P.D. Desai, J.
1. The assessee is the karta of the Hindu undivided family (hereinafter referred to as 'the HUF') consisting of himself, his wife, son and daughter. The assessee held shares of several companies and those shares were his self-acquired and separate property. M/s. C. Doctor & Co. (P.) Ltd. (hereinafter referred to as 'the company') was one of such companies. The assessee held 61 shares of the company and he was also one of its directors. By a resolution dated November 7, 1961, passed by the board of directors of the company, a committee consisting of its two directors (the assessee and one Vimlaben Vadilal Mehta) was appointed 'to manage the business and affairs of the company in accordance with the memorandum and articles of association of the company and subject to the provisions of the Companies Act, 1956, and subject to further superintendence and control of the board of directors'. The members of the said committee were designated as directors-in-charge and extensive powers for the effective management of the company were conferred upon them which they were authorised to excises jointly and/or severally. The resolution fixed the 'remuneration' to be paid in the directors-in-charge 'at a minimum of Rs. 48,000 (exclusive of fees for attending the board's meetings and traveling and other expenses incurred by them for the purpose of attending the board's meetings or any other business of the company) per year which should be paid to them in the proportion of 2 : 1, respectively, i.e., Rs. 32,000 to Shri Bipinbhai Vadilal and Rs. 16,000 to Smt. Vimlaben Vadilal Mehta at the end of each financial year of the company or 10% of the net profits of the company, whichever is higher.' The amount, if any, becoming payable in excess of the sum of Rs. 48,000 in accordance with the said formula was also to be paid to the Two directors-in-charge in the ration of 2 : 1, that is, two-thirds to the assesse and one-third to Vimlaben Vadilal Mehta. Pursuant to this resolution, the assessee entered upon the office of the director-in-charge and remuneration as under became payable to him for the below-mentioned periods :
Period AmountRs.1-4-1963 to 31-3-1964 32,0001-4-1964 to 31-3-1965 32,0001-4-1965 to 31-3-1966 50,717
2. By a declaration made on March 27, 1964, the assesse threw into the hotchpot of the HUF, amongst others, 61 shares of the company held by him and impressed those shares with the joint family character with effect from that date. The said declaration was totally silent with regard to the remuneration receivable by the assessee as the director-in-charge of the company. However, by a letter of even date, the assessee requested the company 'to credit now onwards' the remuneration as well as the fees payable to him for attending the meetings of the board of directors to the HUF's account with the company. It might be stated that, accordingly, from March, 1964, onwards, the remuneration payable to the assessee was from time to time credited directly in the HUF's account in the books of account of the company. Similarly, the remuneration was credited form time to time in the books of account of the HUF and no part of the remuneration was credited in the books of account of the assessee.
3. In the course of proceedings for assessment to income-tax for the assessment years 1964-65, 1965-66 and 1966-67, the assessee contended that having regard to the transaction aforesaid, the remuneration receivable by him as the director-in-charge was required to be treated as the income of the HUF and that the remuneration received in each corresponding previous year should, therefore, be excluded from the total income of the assessee and included in the total income of the HUF and brought to tax in its hands. The assessee relied in this connection upon the declaration dated March 27, 1964, the letter of even date addressed by him to the company and the relevant entries in the books of account of the company as well as in the books of account maintained by the HUF and the assesse himself. The Income-tax Officer negatived the contention of the assessee on the grounds that; (i) the remuneration was earned by the assessee in his individual capacity; (ii) there was no evidence to show that the assesse was appointed as the director-in-charge because of the funds invested by the HUF in the company; and (iii) the entries in the books of account were not conclusive and they did not show that the very source of income had been transferred. The income received by way of remuneration during the course of the relevant previous years, was, therefore, included in the total income of the assessee and taxed in his hands.
4. The assessee preferred appeals against the orders of assessment in respect of each assessment year in question. During the course of the hearing of the appeals before the Appellate Assistant Commissioner, it was conceded on behalf of the assesse that it was not his case that he was appointed as the director-in-charge because of the investment of the HUF funds in the company. In fact, it was interims admitted that his appointment as the director-in-charge had nothing whatsoever to do with the funds of the HUF. The only argument which was advanced before the Appellate Assistant Commissioner was that the assessee had manifested a clear intention 'to transfer the managing director's remuneration to the HUF books' and that this intention became apparent from his conduct in throwing 61 shares into the hotchpot of the HUF and the manner in which the remuneration was subsequently dealt with in the books of account of the HUF as well as of the company. This Appellate Assistant Commissioner accepted the contention of the assessee and held that having regard to the fact that the assesse had instructed the company to credit the remuneration receivable by him in the account of the HUF in the books of the company and in view of the subsequent conduct of the parties which showed that the remuneration received was actually an credited in the books of account of the company as also in the books of account of the HUF, it was clearly established that the assesse intended to impress the income with the joint family character. Accordingly, the Appellate Assistant Commissioner held that the amount of remuneration received during the course of each of the relevant previous years was not assessable in the hands of the assessee.
5. The revenue, feeling aggrieved by the decision of the Appellate Assistant Commissioner, carried the matter in appeal before the Income-tax Appellate Tribunal. The Tribunal agreed with the decision of the Appellate Assistant Commissioner. It held : (i) that the declaration dated Mach 27, 1964, and the letter of even date addressed by the assessee to the company and the treatment accorded to the remuneration in the books of account of the company clearly showed that the assesse intended to treat the remuneration received by him as the income of the HUF; and (ii) that having regard to the clear manifestation of such intention, it was not necessary to apply any test in order to determine whether the remuneration received by the assessee was his individual income or the income of the HUF. In this view of the matter, the appalls were dismissed.
6. At the instance of the revenue, the Tribunal has stated a case on this aspect of the matter and refereed the following question for our opinion : Question (1)
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the remuneration received by the assessee from M/s. C. Doctor & Co (P.) Lt d., was an income of his Hindu undivided family ?' There is also another question in this reference which has been referred for our opinion and it arises out of the claim made b the assessee in the course of the assessment proceedings for the assessment year 1966-67, for a deduction in respect of the municipal tax paid by him while computing the annual letting value of his self-occupied property. The Income-tax Officer and, on appeal, the Appellate Assistant Commissioner rejected the said claim. The assessee preferred cross-objections in the appeals filed by the revenue against the part of the order of the Appellate Assistant Commissioner by which the remuneration of the office of the director-in-charge was held to be taxable in the hands of the HUF and contended that such deduction should have been allowed. The Tribunal, following its own earlier decision in another matter, held that the municipal tax paid by the assessee was an admissible deduction while computing the annual letting value of his self-occupied property. It accordingly allowed the claim. At the instant of the revenue, the Tribunal has referred the following question so far as this controversy between the parties is concerned : Question (2) : 'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the municipal tax is an admissible deduction in computing the annual letting value of self-occupied property ?'
7. We shall first take up for consideration the second question because it is admittedly concluded by the decision of Division Bench of this court i Commissioner of Income-tax v. Arvind Narottam : 105ITR378(Guj) . In that case a similar question has arisen and the Division Bench has there held that while calculating the annual letting value of the property in occupation of the owner for the purpose of his residence, municipal taxes are required to be deducted. Following our decision in that case, we answer the second question in the affirmative, that, is in favour of the assessee and again the revenue.
8. That takes us to the consideration of the first question. It was submitted on behalf of the revenue in support of the said question that the Tribunal misdirected itself in law in holding that the material on record showed that the assesse intended to treat the remuneration receivable by him as the director-in-charge as income of the HUF and that, therefore,it was not necessary to find out whether the remuneration was in fact his individual income or the income of the HUF. The submission was elaborated upon in the following manner : (i) that by merely throwing 61 shares of the company in the HUF hotchpot the remuneration payable to the assesse as the director-in-charge did not become the income of the HUF because
(a) admittedly, the assessee was not appointed nor continued to hold the post of the director-in-charge by virtues of the HUF having invested funds in the company, and
(b) even otherwise, having regard to the fact thatthe remuneration was payable on account of the assignment which required the assessee to exert himself and render personal service with a view to managing the affairs of the company, such remuneration could not be said to flow our of the shares thrown into the hotchpot of the HUF;
(ii) the unless, therefore, the very right to receive remuneration was independently thrown, if it was capable of being so thrown, into the HUF hotchpot, the remuneration could not be said to have accrued to or received by the HUF and could not be taxed in its hands;
(iii) that the right to receive remuneration for managing the affairs of the company as the director-in-charge, in the very nature of things, could not be thrown into the HUF hotchpot and, in any event, it was in fact not so impressed with the joint family character, and there was, therefore, no diversion of income at source but at the highest it was a case so application of the income after its accrual;
(iv) that, in any event, the conduct of the assessee manifested that he was labouring under a misapprehension or mistaken legal assumption that upon the throwing to of the shares of the company into the HUF hotchpot, the remuneration receivable by him as the director-in-charge also belonged to the HUF and it is on that footing that he gave instruction to the company to credit the said remuneration to the HUF account and that, therefore, there was no conscious, intentional and volitional surrender or abandonment of his separate property in the shape of such remuneration and as such also the income cannot acquired the character of the joint family property.
9. We are inclined to think that the revenue is right in submitting that the Tribunal has misdirected in itself in law that it has failed to determine the real point which arose for its decision in the present case. Under the Income-tax Act, the charge is on the total income of the previous year of the taxpayer and the total income includes all income, from whatever source derived, which is received or is deemed to be received by the taxpayer or which accrues or arises or is deemed to be accrue or arise to him in the course of the previous year. Therefore, if the remuneration of the assessee as the director-incharge has in fact or law arisen or accrued to him or is received by him, then, it will be chargeable to tax in his hands, irrespective of the intention manifested by him, by his deed or conduct, to treat it as the income of the HUF, after the income has accordingly arisen or accrued to him or is received by him. Even if such intention is subsequently manifested, it would be a case of application of income after its accrual or receipt and such intention will not absolve the assessee from his liability to be taxed in respect of such income. On the other hands, if it is shown, (a) that the remuneration received by the assessee in substance, though not in form, was one of the modes of return made to the HUF because of the investment of the family funds in the business and the that income was essentially earned as a result of the funds invested by the HUF or (b) that the remuneration was diverted at source even before it reached him as a result of an overriding obligations created in favour of the HUF, different considerations might arise. In any of the above mentioned two eventualities, having regard to the well-settled legal position, there would be neither accrual nor receipt of income which could be brought to tax in his hands. The assessee, even if he collects the remuneration, does so not as a part of his income but for and on behalf of the HUF to whom is was payable and such income would not be subject to tax in his hands.
10. It would thus appear that in a case like the present it is not only necessary but also imperative to decide at the very outset, on application of proper tests, whether the remuneration has to fact or law arises or accrued to or is received by the assessee as his own income and whether it is then applied by him for the benefit of the HUF or whether it is in truth and reality the income of the HUF by virtue of its being a return for the investment of its funds or by reason of an overriding title cited in its favour. It might be stated, however, that in the instant case, it is not necessary to investigate whether the remuneration is a return for the HUF's investment of its funds in the company in view of a clear concession made on behalf of the assessee during the course of the hearing of the appeals before the Appellate Assistant Commissioner to the effect that he was not appointed as the director-in-charge because of the HUF funds having been invested in the company and that his appointment as such had nothing to do with the finds of the HUF. There is, therefore, no scope for investigation on those lines. Still, however, in order to reach the correct decision on the point whether or not the income in question was taxable in the hands of the assessee or the HUF, it would be necessary to find out whether the income by way of remuneration was taken away from his even before its accrual or arisal since it was already allocated in favour of the HUF. In this connection, it may be pointed out that the contention of the assessee in the course of the hearing of appeals before the Appellant Assistant Commissioner in terms was the it was his intention 'to transfer the managing director's remuneration, to the HUF's books.' This contention was comprehensive enough to take in the plea that the assessee had diverted the income at source before it had arisen or accrued to him or was received by him. Before the Tribunal also, the assessee urged that the remuneration was in fact the income of the HUF, though, in the circumstances of the case, any inquiry on the lines whether it was a return for the investment of the HUF's funds was not necessary. This contention too points in the same direction. The Tribunal, however, with respect, missed the real point and failed to determine whether or not by the deed and conduct of the assessee the income was taken away from him even before it accrued or arose to him or was received by him or whether by such deed and conduct the assessee merely applied his own income for the benefit of the HUF. Under the circumstances, it becomes difficult for us to answer the first question referred for our opinion.
11. The question then is as to what course should be followed by us. In view of the circumstances above mentioned, it appears to us proper to decline to answer the first question on the ground that the Tribunal has failed to consider and decide the crucial point necessary for the determination of the controversy between the parties. It will be open to the Tribunal, however, to dispose of the appeals under section 260(1) of the Income-tax Act, 1961, in the light of the observations made in the course of this judgment. In this connection, we may invited the Tribunal's attention to the decision of this court in Commissioner of Income-tax v. Ramanlal Chimanlal (Income-tax Reference No. 46 of 1970, decided on August 19, 1972). In that case, one of the questions which fell for consideration before a Division Bench of this court was whether a portion of the remuneration payable to the assessee as managing director which, by an agreement entered into between him and another person, was earmarked for payment to such other person after meeting with all the expenses required to be incurred in the discharge of the duties, obligations and responsibilities of the post of managing director, was taxable in the hands of the assessee. Speaking for the Division Bench, I had observed in that case as under :
'Income-tax is a levy on income but every sum of money which appears to have been earned by a taxpayer is not necessarily income chargeable to tax. When the charging section of the Income-tax Act subjects to charge the total income of the taxpayer, it is what reaches him as income which it is intended to charge. In other words, income in respect of which liability to tax is attracted must be the real income of the taxpayer and not his artificial or notional income. In a case where the income of a tax-payer is required to be diverted even before it reaches him as a result of an overriding obligation, there would be neither accrual nor receipt of income which can be brought to tax in his hands. The income, in such a case, is taken away from him even before its accrual since it is already allocated for a particular purpose prior to its receipt, in his hands. The taxpayer, even if he collects it, does so, not as apart of his income, but for and on behalf of the person to whom it is payable and such income is not subject to tax in his hands. A case falling in this class must, however, be distinguished from a case falling in another distinct class, though both cases might sometimes appear deceviable similar, namely, where a portion of the taxpayer's income is applied after its accrual or receipt in a particular manner to meet as obligation. The payment in the latter case, which is really made out of the taxpayer's income pursuant to an obligation undertaken or incurred by him, would be chargeable to because subsequent application of the income is of no concern to the revenue. These two classes of cases, which are distinct and separate, sometimes appear to bear a close resemblance at first sight becauser in both cases there is a common factor, namely, existing; obligation to make a payment. The dissimilarity arises, however, because of the nature of the obligation which is really and materially different in each of them. The obligation as a result of which income is diverted at source is substantially different from the obligation in consequence of which income is applied after its accrual or receipt. The obligation of the former kind ordinarily arises out of an overriding charge existing either upon the asset or its income or is traceable to an assignment or creation of a superior title over it or springs from a division of the assets between joint owners of co-owners and requires that the income which accrues or is received from such asset should be applied to discharge the said obligation. The obligation of the latter kind is usually undertaken; or incurred by the taxpayer-be it by virtue of a decree, settlement, agreement, testamentary direction or the like-and requires that a portion of one's own income after its accrual or receipt should be paid to another to get relieved of the said obligation. In the former case, there would be diversion of income in such a way; that it never became the income of the taxpayer and such artificial or notional income would not be subject to tax in his hands. The latter case would be one of application of income in a particular manner after its accrual or receipt and the protion of income so applied would be chargeable to tax in the taxpayer's hands. It would thus appear that the decisive factor which distinguishes one class of cases from the other is the nature of obligation in discharge of which the income is diverted or applied, as the case may be. The test thus laid down is clear, through we must say that like some other tests it may not be easy of application in all cases.'
12. The Tribunal, in adjusting its decision under section 260(1), will have to apply this test to find out whether, on the facts and in the circumstances of the case, there was diversion at source of income, in the shape of remuneration of the office of the director-in-charge in favour of the HUF. It is only if that question is answered in favour of the assessee that the assessee's claim that such income is not taxable in his hands will have to be upheld.
13. The result, therefore, is that, so far as the first question is concerned we decline to answer the same for the foregoing reasons. So far as the second question is concerned, as earlier stated, we answer the same in the affirmative, that is, in favour of the reference in the circumstances of the case.