad. Smt. Yeshwant Kumari is the wife of Rajeshwar Pershad and at the relevant time they had a son. It is stated that Lal Sharan Bihari Lal and Smt. Yeshwant Kumari had got separated from the joint family. But this aspect of the matter is not relevant and we can proceed on the footing that the joint family consisted of Rajeshwar Pershad, his wife and his son. The question which arises in these references is as to whether a sum of Rs. 9,000 received by Rajeshwar Pershad from a private limited company known as Vijay Shri P. Ltd. should be treated as his individual income or whether it was rightly included by the ITO in the assessments of the family which is the present assessed. The assessment years in question are 1970-71 and 1971-72, for which the relevant previous years are the financial years 1969-70 and 1970-71, respectively. Rajeshwar Pershad received a salary of Rs. 1,500 p.m. from the above company with effect from 1st October, 1969. He continued to receive the above remuneration until there was a partial partition on 3rd October, 1970. That is how the amount in dispute in each of the references in only Rs. 9,000.
2. Vijay Shri P. Ltd. was carrying on the business of exhibition of films and running the Liberty Cinema in Delhi. Till 1962 the assessed-family had nothing to do with the company. Subsequently the family acquired the share of the company. In November, 1962, the family invested Rs. 27,000 in shares of the Company. In November, 1965, there as a further investment of Rs. 1,00,000. In December, 1967, there was another investment of Rs. 2,00,000. Thus, the family held shares in the company to the extent of Rs. 3,27,000 out of a total capital of Rs. 5,00,000. The other shares in the company were held by Lala Sharan Bihari Lal and Smt. Yeshwant Kumari who, it is common ground, had acquired 1,330 and 400 shares, respectively, in the company out of their separate funds.
3. Thus, on the one hand, the family invested a little more than Rs. 3,00,000 in the company. Even this had been really a conversion of an advance which had been granted to the company by the family in 1964. The family had lent Rs. 3,00,000 in 1964 to the company on interest at 18% p. a. But slowly, as we have pointed above, the company converted business. A copy of the account of the company in the books of the family had been exhibited before the assessing authorities. It shows that the company was indebted to the family in the sum of Rs. 2,21,637 as on March 31, 1967. Thereafter, the position got completely reversed. On 31st July, 1967, the assessed-family withdrew a sum of Rs. 2,00,000 from the company. Some time in December, 1967, the company purchased a bungalow in Greater Kailash for a sum of Rs. 3,24,000. Primarily to meet the purchase consideration, the assessed withdrew various amounts aggregating to Rs. 2,87,101 from the company between October and December, 1967. These withdrawals made the assessed a debtor to the company in place of the favorable balance which existed earlier. Thereafter, more and more amounts were withdrawn by the family from the company, As on March 31, 1969, the family was indebted to the company to the extent of Rs. 2,00,114.50. As on 25th September, 1969, the balance was Rs, 2,53,863 and it increased further to Rs. 3,47,300 by March 31, 1970.
4. The above state of financial relationship between the company and the assessed is of some importance for the purposes of the present case.
5. As already pointed out, the family itself was holding the majority of shares in the company. It appears that the activities of running the cinema hall were being looked after by Smt. Yeshwant Kumari and a manager and an assistant manager. Smt. Yeshwant Kumari was being paid a salary of Rs. 500 p.m. apparently from the beginning. This salary was being allowed in the case of the company as an admissible deduction and it was also treated as the individual income of Smt. Yeshwant Kumari. This lady, however, unfortunately died some time in 1969. After her death the company passed a resolution at a meeting of the board of directors on 1st September, 1969, which, Shri Chopra informs us, was confirmed by the general meeting of the company with effect from 1st October, 1969. But that information has not been placed on record earlier. However, according to the resolution of the directors, Rajeshwar Pershad (hereinafter referred to as 'the karta') was appointed as a working director of the company in view of the death of Smt. Yeshwant Kumari who was looking after the day-to-day business. The resolution states that keeping in view his qualifications and experience and the fact that he will have to devote his full time in managing the business of the company, the karta had demanded a salary of Rs. 2,250 p.m. However, the company resolved to start him on a monthly remuneration of Rs. 1,500 with annual increments of Rs. 150 p.a.
6. The salary received by the karta was not included by the assessed in its returns for the assessment years 1970-71 and 1971-72. On the other hand, it was shown as the individual income of the karta in the return which he filed separately. It was submitted on behalf of the assessed that the salary income was not liable to be assessed in the hands of the present assessed. It was claimed that the karta was paid the above amount by way of salaries not in view of the family's investment in the company but on account of his special qualifications and experience. It was pointed out that though Rajeshwar Pershad was a director of the company from the inception, he had not been paid any remuneration. In 1963-64, his services were required to supervise the renovation of the cinema hall and for doing this job for a few months he had been paid a salary of Rs. 7,175 and the Department has also accepted the claim that the above sum represented his individual income. It was claimed that the payment currently under dispute had also been paid likewise only on account of the personal services rendered by him. It was pointed out, as had indeed been mentioned in the resolution, that his appointment became necessary because on the death of Smt. Yeshwant Kumari who was looking after the affairs of the company and also because after her death the company was in need of a full time person to supervise the work. It was pointed out that Rajeshwar Pershad had a long experience of 23 years in the cinema line, that he was a law graduate and that since the company was in need of a full time person to supervise the work of the company, it agreed to pay Rs. 1,500 for his services. It was also pointed out that there was no relation between the investment made in the family and the remuneration paid to Rajeshwar Pershad because for the purchase of a dwelling house the family had taken large funds from the company.
7. The ITO did not accept the assessed's claim. He was of opinion that the remuneration was assessable as the income of the family and in coming to this conclusion he relied upon the following circumstances : (a) the shareholding of the assessed in the company rose to Rs. 3,27,000 on March 31, 1969, and the resolution appointing the karta as the working director was passed on 1st September, 1969; (b) the family held 3,270 shares out of 5,000 shares and even the other shares were held by the father and wife of Rajeshwar Pershad with the result that they could pass any resolution they wanted regarding the remuneration payable to Rajeshwar Pershad; (C) the company's business consisted of running only a cinema hall and for this purpose the company had already employed experienced managers and assistant managers; (d) the fact that the family had withdrawn funds to the extent of Rs. 2,00,000 was not very material in the context of the fact that the company also owed more than Rs. 12,00,000 to other outsiders; the assessed had not paid any interest to the company whereas the company was paying interest on the huge loans outstanding against it; and (e) the assessed had not received a single penny as dividend from the company from the inception till the end of the accounting year under consideration nor did it pay any interest to the company since 1962, and this the payment of remuneration to the karta in his individual capacity was by way of determinant to the joint family interest. For the above reasons the ITO rejected the assessed's contention and included the sum of Rs. 9,000 each in the assessments of the two years in question.
8. This was confirmed by the AAC. He was of opinion that perhaps the treatment of the salary paid to Smt.Yeshwant Kumari as her individual income was itself wrong. He mentioned the fact that the business was being managed only by an assistant manger because the manager had left. But he pointed out that when the assistant manager was there looking after the work of the manager there was no need to employ Rajeshwar Pershad at Rs. 1,500 p.m.
9. The assessed preferred an appeal to the Tribunal and the Tribunal disposing of the appeal for the assessment year 1970-71 concurred with the findings of the AAC. In para 8 of its order the Tribunal pointed out that even though the family had got an interest-free loan of Rs. 2,00,000 from the company, it had still a large investment of over Rs. 1,25,000 in the company which was not bringing any return to it. In para. 9 the Tribunal referred to the observations of the AAC that the cinema had its manger and assistant manager who were looking after the operation side. Relying upon the decision of the Supreme Court in the case of P.N. Krishna Iyer v. CIT : 73ITR539(SC) , the Tribunal affirmed the findings of the lower authorities. The assessed made an attempt to re-argue the matter when the Tribunal heard the appeal for the assessment year 1971-72, and sought to distinguish the decision of the Tribunal in the earlier year by pointing out that the amount advanced by the joint family to the company was about Rs. 3.25 lakhs and that the joint family had already taken an interest-free loan of a like amount. This argument was apparently based on the fact that while the debt due to the company by the family was only about Rs. 2,00,000 as on March 31, 1969, it had increased to about Rs. 3.47 lakhs as on March 31, 1970. But this attempt was not successful and the Tribunal, following the order for the earlier year, confirmed the findings of the ITO and the AAC.
10. Dissatisfied with the orders of the Tribunal the assessed has sought a reference to this court and the following question has been referred to us by the Income-tax Appellate Tribunal :
'Whether, on the facts and in the circumstances of the case of, the Tribunal was right in holding that the salary enjoyed by Shri Rajeshwar Pershad, karta of the assessed-Hindu undivided family, in fact, was the income of the Hindu undivided family and not the individual income of karta ?'
11. This is common question which has been referred for both the assessment years.
12. The principles to be applied in order to determine whether the salary or remuneration received by the karta or a member of the joint family has to be treated as his individual income or as the income of the joint family of which is a coparcener have now been stated in clear terms by the Supreme Court in the case of Raj Kumar Singh Hukam Chandji v. CIT : 78ITR33(SC) . After reviewing a number of earlier decisions on the topic which appeared to be conflicting and which indicated different tests and approaches to the question, the Supreme Court laid down the following as the broad principle which could be applied in such cases (p. 43) :
'In our opinion from these subsidiary principles, the broader principle that emerges 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 former, it is an income of the Hindu undivided family but 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.'
13. It is this test which has to be applied to the facts of the present case. It is to be found out on the facts and the circumstances whether the remuneration paid to Rajeshwar Pershad was paid by way of compensation for the family funds that had been invested in the business of the company or whether the income was essentially earned by Rajeshwar Pershad as a remuneration for the services rendered by him to the business. Though this is mainly a question of fact, the question whether the principle laid down by the Supreme Court has been properly applied to the facts of a particular case would clearly raise a question of law and as has been pointed out by the Supreme Court in the course of its discussion in the above decision the final conclusion drawn by the Tribunal from the primary evidentiary facts is open to challenge on the plea that the relevant principles had been misapplied by Tribunal.
14. Applying the principle stated by the Supreme Court to the facts and circumstances in the present case it appears to us that the only conclusion that is possible to be drawn is that the remuneration received by Rajeshwar Pershad was only by way of remuneration for the services rendered by him to the company. In the first place there is substantial force in the contention of Mr. Chopra that having regard to the state of account between the assessed and the company it cannot be said that the company by grating a remuneration to Rajeshwar Pershad was actually making a return to the family in respect of the funds invested in the company. As we have already pointed out though the company initially invested Rs. 3,27,000 in order to get control over the business of the company, subsequently substantial funds were withdrawn by the family from the company. Between July and December, 1967, sums aggregating to more than Rs. 5,00,000 were withdrawn by the family of which, as already pointed out, about Rs. 3,00,000 was utilised for the construction of a building for the joint family. The family also paid no interest to the company in respect of these loans. Thus, it is clear that there was really no substantial investment by the family in the company by the end of 1967 in respect of which the family was entitled to any return from the company. This is the true position as appears from the books though the actual balance of the family towards the company was only about Rs. 2,00,000 as on April 1, 1969. The facts of the case, thereforee, bring out prominently that though the family did invest in the company initially in order to acquire the business of the company it had substantially taken back the funds so invested. In this context, the failure of the company to declare any dividends is also not of much significance, even assuming that there were some profits to justify a dividend declaration and not losses, as stated by Sri Chopra. The fact that the company was heavily indebted to others as well does not also alter the position that the family had already derived substantial benefits from the company by reason of its capital investment and control. Thus, no link can be made out between the family's investment which was in 1967 (not 1969, as mistakenly stated by the ITO) and the resolution granting remuneration which was in September, 1969, when the position was entirely different. No question, thereforee, arises of the company seeking to compensate the family for its investment by remunerating its karta as such. This is one aspect of the question.
15. The other more important aspect is that the material on record clearly shows that Rajeshwar Pershad was paid for his services. The admitted facts show that he was not being paid earlier and it was only his wife who was receiving a small remuneration for looking after the business of the company. On an earlier occasion when Rajeshwar Pershad's services were utilised he was paid a remuneration which, it is common ground, was his individual remuneration. At the time when Smt. Yeshwant Kumari was looking after the business of the company it also had a manager and an assistant manager. There is material on record to show that the manger had walked out and that at the relevant time there was only one assistant manager looking after the business. The detailed statement given by the assessed before the ITO that Rajeshwar Pershad was an educated person, that he was in fact a law graduate and that he had 28 years of experience in this line was not controverter by the ITO. In fact the printed record shows that the family was running a number of theatres and it is, thereforee, quite natural that Rajeshwar Pershad should be having a substantial period of experience in this line. thereforee, looked at purely from the capabilities of Rajeshwar Pershad also, there is a good deal of information and material on record to show that he was fully qualified to run the activities of the business. Previously, his wife was being paid some salary and a manger was also being paid for looking after the theatre. The remuneration paid to Rajeshwar Pershad is not out of proportion to the remuneration paid jointly to Smt. Yeshwant Kumari and the manager.
16. From the above review of the facts it will be seen that there is on the one hand no material to suggest that the remuneration paid to Rajeshwar Pershad could have been intended to be a return to the family in respect of its investment in the business. On the other hand there is definite material to show that it could very well have been intended as remuneration for the services rendered by Rajeshwar Pershad. Both from the negative as well as positive aspects the conclusion that seems to us to be the only reasonable conclusion on the facts and in the circumstances of this case is that the remuneration received by Rajeshwar Pershad was his individual income.
17. For the reasons above stated we answer the question referred to us in the negative and in favor of the assessed. The assessed will be entitled to its costs. Counsel's fee Rs. 350 one set.