1. The respondent-assessee, an HUF filed its returns for the assessment years 1966-67 and 1967-68, disclosing income from property and from other sources being interest on account with M/s. K. S. Subbaiah Pillai & Co. P. Ltd. and dividend income therefrom. The ITO noticed that in the prior years, the property income and interest income were shown as the personal income of Sri K. S. Subbaiah Pillai and assessed as such. The assessee when called upon to explain the reasons for the same submitted that the two items of immovable property, namely, a house property in Guntur and a house property in Madras and the balances in the books of M/s. K. S. Subbaiah Pillai & Co. P. Ltd. were included in his individual assessments filed for the earlier years on an erroneous view of the legal position although they were acquired by means of funds belonging to the HUF.
2. In March, 1947, Shri K. S. : Sankaram Pillai, father of Sri K. S. Subbaiah Pillai, died. He was carrying on business in tobacco for a number of years at Guntur and Whitefield. A sum of Rs. 861, being the outstanding commission from Allori Kotaiah & Co., to late K. S. Sankaram Pillai was received by him. He continued the business after the death of his father and used the assets of the business after including the goodwill, from Allori Kotaiah & Co., towards commission due and payable to his father. The properties at Whitefield were sold for a sum of Rs. 10,000 in November, 1951. He received a sum of Rs. 2,350 towards the lease amount for barns and agricultural lands at Whitefield. The aforesaid properties were ancestral. He later on married and had a male child on October 30, 1956. On the basis of the aforesaid information, the ITO held that the entire business of the limited company was traceable to the HUF funds of Sri Sankaram Pillai and Subbaiah Pillai and, therefore, the remuneration, commission and sitting fees of Subbaiah Pillai and Ms wife, the two directors who were members of the HUF were to be assessed in the hands of the HUF consisting of Sri K. S. Subbaiah Pillai as karta and his wife, son and daughter, and he completed the assessments accordingly on January 24, 1969. He also completed the assessment for 1968-69 in the same manner on the same day. The appeals preferred by the respondent-assessee to the AAC were not successful. The Appellate Tribunal, on further appeal, found that the earning of the remuneration and commission was for services rendered by the karta in his individual capacity to the company and it could not be attributed to the investment of the family funds in acquiring the shares of the company. While arriving at that conclusion the Tribunal took note of the fact that K. S. Subbaiah Pillai & Co. P. Ltd. was started in the year 1957 with a subscribed capital of Rs. 25,000 only and its profits for the first year was barely Rs. 5,000 and that, thereafter, its profits began to rise as follows :
Rs.
46,137 in 1958 75,259 in 1959 1,83,687 in 1960 3,48,202 in 1961 3,01,584 in 1962 2,29,174 in 1963
3. The Tribunal, therefore, inferred that so much of profit could not be attributed to the investment of the paltry sum of Rs. 25,000 by the HUF, that the extent of the company's prosperity indicated an expert handling of the affairs, that such expert handling was an individual attribute and that investment of funds could never give such a qualification or attribute. Although the karta became the company's director as a result of the investment made by the family, it cannot be said that the salary and commission on the net profits were earned by him not on account of his personal qualifications and exertions but on account of the investment of the family funds, and, consequently, the Tribunal allowed the appeals. The reference application filed before the Tribunal under Section 256(1) of the I.T. Act, 1961, was rejected. Thereafter, pursuant to the directions given by this court in the application filed by the Commissioner under Section 256(2) of the Act, the Income-tax Appellate Tribunal, Hyderabad Bench, has drawn up a consolidated agreed statement of the case and referred the following question of law for the opinion of this court :
" Whether, on the facts and in the circumstances of the case, the remuneration and commission received by Sri K. S. Subbaiah Pillai was assessable in the hands of the HUF ?"
4. Sri P. Rama Rao, learned standing counsel for the I.T. Dept., contends that the karta of the family became a director and also became entitled to the remuneration and commission by virtue of the investment made by the joint family in the company, that the remuneration and commission paid to the karta had been primarily earned by utilising the joint family assets or funds and that the mere fact that in the process of gaining the advantage an element of personal service or skill or labour is involved would not alter the character of the income received by the karta. In other words, the original capital investment of Rs. 25,000 was found to be ancestral property belonging to the HUF, that is, the respondent-assessee. The business in tobacco is not a new one but a family business which is being continued by Sri Subbaiah Pillai. The remuneration and commission earned by Subbaiah Pillai, who is the karta of the HUF, cannot, therefore, be held to to have been earned solely by his services rendered to the company. In support of his plea, he placed strong reliance on the decision of the Supreme Court in P. N. Krishna Iyer v. CIT . Secondly, it is urged that huge sums now claimed by the karta of the HUF as his individual earnings are disproportionate to the services, if any, rendered by him to the company, and this is only a device adopted by the assessee to reduce the extent of taxation and is not permissible under law. This claim of the applicant is resisted by Sri M. Uthama Reddy, the learned counsel appearing for the respondent-assessee, contending, inter alia, that on a consideration of the facts and circumstances, the Tribunal has found that the remuneration and commission paid to the karta in the instant case is on account of the personal services rendered by him, that this finding has been arrived at on the application of the correct principles of law laid down by the Supreme Court in Raj Kumar Singh Hukam Chandji v. CIT and that, therefore, there is no substance in the contention of the applicant. It is further contended that in the company's assessment the remuneration and commission paid to the karta of the HUF has been accepted by the department and the assessments having become final, it is not open to the department to contend in this reference that payments are disproportionate to the services, if any, rendered by the karta of the HUF and that it strengthens the stand taken by the assessee and accepted by the Tribunal.
5. The only question is whether the remuneration and commission received by the karta of the respondent-HUF is one received by him in his capacity as an individual for the services rendered by him or does it belong to the HUF of which Sri Subbaiah Pillai is the karta. This question is a mixed question of fact and law. True, as contended by Sri P. Rama Rao, the Supreme Court held that the income received by the coparcener in P. N. Krishna Iyer's case was joint family income although there was an element of personal service or skill or labour in earning the same. However, we may, on a careful examination of the facts of that case, notice that that case is distinguishable on facts.
6. The assessee in that case set up a motor transport business in 1923, in the former State of Travancore. Disputes arose between the assessee and his brothers about the division of the estate of the joint family in the year 1945, and, finally, they were settled by mutual agreement dated October 23, 1951, and the motor transport business together with the "workshop, stores, agency, cinema companies, etc.", were treated as the business of the joint family and on partition were allotted to the assessee. On July 3, 1952, a private limited company, P.S.N. Motors P. Ltd., was floated with the object of taking over the transport business carried on by the assessee. The assessee purchased 100 shares of the company of the face value of Rs. 100 each. On August 18, 1952, he was appointed by the company as governing director with an allowance of Rs. 3,000 per month and a commission of 15% on the net profit. Then, the directors approved the purchase, from the HUF of the assessee, of assets of the transport business valued at Rs. 8,01,074-1-4. Though no payment was made, credit entries were made in the books of the company in the name of the HUF. On September 28, 1952, a special resolution was passed by the company to the effect that in consideration of the " valuable services" rendered by the assessee in the promotion of the company and of the " large sacrifices " made by him to serve the company and in view of the benefit that the company received on account of his " long experience, goodwill and reputation in the transport line of business ", the assessee be allotted 4,880 fully paid up shares of the company. In those circumstances, the Supreme Court found thus (p. 546) :
" The entire capital assets of the company originally belonged to the joint family and were made available to the company in consideration of a mere promise to pay the amount for which the assets were valued. The income was primarily earned by utilising the joint family assets or funds and the mere fact that in the process of gaining the advantage an element of personal service or skill or labour was involved did not alter the character of the income. In cases of this class the character of the receipt must be determined by reference to its source, its relation to the assets of the family of which the recipient was the member, and the primary object with which the benefit received was disbursed."
7. This case, therefore, is distinguishable from the case on hand. The present case in our considered view is governed by the later decision of the Supreme Court in Raj Kumar Singh Hukam Chandji v. CIT . Therein, the question that fell for consideration was whether the managing director's remuneration as karta of the HUF received from the company was the individual income of the karta or the income of the HUF. The appellant therein, an HUF, was a branch of a larger family which had disrupted. The HUF had considerable shares in the 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 appointed by a resolution of the board of directors of the company and they were subject to removal at any time. There was no proof or material to show that they were appointed managing directors for and on behalf of the HUF or as a result of any investment or expenditure made by the family ; nor was there any link or nexus between their appointment as managing directors and the acquisition of the business or floating of the company. The Tribunal which was the final fact-finding authority found that the managing directorship was an employment of personal responsibility and ability of the karta who was paid remuneration for his personal services. On a reference, this view of the Tribunal was reversed by the High Court of Madhya Pradesh which was not approved by the Supreme Court. The Supreme Court agreed with the view taken by the Tribunal and held that the remuneration was paid to the karta for his personal services rendered to the company and, therefore, not assessable in the hands of the HUF but assessable only in his hands as an individual. The learned judges of the Supreme Court have considered the entire case law on the subject. They also noticed the conflict between the two lines of decisions, namely, Kalu Babu's case , Mathura Prasad's case , the two Dhanwatey's cases : V. D. Dhanwatey and M. D. Dhanwatey and Krishna Iyer's case and S. Palani Appa Chettiar's case , Dhakappa's case and D. C. Shah's case on the other. The learned judge, Hegde J. speaking for the court, observed at page 43 (of 78 ITR) thus :
" The line that demarcates these two lines of decisions is not very distinct but on a closer examination that line can be located. In order to find out whether a given income is that of the person to whom it was purported to have been given or that of his family, several tests have been enumerated in the aforementioned decisions but none of them excepting Kalu Babu's case makes reference to the observations of Lord Sumner in
Gokul Chand's case (Amarnath v. Hukam Chand Nathu Mal) [
1921] LR 48 IA 162 ;
AIR 1921 PC 35 that ' in considering whether gains are partible, there is no valid distinction between the direct use of the joint family funds and a use which qualifies the member to make the gains by his own efforts. ' We think that that principle is no more valid."
8. After enumerating the other tests the learned judge ruled (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. Applying the tests enumerated above to the facts found by the Tribunal in the present case, there is hardly any room to doubt that the income in question was the individual income of Rajkumar. He did not become the managing director of the firm for the mere reason that his family had purchased considerable shares in the firm. He was elected as a managing director by the board of directors. The Tribunal has found that he received his salary for his personal services. There is no material to hold that he was elected managing director on behalf of the family.
9. On the application of the principles laid down by the Supreme Court in the aforesaid case, we have no hesitation to hold that the remuneration and commission received by the karta of the assessee-HUF, Sri Subbaiah Pillai, in substance though not in form, is not one of the modes of return made to the respondent-assessee family because of the investment of the family funds in the business, but it is only a commission paid by the company for the services rendered by the karta of the HUF and, therefore, the income has been earned by the individual karta and not as a result of the funds invested by the family. There is absolutely no material to hold that the payments made can be connected in any way to the investment of the family funds in the company. Judged from any angle, we are satisfied that the finding arrived at by the Tribunal that the amounts in question have been received by the karta for the services rendered by him and not on account of the investment made by the HUF is correct and there is ample material in support of the same. We may also add that in the assessment of the company, the remuneration and commission paid to Subbaiah Pillai, karta of the respondent-HUF, was allowed without any objection that it was unreasonable though the ITO could have certainly disallowed the same by the exercise of his powers under Section 40(c) of the I.T. Act. The ITO did not exercise his power under Section 40(c) in this regard to disallow the amount of remuneration or commission paid by the company to the karta as managing director for services rendered by him to the company and it is not open to the department in this reference to urge this point, as the assessments of the company have been allowed to become final. We have also noticed that no detriment to the interests of the joint family has been alleged or established in this regard.
10. For all the reasons stated, our answer to the question is in the negative and against the department holding that the remuneration and commission received by Sri K. S. Subbaiah Pillai was not assessable in the hands of the HUF, but assessable only in his individual assessment. The assessee shall receive his costs of the reference. Advocate's fee Rs. 300.