1. The abovementioned four references relate to the assessment years 1962-63, 1963-64, 1965-66 and 1966-67, respectively. As identical questions of law arise in all the four cases, the same are disposed of by one single order.
2. Briefly stated, the facts of the case as mentioned in the statement of the case are that Shri Pannalal Kothari, hereinafter referred to as 'the assesses', was working as the managing director of M/s. Mahalaxmi Cotton Mills, Beawar (hereinafter referred to as 'the company'), during the relevant assessment years. He was appointed as managing director of the company by an agreement on May 7, 1960, for a period of five years, vide the resolutions of the board of directors of the said company. It was resolved in the resolutions that 'the company should engage and employ Shri Pannalal Kothari as managing director who should serve the said company on the said terms and conditions herein set forth......'
3. According to Clause (1) of the agreement, it was provided that the company shall employ Seth Pannalal as its managing director who shall serve and act as manager of the said company for a period of five years on a remuneration of Rs. 2,000 per month plus free use of the compay's car with effect from January 1, 1960, unless determined earlier. Clause (2) of the said agreement enabled the managing director to appoint and dismiss officers, supervisory staff, clerks, workmen and servants in the employment of the company and to deal otherwise with the terms and conditions of their employment and of service, to draw, accept or endorse a bill of exchange, hundi or promissory note or other negotiable instrument or security on behalf of the company in the ordinary course of business of the company. He was further charged with the responsibility of maintaining proper books of account, files, etc., of the company. He was to keep and preserve in proper and safe custody useful and valuable papers, documents and deeds, etc. He was further entitled to carry out, run, and superintend contracts, business and other undertakings of the company and all the financial, commercial and other accounts and affairs of the company and to look after the effects and the properties of the company. Clause (3) of the agreement stipulated that the managing director shall be bound to attend diligently, faithfully and honestly to the business of the company to the best of his ability and skill possessed by him.
4. In accordance with the aforesaid agreement, the company paid to the assessee a remuneration of Rs. 2,000 per month. The aforesaid remuneration was credited in the books of M/s. Rai Bahadur Seth Kundanmal Kothari, Beawar, which was the firm consisting of Shri Pannalal and his brothers, namely, Shri Navratan Mal and Shri Sohan Lal. The aggregate of the remuneration thus credited in the books of the aforesaid firm was, at the end of the year, transferred to the profit and loss account of the firm. After deducting the shop expenses, motor expenses, salary, etc., whatever remained, was divided equally amongst the partners of the said firm in equal shares. The net profit as per the profit and loss account of the aforesaid firm, which remained with the firm for distribution amongst the partners during the years under consideration, was as below :
5. The aforesaid firm had come into existence with effect from April 18, 1959, as a result of the partition in the joint family of the assessee consisting of the father, Shri Lalchand and brothers named above known as M/s. Kundanmal Lal Chand. Prior to partition, the said Hindu undivided family was carrying on business of managing agency of M/s. Mahalaxmi Mills Ltd., Beawar. The said company had 12,996 shares. Out of them, as many as 10,014 shares were held by the various descendants of Lal Chand and their family members. Each of the brothers namely, Navratan Mal, Pannalal and Sohan Lal held 2,146 shares and their wives held 230 shares each. Sons of the brothers also held some shares. The aggregate of the shares held by the three brothers and their family members was 8,736, held equally by three branches of the three brothers. 1,228 shares were held by a trust known as Rai Bahadur Kundanmal Kothari Trust, Beawar. Voting power on these shares was also available to these three brothers.
6. After partition of the family, the shares were retained by the three branches in the manner indicated above. After partition of the family on April 8, 1959, the business of the managing agency of the company was taken over by the newly constituted firm M/s. Kundanmal Lal Chand, consisting of the father Lalchand and his three sons named above.
7. With effect from 1960, on account of certain changes in the Companies Act, the managing agency system was to be abolished. The company had to fall in line with the proposed change in law. The company, therefore,abolished the managing agency and appointed instead Shri Lalchand as the first managing director of the company in July, 1959. Shri Lalchand Worked as managing director of the company for a brief period from July, 1959, to December 24, 1959, on which date he died. After his death, Pannalal, the present assessee, was appointed as managing director.
8. On the basis of the above facts and the history of the case, the Income-tax Officer was of the opinion that the income from remuneration derived by Pannalal as managing director of the company was his personal income and the assessment was made accordingly.
9. The appeal filed by the assessee was dismissed by the Appellate Assistant Commissioner. The Income-tax Appellate Tribunal also upheld the order of the Appellate Assistant Commissioner. The assessee submitted applications for referring the question of law to this court for decision. The Income-tax Appellate Tribunal accepted the reference applications and has referred the following question of law for the opinion of this court :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the managing director's remuneration received by the assessee was his personal income assessable in his hands as individual ?'
10. We have heard Mr. Jain on behalf of the assessee and Mr. Surolia on behalf of the Department. The Supreme Court in Raj Kumar Singh Hukam Chandji v. CIT : 78ITR33(SC) has already enunciated the following principles in such kinds of cases : (at pp. 43 & 44)
'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. Applying the above test to the facts of the present case, it would be evident that the assessee was appointed as managing director in his individual capacity. He was bound to attend diligently, faithfully and honestly to the business of the company to the best of his ability and skill possessed by him. According to the clauses in the agreement, the managing director was authorised to appoint and dismiss officers and other workmen and servants in the employment of the company. He was further charged with the responsibility of maintaining proper books of account and he was to keep and preserve in proper and safe custody useful and valuable papers, documents and deeds, etc. He was further entitled to carry out, run and superintend contracts, business and other undertakings of the company. All these terms and conditions mentioned in the agreement clearly go to show that the assessee was to perform his duties as managing director on the basis of his own ability and skill possessed by him. The facts on record and the nature of the entries made in the books of account clearly go to show that at the time when the entries were made, the income from the managing director's remuneration was treated not as belonging to the three brothers but as belonging to the firm of Kundanmal Lalchand. If there was an arrangement between the brothers, there was no occasion to credit the income in the books of the firm. In that case, it would have been divided amongst the brothers straightaway. Once the income was credited in the books of the firm, it became the property of the firm which was distinct from the property of the partners. The agreement with the company clearly shows that Pannalal Kothari was an employee of the company in his individual capacity for specific services to be rendered by him to the company. The remuneration thus received by Pannalal was on account of his personal services. It was not a return to him on account of any investment made by the firm and it cannot be considered an investment in the same manner which may bring any dividend or interest on such investment. Even if the brothers had voted for appointment of Pannalal, it was not on account of any detriment to the shares held by them and in this view of the matter, it cannot be said that the brothers had made any investment in the company and the managing director's remuneration was fixed on account of a return from such investment.
12. In view of these circumstances, we agree with the view taken by the Income-tax Appellate Tribunal in the present case and the question of law referred to above is answered in the affirmative and in favour of the Revenue, The parties are left to bear their own costs.