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M. N. Murugappa Chetty and Sons Vs. Commissioner of Income-tax, Madras. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberCase referred No. 10 of 1947
Reported in[1952]21ITR311(Mad)
AppellantM. N. Murugappa Chetty and Sons
RespondentCommissioner of Income-tax, Madras.
Cases ReferredRamachandra v. Chinubhai
Excerpt:
- - ' the learned judge in that sentence must have been thinking of a case where no detriment to the family estate was involved in the acquisition of the office of managing agents and not a case like the one which was considered in haridas purushottam, in re......the managing agency commission earned by one murugappa chettiar is assessable to income-tax as the joint family income of murugappa and his sons. the question formulated in this reference is as follows :-'whether on the facts and in the circumstances of the case the tribunal was right in holding that the proportionate income of the managing agents, messrs. m. nanjappa chettiar & sons, was the income of the hindu undivided family of murugappa chettiar and not the individual income of the karta ?'the facts relevant for the disposal of this reference may be shortly stated. on may 12, 1932, murugappa chettiar and his brother chikkanna chettiar entered into a managing agency agreement with the dhanalakshmi mills ltd., whereunder messrs. nanjappa chettiar and sons, the name of the firm of.....
Judgment:

The Judgment of the Court was delivered by

SATYANARAYANA RAO, J. - The short question that arises for consideration in this reference is whether the managing agency commission earned by one Murugappa Chettiar is assessable to income-tax as the joint family income of Murugappa and his sons. The question formulated in this reference is as follows :-

'Whether on the facts and in the circumstances of the case the Tribunal was right in holding that the proportionate income of the managing agents, Messrs. M. Nanjappa Chettiar & Sons, was the income of the Hindu undivided family of Murugappa Chettiar and not the individual income of the Karta ?'

The facts relevant for the disposal of this reference may be shortly stated. On May 12, 1932, Murugappa Chettiar and his brother Chikkanna Chettiar entered into a managing agency agreement with the Dhanalakshmi Mills Ltd., whereunder Messrs. Nanjappa Chettiar and sons, the name of the firm of which the two brothers are partners, was appointed managing agents of the company subject to certain conditions and rights enumerated in the agreement. The two brothers, at the time when the agreement was entered into, were admittedly members of a Hindu joint undivided family. On February 7, 1941, the two brothers, Murugappa and Chikkanna, became divided and the partition is evidenced by a partition deed of that date. The partition was between Murugappa on the one hand and Chikkanna on the other and there was also a division inter se between Chikkanna and his sons. Murugappa also had sons but there was no division inter se between Murugappa and his sons. Murugappa seems to have obtained a deed of release on April 2, 1941, from his sons, but that release may be left out of consideration as no argument is now based on the strength of that release. The partition deed made no reference to the rights under the managing agency agreement; nor was there any fresh agreement after partition between the Dhanalakshmi Mills and the firms. The firm continues to manage the company and in the year of account 1942-43, Murugappa, for his share of the managing agency commission, obtained a sum of Rs. 26,607. This sum was treated by the Income-tax Officer as income of the joint family and was assessed as such overruling the objection of Murugappa that it was really his individual income and should not have been included in the income of the joint family. This decision was upheld by the Appellate Assistant Commissioner and also by the Appellate Tribunal. Hence this reference.

Undoubtedly on the date of the assessment, Murugappa and his sons were members of a Hindu joint family and Murugappa, the father, is no doubt also the karta of that family. The commission earned by the Murugappa as managing agent under the managing agency agreement above referred to can be established to be joint family property in one of two ways : (1) either by establishing that the managing agency agreement was in fact obtained on behalf of the joint family and that therefore the commission earned under that agreement must be deemed to be property of the family; or (2) by establishing that the income was earned by utilising joint family property or joint family money or at any rate by utilising the property of the joint family to its detriment. If none of these is established, it must be presumed that the managing agency commission earned by Murugappa is his separate and individual property and not property of the joint family.

Mr. Rama Rao Sahib, learned counsel for the Income-tax Commissioner, tried to sustain in decision of the Appellate Tribunal on those two grounds. We may here dispose of the basis of the decision of the Appellate Tribunal as it is now conceded and indeed it cannot be sustained that merely because in the previous years Murugappa did not object to the assessment of this commission as income of the joint family, the income during the assessment year also must be treated as the income of the joint family. It is rather difficult to see on what principle the Appellate Tribunal presumed that the income during the accounting year was also income of the joint family merely because on prior occasions Murugappa or Chikkanna did not object to the income being treated as the income of the joint family.

The contention that the managing agency agreement must be deemed to have been obtained on behalf of the joint family may now be considered. The agreement was entered into in 1932 when Murugappa and Chikkanna were undivided and there is nothing to indicate in the document that it was entered into on behalf of, and for the benefit of, the family. The indication, if any, points to an opposite conclusion for the reason that when the karta of the family at that moment was Murugappa, who was the senior of the two brothers, agreement was entered into in the name of the two brothers. Which negatives any presumption that the agreement was entered into on behalf of the family. Even a contract entered into by a person who happens to be the manager of the family is prima facie a contract entered into in his individual capacity, unless there is a clear indication in the document itself that he entered into it on behalf of, and for the benefit of, the family. In this document, which was entered into by the two brothers in their individual capacity, there is nothing to support the contention that it was entered into on behalf of the family. Further, liberty was given under the agreement to the two partners of the firm of Messrs. Nanjappa Chettiar and Sons to take any others also into the partnership and the change in the constitution of the firm, or the name and style, would not have the effect of affecting in any manner the rights under the managing agency agreement. The mere accident that these two persons were members of an undivided family affords on justification for inferring that the agreement was entered into on behalf of the family. Further, under the Indian Companies Act as it stands after the amendment of 1936, a joint family as such cannot enter into a managing agency agreement for in the definition under Section 2, clause (9-A), a 'managing agents' is defined as meaning 'a person, firm or company'. A Hindu undivided family is not a 'person' and therefore it is incapable of entering into a managing agency contract as a legal entity.

The next contention is that a large amount was invested by the two brothers in purchasing shares in Messrs. Dhanalakshmi Mills, Ltd., and from this it is argued that there is utilisation of the joint family funds and hence the managing agency commission earned by the brothers must be deemed to be the income of the family. That there is really no connection between the purchase of the shares from and out of the joint family funds and the managing agency agreement is made clear by the agreement itself as it specifically states that the agreement was entered into between the two brothers and the company in consideration of the firm of Messrs. Nanjappa Chettiar & Sons having promoted the company and not for the reason that they purchased the shares in the Dhanalakshmi Mills. There is no qualification prescribed in the agreement that the managing agents should so hold any shares in the company and that they should so hold and continue to hold the shares during the continuancy of the managing agency agreement. The purchase of the shares, the acquisition of the rights under the managing agency agreement, and the agreement itself, are not in any manner connected and therefore it cannot be stated that the joint family property suffered any detriment to any extent by the conduct of these two person in obtaining the managing agency agreement. The shares have been earning large dividends, in some years, as large as the face value of the shares, and really no detriment was suffered by the family by the purchase of these shares.

The fact that in the previous years the brothers did not object to the assessment of the income as joint family income does not at all support the inference that the income should be treated as joint family income. It may be in the prior years that the two brothers, and later after partition Murugappa, had no objection to treat the income of that particular year or years as joint family income. But that does not have the effect of converting the income to be accrued in future into joint family income on any conceivable principle of Hindu law. If it is a case of blending, it requires that the property must be existence before it is actually blended. It cannot be said that at the time the income of the previous years was agreed to be treated as joint family income, the income of the assessment year was in existence, and it is therefore impossible to invoke the doctrine of blending to a case of this description and to hold that the managing agency commission earned during the accounting year must be treated as joint family income.

The commission earned under a managing agency agreement by a member of a coparcenary would prima facie be his individual property or separate property unless it be shown that the rights were acquired by utilising any portion of the joint family property as in the case of Haridas Purushottam, In re. In that case emphasis was laid upon the fact that an asset was sold to the new company, i.e., the mills, which formed part of the joint family property of the person or persons who entered into the managing agency agreement, and as stated at page 132 of the report, the new company, i.e., Messrs. Purushottam Govindji & Co., was appointed managing agents and as part and parcel of that arrangement, the Hubli Mills in which the assessee admittedly held a share as karta were sold by the partnership to the new company. The managing agency therefore was held, in that case, to have been derived from, or acquired with, the assistance of the joint family. The prima facie view that the rights under the managing agency agreement acquired by a coparcener would be his individual property may be rebutted by showing, as in that case, that the family estate had suffered a detriment as part and parcel of the arrangement under which the managing agency rights were acquired. This position is not inconsistent with the view of Chagla, J., in Ramachandra v. Chinubhai , where the learned Judge observed : 'To my mind it is impossible to contend that the mere office of managing agent without any benefits attaching to it can ever be deemed to be joint family property.' The learned Judge in that sentence must have been thinking of a case where no detriment to the family estate was involved in the acquisition of the office of managing agents and not a case like the one which was considered in Haridas Purushottam, In re. For these reasons we are of opinion that the decision of the Appellate Tribunal is wrong and that the first part of the question referred to us must be answered in the negative. On the second part of the reference we hold that the managing agency commission should have been treated as the individual income of Murugappa Chettiar. The assessee who succeeds in this reference is entitled to his costs which we fix at Rs. 250.

Reference answered accordingly.


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