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The Commissioner of Income-tax Vs. S.N.N. Sankaralinga Ayyar - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation;Service
CourtChennai
Decided On
Case NumberCase Referred No. 36 of 1946
Judge
Reported inAIR1950Mad610; [1950]18ITR194(Mad)
ActsIncome Tax Act, 1922 - Sections 14; Hindu Law
AppellantThe Commissioner of Income-tax
RespondentS.N.N. Sankaralinga Ayyar
Appellant AdvocateC.S. Rama Rao Sahib, Adv.
Respondent AdvocateM. Subbaraya Aiyar, Adv.
Cases ReferredSirdar Indra Singh v. Commissioner of Income
Excerpt:
.....- remuneration - section 14 of income tax act, 1922 - whether amount received by respondent as managing directors' remuneration and directors' sitting fees from bank can be part of income of hindu undivided family (huf) of which he was 'karta' - respondent earned remuneration in consideration of services rendered to bank under specific contract entered into with bank - no part of family funds spent for acquiring remuneration - no detriment to family property and no income of family property utilized for earning remuneration - actual appointment as managing director and remuneration result of contract of service entered into between him and bank and not of holding of shares by respondent - in light of precedent income of respondent as managing director of bank cannot be said to be..........mr. sankaralinga aiyar claimed that the remuneration of rs. 18,991 which he received as the managing director of the indo commercial bank and a sum of rs. 105 which he received as director's sitting fees, were his personal earnings and not property belonging to the undivided hindu family of which he has been the head and the manager. the only circumstance relied on behalf of the commissioner of income-tax to declare these two amounts, family property is that in order to acquire the qualification for managing director mr. sankaralinga aiyar utilised family funds and purchased shares, and as the qualification was acquired by utilising the family funds, it is claimed that his remuneration earned as managing director as director's sitting fees must be treated as joint family property......
Judgment:

Satyanarayana Rao, J.

1. This reference raises a very plain question, viz., whether in the circumstances and on the facts of this case, the two sums of Rs. 18,991 and Rs. 105 received by the respondent as Managing Directors' remuneration and Director's sitting fees from the Indo Commercial Bank could be said to be a part of the income of the Hindu undivided family of which he was the karta.

2. The assessment was made on the basis that the family of which Mr. Sankaralinga Aiyar was the karta or the manager was an undivided Hindu family. For the assessment year 1943-44 Mr. Sankaralinga Aiyar claimed that the remuneration of Rs. 18,991 which he received as the Managing Director of the Indo Commercial Bank and a sum of Rs. 105 which he received as Director's sitting fees, were his personal earnings and not property belonging to the undivided Hindu family of which he has been the head and the manager. The only circumstance relied on behalf of the Commissioner of Income-tax to declare these two amounts, family property is that in order to acquire the qualification for managing director Mr. Sankaralinga Aiyar utilised family funds and purchased shares, and as the qualification was acquired by utilising the family funds, it is claimed that his remuneration earned as managing director as director's sitting fees must be treated as joint family property. Articles 87 and 88 of the Articles of Association of the Indo-Commercial Bank lay down the qualification of a managing director and Article 88 requires that :

'No director shall be eligible to be a managing director unless at the time of his appointment as such, and also during his continuance of that office, he holds, In his own right, unencumbered shares of the bank of the nominal value of one-eighth of the total issued capital for the time being.'

This article was subsequently amended by substituting:

'1. '500 unencumbered A series shares of the bank' for 'one-eighth of the total issued capital for the time being'.'

The appellate tribunal decided in favour of the assessee and treated the two items as the individual property of Mr. Sankaralinga Aiyar. This position is contested on behalf of the Commissioner of Income-tax by his learned counsel.

3. The remuneration of the managing director is earned by him in consideration of the services which he rendered to the bank. No part of the family funds were spent of utilised for acquiring this remuneration, except that the necessary shares to acquire the qualification of a managing director were purchased out of the joint family funds. There is no detriment to the family property in any manner or to any extent as admittedly the shares earn dividend which is included in the income of the family. Under Hindu law, the remuneration of the managing director whose employment is in the nature of a contract of service would ordinarily be his self-acquisition and unless the earnings are thrown into the common stock or, in other words, blended with the family property, they would not become family property. The mere fact that the income is entered in the family accounts or is mixed in the bank account would not make it family property as that by itself would not constitute blending under Hindu law, as it requires the throwing of the income into the common stock with the intention of abandoning the ownership and vesting it in the family. It is therefore difficult to see on what basis the claim that the remuneration and the sitting fees constitute joint family property can be sustained. No doubt the shares were purchased out of the joint family funds and were shown as held by him in his own right. It is impossible to infer from that, that the appointment itself was on behalf of and for the benefit of the joint family; or, in other words, that he was managing director as representing the undivided family. It is argued by the learned counsel for the Commissioner of Income-tax that there may be an agreement, or from the facts and circumstances an inference may be drawn, under which the remuneration as and when it was earned automatically became the property of the joint family. No such agreement has ever been pleaded; nor is there any foundation for inferring on the facts an agreement of this description. In Dover Coalfield Extension Ltd., In re, (1908) 1 Ch. 65 : 77 L. J. Ch. 94, the Court of appeal had to consider a somewhat analogous situation. The facts of the case are clearly stated in the headnote which reads as follows:

'The D company transferred certain shares which it held in the K Company to C, one of its directors, in order to qualify him to become a director of the K Company, the intention being that C should represent the interests of the D company on the board of the K Company and C executed a declaration of trust of the shares in favour of the D company. Held, that the remuneration received by C as director of the K Company was not profit received by him from the use of the property of the D company, and that C was under no liability to account for that remuneration to the D company.'

The peculiar feature of this case is that C executed even a declaration of trust of the shares in favour of the D company. Notwithstanding this circumstance it was held that the remuneration received by him by using the property of the D company was not remuneration in respect of which he was liable to account to the D company. Cozens-Hardy M. R. at p. 69 considered the legal position of C in those circumstances and observed that

'the money received by C was received by him not by virtue of the shares but by virtue of a separate contract with the K company and therefore the mere fact that he was a director of a company holding his qualification shares as trustees for another company would not make him liable or accountable for the remuneration earned by him.'

It is therefore difficult to accept the contention advanced on behalf of the Commissioner of Income tax.

4. The question was considered by the Patna High Court in Commissioner of Income-tax B. & O. v. Darsanram, 1945 T. R. 419: A. I. R. 1946 Pat. 50, which followed an earliar decision of the same High Court in Indar Singh v. Commissioner of Income-tax, B. & O. : AIR1943Pat169 . In my opinion, the question does not present any difficulty and so long as there is no detriment to the family property and so long as the corpus or the income of the family property is not utilised or spent in making the acquisition, or in earning the remuneration, the remuneration cannot be treated as joint family property.

5. For these reasons I think the question should be answered in the negative. The asses-see is entitled to his costs which will be fixed at Rs. 50.

6. Viswanatha Sastri J.--I agree. By virtue of his position as the holder of a large number of shares, Mr. Sankaralinga Aiyar became eligible for appointment as the managing director of the Indo-Commercial Bank. But his actual appointment and his remuneration were the result of a contract of service entered into between him and the bank and not of the holding of shares by him. He was entitled to be paid and was paid remuneration for service rendered by him to the Indo-Commercial Bank under a specific contract entered into by him with the bank. The mere fact that he held a particular quantity of shares as manager of a joint family did not ipso facto enable him to function as the managing director. His personal qualifications were mainly responsible, in addition to the holding of shares, for his selection and appointment as the managing director of the bank, The remuneration was really the quid pro quo for the work which he did under the contract of service with the bank. The answer to the argument of the learned counsel for the Income-tax authority that the managing director could not have earned the remuneration unless he had been qualified to act as director by the possession of shares belonging to the family, is that he became a director by an appointment by the bank under a contract in which his own personal qualifications were mainly responsible for the choice. The managing directorship was in fact a contract of service, and it is not as if the family represented by the manager was the managing director. It was the individual that was appointed and that was functioning as the managing director. It may be that his holding of a large block of shares had an indirect influence on his appointment but that is not the cause causans of his earnings, which were merely, remuneration for personal services rendered by him to the bank. It is not as if any family monies have been spent, consumed, or expended in the process of the acquisition of the managing directorship or in the earning of the remuneration which has been paid to the managing director. The monies of the family represented by the shares are still intact as an investment and the shares are giving dividends which go into the coffers of the family, I therefore agree with my learned brother in thinking that the income of Mr. Sankaralinga Aiyar as the managing director of the Indo Commercial Bank cannot be said to be an asset or income of the joint family of which he is the manager, I also agree that the two decisions of the Patna High Court in Commissioner of Income-tax v. Darsanram, 1945 I. T. R. 419: A. I. R. 1946 Pat. 50, Sirdar Indra Singh v. Commissioner of Income-tax B. & O. : AIR1943Pat169 and In re Dover Coalfield Extension Co., 1908 1 Ch. 65: 77 L. J. Ch. 94, take the correct view of the legal position I agree in the answer to the reference and in the direction for costs given by my learned brother.


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