1. This is a reference under Section 66(2) of the Indian I.T. Act, 1922. It arises out of the assessments of an HUF which is styled as M/s. P. S. Jain Motor Co. for the assessment years 1952-53, 1954-55 and 1955-56. The karta of the family, Shri P. S. Jain, received during the previous years relevant for the above assessment years remuneration amounting to Rs. 9,300, Rs. 15,600 and Rs. 15,600, respectively. In the assessment year 1952-53, the remuneration received was from two limited companies, namely, M/s. P. S. Jain Motor Company and the Universal Industries Ltd. For the two subsequent years the remuneration received was from three companies, namely, M/s. P. S. Jain Motor Company, Delhi, M/s. P. S. Jain Motor Company, Jullundur, and Universal Industries Ltd. The question for consideration is whether the remuneration received by karta,Shri P. S. Jain, can be treated as the income of the joint family. The above question arises in the following background.
2. M/s. P. S. Jain & Co. Ltd., Delhi; was incorporated in April, 1951. Out of 175 shares issued by the company 100 shares are in the name of Shri P. S. Jain. It is common ground that these shares were acquired by the use of the joint family funds and that in the balance-sheet of the HUF 50 of these shares were shown in the name of Shri Jain and the other 50 stand in the name of his wife. It has also been found that the company's balance-sheet also showed amounts advanced as loans to the company by the HUF and that such loans were quite substantial.
3. In the case of Universal Industries Ltd., 15,750 shares were issued as fully paid up. Out of these 14,250 shares belonged to Shri P. S. Jain or his nominees. The investments made in the name of Shri P. S. Jain had been admitted to bs the investment of the joint Hindu family in the course of disclosures made by the HUF before the department.
4. For the assessment year 1952-53 the joint family did not return the remuneration of Rs. 9,350 received by Shri Jain from the two companies. The ITO also completed the assessment on January 31, 1969, without including the remuneration as part of the family's income. When this came to the notice of the Commissioner, he revised the assessment under Section 33B of the Indian I.T. Act, 1922, by his order dated January 30, 1961. He referred to the facts regarding the investments of the family in the two companies and relying upon the decision of the Supreme Court in the case of CIT v. Kalu Babu Lal Chand : 37ITR123(SC) came to the conclusion that the remuneration received by Shri Jain from the two companies constituted the income of the joint family of which he was the karta.
5. For the assessment years 1954-55 and 1955-56, the ITO himself included the salaries received by Shri Jain from the three companies as part of the joint family income. He observed that it was not possible for an individual to serve at more than one place at a time. The receipt of Rs. 17,850 was on account of his huge investment in the above companies and not for actual services rendered.
6. Against the orders of assessment for the assessment years 1954-55 and 1955-56, the assessed preferred an appeal to the AAC. The AAC observed that it was necessary to be determined as a fact as to whether the remuneration paid to Shri P. S. Jain as managing director was paid to him for services rendered under the contract of service or whether, irrespective of the question whether the director had rendered any service, the remuneration was paid to him on account of the investments made by the family. When the matter went back to the ITO, the assessed produced certain evidence before the ITO. He filed certificates from the banks, correspondence, purchase and sale vouchers and expense vouchers and other documents to show that Shri P. S. Jain actually rendered services to the company. After examining these documents, the ITO recorded the following finding :
' From these facts and circumstances it is clear that Shri P. S. Jain actually rendered his services to these limited concerns and received remunerations from the same.'
7. The ITO, however, pointed out that the assessed had not produced any evidence to prove that he, actually rendered services for which he received sitting fees from the companies. The matter again went before AAC. At this stage, the assessed did not dispute the inclusion of the sitting fees received by Shri P. S. Jain in the assessment of the joint family. It was, however, contended that in view of the findings of the ITO in the remand report the remuneration received by Shri P. S. Jain should be deleted from the assessment of the family. The AAC accepted this contention and deleted the sum of Rs. 15,600 from the two assessments.
8. The ITO preferred appeals to the Tribunal raising a solitary and general ground of appeal that on the facts and circumstances of the case the AAC erred in deleting the sum of Rs. 15,600 received from the companies. In the meantime, the assessed had also preferred an appeal to the Tribunal from the order passed by the Commissioner under Section 33B for the assessment year 1952-53. All these three appeals came before the Tribunal for hearing together. The Tribunal was of opinion that the decision in Kalu Babu Lal Chand's case : 37ITR123(SC) was based on the special facts and circumstances of the case. But so far as the present case was concerned they found that Shri P. S. Jain had considerable previous experience extending over two decades in the line of business in which the companies were engaged. They also referred to the remand report of the ITO showing that the remuneration was a quid pro quo for the services rendered by Shri P. S. Jain. They observed that it was clear that the shares held by the family had nothing to do with the appointment of Shri P. S. Jain in these companies. The shares held by the family earned dividend which had been included in the income of the family. On these findings the Appellate Tribunal allowed the assessed's appeal for the assessment year 1952-53 and dismissed the appeals of the department for the assessment years 1954-55 and 1955-56.
9. The Commissioner has obtained a reference under Section 66(2) of the following question :
'Whether, on the facts and in the circumstances of the case, the salary of Rs. 9,300, Rs. 15,600, Rs. 15,600 received by Shri P. S, Jain during the previous years relevant for 1952-53, 1954-55 and 1955-56 assessment years, respectively, was assessable in the hands of the Hindu undivided family '
10. The question as to the circumstances in which the remuneration received by a member of a joint family from a partnership or a firm can be treated as the income of the joint family has come up for. consideration before the High Courts and the Supreme Court in a large number of cases. It is sufficient to refer to the decision of the Supreme Court in the case of Raj Kumar Singh Hukam Chandji v. CIT : 78ITR33(SC) . In that case the appellant was an HUF. It was a branch of a larger family which had disrupted. The appellant had been allotted considerable shares in a company which was formed to take over certain businesses of the larger family. The karta of the family and another member were managing directors of the company at the relevant time and were paid remuneration thereforee. The question arose whether the managing director's remuneration received by the karta from the company was assessable in the hands of the family. The Supreme Court answered the question by saying that, in the circumstances of the case, the income had to be treated as the individual income of the karta and the other member. But in doing so the Supreme Court enunciated the principle to be applied to such cases in the following words (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 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.'
11. That is the test to be applied to the facts in the present case.
12. As we have already mentioned, the AAC had remanded the matter to the ITO specifically for giving a finding on the above issue and the ITO in his remand report accepted the case of the assessed that Shri P. S. Jain had rendered services to the companies and that the remuneration had been allowed to him essentially for the services rendered by him. The Tribunal has also found that Shri P. S. Jain had considerable length of experience in the business which the companies were carrying on. In these circumstances it would appear to follow from the findings given by the ITO himself and also by the Appellate Tribunal that the remuneration received by Shri P, S. Jain constituted his individual income and not the income of the joint family.
13. Shri M. L. Verma, learned counsel for the department, however, contended that in the present case the remuneration paid to Shri P. S. Jain was essentially earned as a result of the funds invested by the family in the companies. He pointed out that the joint family owned a considerable percentage of the total shareholdings of at least two of the companies. In one company the capital investment came to Rs. 1,42,500 and in the other company Rs. 10,000. Mr. Verma also pointed out from the assessment orders that no dividend had been declared by these companies to the joint family except a sum of Rs. 3,000 in the assessment year 1955-56. His submission, thereforee, was that having regard to the substantial investment made by the family and the poor return that it got for the investment made we should infer that the payment of remuneration to Shri P. S. Jain was really in the nature of a return to the family for the funds invested by it in the companies.
14. There is some force in the contention of the departmental counsel. But after careful consideration we have come to the conclusion that the facts pointed out by him are not sufficient to displace the findings of the ITO and the Appellate Tribunal. In view of those findings, it cannot be disputed that Shri P. S. Jain was a highly experienced person and that he had rendered services to all the three companies. The remuneration received by him was only Rs. 3,600 from one and Rs. 6,000 from each of the other two. These payments cannot be said to be very considerable and prima facie, having regard to the findings of the Tribunal, they must be accepted to be the payments made to Shri P. S. Jain essentially for the services rendered by him to the company. It is no doubt true that the family has invested a considerable sum of money in these concerns. But in our opinion that alone is not sufficient to characterise the remuneration paid to Shri Jain as joint family income. We think that much stronger facts are necessary from which it can be deduced that a payment to the member or karta of a joint family represents a return to the family for the funds invested by it. Such a conclusion can perhaps more easily follow in the case of a partnership where the karta is a partner and a share of profits flows to the family as a result of its investment through the karta. But even in the case of a firm if remuneration is paid to the karta or any other member of the family, the same inference would not readily follow despite the fact that the family might have invested substantial amounts in the partnership. It is now well settled that even where a joint family is running its own business it is entitled to pay the karta of the family or some other member who attends to the business ofthe family a remuneration, vide Jugal Kishore Baldeo Sahai v. CIT : 63ITR238(SC) , and such income will be the individual income of the karta. If that be so, we think in a case where the family does not own the business itself but only holds the majority of shares, it does not necessarily follow that the remuneration paid to the karta of the family would be a form of return for the investments made by the family, particularly when it has been found by the authorities that such karta has rendered services and deserves the remuneration for such services. The case of Kalu Babu Lal Chand : 37ITR123(SC) , relied upon by the departmental counsel, was decided on its own facts. In that case, the karta was one of the promoters of the company which he had floated with a view to take over a business as a going concern. In anticipation of the incorporation of that company, the karta of the family had taken over the concern and carried it on, on behalf of the company until it was incorporated out of joint family funds. The articles of association of the company provided for the appointment of the karta as the managing director. They also provided that the office of the managing director was assignable by the said person. It was held that the acquisition of business, the floatation of the company and the appointment of managing director were inseparably linked together. It was on those material facts that the court came to the conclusion that the remuneration received by the managing director was the income of the family and not the individual. In the present case, there are no such facts except only a consideration that the family was a major shareholder in the company. As we have said earlier this alone would not be a sufficient consideration to come to the conclusion that the remuneration paid to Shri Jain would belong to the family.
15. Shri Verma also emphasised on the lack of any return to the family from the companies despite the heavy investments made therein. Here again we think that this fact should be appreciated in the context of the circumstances of the case. The companies had recently been floated. There is no information regarding the extent of profits made by the companies and there is nothing to suggest that though heavy profits were earned by the companies they were distributed by way of a remuneration to the director rather than by way of dividends to the shareholding family. Actually in the third of the years under consideration the family had received a dividend. Though this is a small amount of Rs. 3,000, there is no reason to believe that the companies were in a position to distribute a much larger dividend. It will also be appreciated that if Shri P. S. Jain had really rendered services to the companies as found and a remuneration had to be paid to him for that purpose, naturally the distributable profits of the companies would be pro tanto reduced. If Shri P. S. Jain had not been the managing director theft the companies would have had to engage somebody else and he would have to be paid a remuneration. In these 'circumstances, thereforee, before any conclusion can be drawn from the fact that the family has not received a substantial dividend, it would be necessary to examine the working of the companies and to find out whether the circumstances were such that though the companies were in a position to give the family a substantial return for its investment, they chose not to do so but preferred to pay the amount as a remuneration to the karta of the family. The mere fact, thereforee, that in the first two years there was no dividend income and that in the third year it was a small amount cannot again lead to the conclusion that the remuneration paid to Shri Jain was only a way of return to the joint family in respect of its investment. In this context it will be appreciated that so far as the assessment years 1954-55 and 1955-56 are concerned the department was the appellant before the Tribunal and it was for the department to have brought out the necessary facts to rebut the finding of the ITO himself and the finding of the AAC. None of the points now put forward by Shri Verma were urged before the Tribunal nor was any real attempt made to establish that what was paid to Shri Jain was not in respect of services rendered by him but was really intended as a recompense to the family for its investment. These were essentially matters of fact which must have been placed before the Tribunal but they do not appear to have been so placed. That apart, we have also tried to indicate that the circumstances, on which Shri Verma places reliance, themselves are not sufficient to displace the findings of the ITO and the Tribunal.
16. For these reasons, we have come to the conclusion that the view taken by the Tribunal should be upheld and that the question referred to us should be answered in the negative and in favor of the assessed. There will be, however, no order as to costs in the circumstances of this case.
17. As the narration of facts by my learned brother shows, the two concerns, the P. S. Jain Motor Co. Ltd., Delhi, and the Universal Industries Ltd., were incorporated in the year 1951. In the former com-. pany, the assesses-HUF held 100 shares out of the total 175 shares issued by the company. The family's investment in this company in the shares and by way of deposits, etc., totalled Rs. 88,160.
18. In the Universal Industries Ltd., the assessed-family held 14,250 shares out of the issued shares totalling 15,750. The assessed's investment in this company amounted to Rs. 1,42,500.
19. The third company, P.S. Jain & Company, Jullundur, was constituted some time in the year 1954-55, and in this concern, the investment of the family in its shares amounted to Rs. 5,000. It has not been brought out as to what was the value of the other issued shares.
20. Shri P.S. Jain, karta of the assesses-HUF, became the managing director of the three companies on their incorporation. For the first two years relevant for the present reference, no dividend or other return accrued to the assessed-family from these companies. In the third year, of course, there was dividend income from P. S. Jain Motor Company, Delhi, amounting to Rs. 3,000. It is thus obvious that considering the large investments made by the assessed in those companies, it got no return for the first two years, and the return obtained in the third year was negligible.
21. So far as the observations of the Appellate Tribunal that Shri P,S. Jain was performing some duties and operating the affairs of the companies by signing bank papers and doing some correspondence, no undue significance need be attached to this as he did not become the managing director as a figure-head only or a mere ornamentation. After all, in that capacity he had to look after the affairs of the companies and in the course of the same, discharge some functions. The observations, next, that he had experience of about 20 years again was not anything exceptional. After all, the companies which had been created by such large investments by the family, were not to be managed by mere novices or a person who had just come out of a college. The very post of the managing director naturally demanded and had expectations of a person of some maturity and experience. It is, further, noteworthy that it has not been brought out that Shri P. S. Jain held any technical or special qualifications which rendered his posting as managing director indispensable or that he was imbued with such expertise or experience that the companies had to have him as managing director irrespective of whether the assessed-family effected any investments.
22. In the case of CIT v. Kalu Babu Lal Chand : 37ITR123(SC) , on which the ITO relied, the karta had become the managing director soon after the floating of the company, and it was the family funds which had all along been invested in the company. The karta made no contribution in this respect. Initially, the remuneration enjoyed by him was also credited in the books of the family; Subsequently, the karta claimed that the salary income belonged to him individually. This was negatived by the Supreme Court.
23. In S. RM. CT. PL. Planiappa Chettiar v. CIT : 68ITR221(SC) , the salary income enjoyed by the karta on becoming a director of the company in which the family had substantial investment, was treated by the Supreme Court as his individual income. The noteworthy feature in this case was that the investment of the family was in 90 shares out of 300 shares and this had taken place in the year 1934. The karta had, however, become director in 1941. It was further observed that the shares were acquired by the family not with the object that the karta should become the managing director but in the ordinary course of investment and there was no real connection between the investment of joint family funds in the purchase of the shares and the appointment of the karta as managing director of the company. The remuneration of the managing director was not considered by way of detriment to the joint family assets. This case is thus distinguishable inasmuch as there was a gap of about seven years between the investment of the family funds and the appointment of the karta as the director.
24. The Supreme Court has in the case of V. D. Dhanwatey v. CIT : 68ITR365(SC) , again treated the salary enjoyed by the karta from a partnership in which the HUF had substantially invested as belonging to the family. It was observed that the remuneration paid by the firm was directly related to the investment in the partnership business from the assets of the family, and there was real and sufficient connection between the investment from the joint family funds and the remuneration paid to the karta.
25. The case of Raj Kumar Singh Hukam Chandji v. CIT : 78ITR33(SC) , on which the Tribunal has primarily relied, treated the salary income enjoyed by the karta from a company in which the HUF had considerable shares, as belonging to him individually. In that case, this family was a branch of a larger family which had disrupted. It was allotted considerable shares in a company which was formed to take over the business of the larger family. Its karta and another member were managing directors and the question was whether the managing directors' remuneration received by them were assessable in the hands of the family. It was found that there was no material to show that they were appointed managing directors on behalf of the family or as a result of any outlay or expenditure of or detriment to the family property, or that their appointment was linked with the acquisition of the business or floatation of the company. The following tests were enumerated :
'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 utilization 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 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 HUF 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 circumstances 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.'
26. Thus, amongst the various tests to be kept in view one pertaining to the detriment of the family funds cannot be lightly ignored. What has to be further seen is whether the payment of the salary in substance though not in form was one of the modes of return of income 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. Although to a considerable extent as the facts brought out above bear out, there has been detriment to the family funds inasmuch as in spite of investment of about Rs. 2 1/3 lakhs, the return which the family got in three years has been Rs. 3,000 only, both the AAC and the Tribunal have come to the view that the salary amounts paid to the karta were not essentially on account of those investments but for the individual services he rendered. They have mainly placed reliance upon the decision in Raj Kumar Singh Hukam Chandji : 78ITR33(SC) . My learned brother too has agreed with those conclusions and has also referred to the Supreme Court decision in the case of Jugal Kishore Baldeo Sahai v. CIT : 63ITR238(SC) , wherein a karta or a coparcener attending to the family business, it was held, could be paid remuneration. From the side of the assessed, it was also sought to be urged in the present case that new businesses set up do take time before they start yielding profits. In the circumstances, it was urged that the non-enjoyment of dividend incomes by the family in the present years should not be given undue significance. In view of all these circumstances, I am not inclined to take a different view from what has been arrived at by my learned brother and, thereforee, concur, though not without some reservations, with the final conclusion arrived at.