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T.T. Rathnasabapathy Pillai v. Commissioner Of Income-Tax

Madras High Court

Nov 1, 1965

Judgment

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References

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Factual and Procedural Background

This reference under Section 66(1) of the Indian Income-tax Act, 1922, concerns the characterisation of an assessee's income for the accounting year relevant to assessment year 1960-1961. The assessee, an advocate at Coimbatore and karta of a Hindu undivided family (HUF), had, over the years, acquired shares in a number of companies and thereby became a director in several of those companies. He received directors' sitting fees which rose to Rs. 8,708 in the assessment year 1960-1961.

In May and August 1957 the assessee sent declarations to the tax officer stating that from 31 March 1956 he had changed his status to that of the karta of a joint Hindu family and that all his properties, movable and immovable, had been thrown into the common stock of that family. As a result, for assessment year 1957-1958 his status was taken as a joint Hindu family. The Income-tax Officer, however, for assessment year 1960-1961 treated the sitting fees as income of the Hindu undivided family (relying on a Supreme Court decision), and assessed them accordingly. The Appellate Assistant Commissioner and the Tribunal concurred with that assessment. The Tribunal referred the following question to the High Court:

“Whether the inclusion of the sitting fees earned by T.T. Rathnasabapathy Pillai as a director in several companies in the total income of the Hindu undivided family of which he is the karta is correct?”

The Tribunal had found as facts that by his declarations all the shares held by the assessee as an individual became property of the Hindu undivided family from 16 May 1957; that in every company where he was a director the holding of qualification shares was a pre-requisite; that no proof was offered that he was appointed director irrespective of holding shares; and that the assessee had treated the sitting fees as belonging to the HUF in earlier returns. The Tribunal therefore concluded the fees belonged to the HUF and dismissed the appeal; it relied on a Supreme Court authority in doing so. The High Court heard further argument and answered the reference against the assessee with costs.

Legal Issues Presented

Whether the sitting fees earned by the assessee as a director in several companies should be included in the total income of the Hindu undivided family of which he is the karta.

Arguments of the Parties

Assessee's Arguments

The assessee's declarations were limited to movable and immovable properties and did not expressly include sitting fees or the office of director; therefore the sitting fees were not thrown into the family hotchpot by those declarations.
The original acquisition of the qualification shares and his becoming a director were without detriment to the HUF (i.e., not acquired from family funds to the family's detriment), so the sitting fees earned thereafter should be his individual income.
The case is governed by Piyare Lal Adishwar Lal v. Commissioner of Income Tax (1960-3 SCR 669 : AIR 1960 SC 997), not by the Supreme Court decision relied upon by the revenue.

Revenue's Arguments

If the shares belong to the joint family and those shares provide the qualification for the assessee to be a director, then the sitting fees earned by him belong to the joint family.
Regardless of the origin of the shares, continuation in directorship required maintaining the qualifying shares; since those shares were referable to the joint family, the sitting fees are referable to family-owned assets and therefore belong to the family.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner of Income-tax v. Kalu Babu Lal Chand, 1960-1 SCR 320 : AIR 1959 SC 1289	Principle that where a karta uses joint family assets to acquire or promote an enterprise and earns remuneration with the help of those assets, that remuneration is income of the HUF; whether the karta acted for the family or individually is a question of fact.	The court applied this principle as governing the reference: it treated the family-owned qualifying shares as having enabled the assessee to continue as director and thus to earn sitting fees; consequently the fees were held to be income of the HUF.
Piyare Lal Adishwar Lal v. Commissioner of Income Tax, 1960-3 SCR 669 : AIR 1960 SC 997	Decided on particular facts; held that merely furnishing security (for holding an office of treasurer) did not make the salary of the treasurer income of the family.	The court distinguished this precedent: it held Piyare Lal did not help the assessee because in the present case holding a stated number of shares was a pre-requisite for directorship and the shares belonged to the family, unlike mere furnishing of security in Piyare Lal.
Murugappa Chetty and Sons v. Commissioner of Income-tax, (1952) 21 ITR 311 : AIR 1952 Mad 828	Authority for the proposition that sitting fees may be blended with family assets, but blending requires that the fee exist at the time of blending.	The court noted blending is possible but observed the revenue did not rely on a blending argument here; blending requires the fee to already exist at the time of blending of assets.
Mallesappa v. Mallappa, AIR 1961 SC 1268	Authority indicating that rights to fees can be blended with family assets (cited alongside Murugappa Chetty).	The court cited it for the proposition that fees can be blended with family assets but reiterated that blending was not the revenue's principal contention in this case.
Sivaramakrishnan v. Kaveri Ammal, 1956-1 Mad LJ 152 : AIR 1955 Mad 705	Relied upon by the assessee to support the submission that the doctrine of "detriment" should be confined to the stage of original acquisition.	The court rejected this narrow reading and held that the doctrine of detriment is not limited to original acquisition; it is applicable where income is derived by using family funds or assets.
Commissioner of Income-tax, Madras v. Sankaralinga Iyer, 1950-18 ITR 194 : AIR 1950 Mad 610	A prior decision whose view was not accepted by the Supreme Court in Kalu Babu; earlier authority viewed personal qualifications as central and did not treat remuneration as necessarily family income merely because shares were held by the karta.	The court noted the Supreme Court in Kalu Babu dissented from this decision; the High Court followed the Kalu Babu principle rather than Sankaralinga Iyer.
Gokal Chand v. Hukam Chand, 48 Ind App 162 : AIR 1921 PC 35	Principle that there is no valid distinction between direct use of joint family funds and the use which qualifies a member to make gains — both can render resultant gains as family income.	The court relied on this Judicial Committee authority (as adopted in Kalu Babu) to support the proposition that using family assets to qualify for and retain an office that yields remuneration makes that remuneration family income.
Commissioner of Income-tax v. Palaniappa Chettiar, 1964-53 ITR 581 (Mad)	Division Bench holding that a manager/karta cannot claim as individual income a pecuniary advantage gained by utilising family assets; income traceable to family property partakes of family character.	The High Court expressed respectful agreement with this view and applied the same reasoning to hold that sitting fees traceable to family-owned qualifying shares are taxable as HUF income.

Court's Reasoning and Analysis

The court undertook a step‑by‑step analysis grounded in the facts found by the Tribunal and several authorities:

Fact foundation: The Tribunal found that by unequivocal declarations the assessee threw all his shares into the family hotchpot from 16 May 1957 and that in every company in which he was a director holding of qualification shares was a pre‑requisite for directorship, with no evidence he was appointed irrespective of share‑holding.
Distinction of blending doctrine: The court acknowledged that sitting fees pertain to the office of director and that fees can be blended with family assets (citing Murugappa Chetty and Mallesappa), but observed that blending requires the fee to exist at the time of blending and that the revenue did not rest its case on a blending argument or on the office itself being thrown into the hotchpot.
Application of partnership/karta principles: Quoting the Supreme Court's observation (from the Kalu Babu decision) that whether the karta acted for himself or for the family is a question of fact and that profits arising from use of family funds are assessable as family income, the court held the same approach applies where a karta is a director: vis‑à‑vis outsiders the karta alone deals with the company, but as between karta and family the character of the income depends on whether family assets were used to acquire or maintain the qualifying shares.
Doctrine of "detriment" and self-acquisition: The court rejected the assessee's submission that detriment should be confined to the original acquisition stage (as urged from Sivaramakrishnan). It accepted the textual exposition that acquisitions made with the aid of joint estate become joint family estate, and held that income derived by a member by utilisation (directly or indirectly) of family funds or assets falls within the doctrine.
Causal connection between family-owned qualifying shares and sitting fees: The court held that where qualifying shares owned by the family are the very basis for the assessee's continuance as director (and thus enable him to earn sitting fees), those fees are to be regarded as earned by utilising family assets; because the family suffered detriment in that way, the fees partake the character of family income.
Precedential alignment and distinctions: The court held that Kalu Babu governs the reference, applying its principle that remuneration earned with the help of joint family assets is family income. The court distinguished Piyare Lal on its facts (security furnished versus shares as a continuing qualification) and noted Palaniappa Chettiar and Gokal Chand as supporting the approach that income traceable to family property partakes of family character.

Holding and Implications

Holding: The sitting fees received by the assessee during the accounting year relevant to assessment year 1960-1961 are chargeable to tax in the hands of the Hindu undivided family. The reference was answered against the assessee with costs; counsel's fee Rs. 250.

Implications:

Direct effect: The assessment treating the directors' sitting fees as income of the Hindu undivided family was upheld; the assessee cannot claim those sitting fees as his individual income where family-owned qualifying shares were the basis for his directorship.
Doctrinal note: The court applied and followed the principle that remuneration or gains earned with the help of joint family assets, including where those assets provide the qualification for office, are income of the joint family. The court distinguished earlier authorities where the factual basis was different (for example, mere furnishing of security).
Precedential position: The opinion applies existing precedents (notably the Supreme Court decision cited as governing) to the facts; the court did not indicate it was laying down any novel legal principle beyond applying those authorities to the present facts.

Reference answered. Counsel's fee awarded: Rs. 250.

Show all summary ...

Veeraswami, J.:— This reference under Section 66(1) of the Indian Income-tax Act, 1922, raises a question as to the character of the assessee's income which he received during the accounting year, relevant to the assessment year 1960-1961, as directors sitting fees from certain limited companies. The assessee is an advocate by profession at Coimbatore and is the karta of a Hindu undivided family. From 1924-1925 to 1956-1957, he was assessed as an individual on his income derived from the profession, dividend from companies and interest. In the course of these years, he acquired shares in a number of companies which yielded dividends from Rs. 3,136 in 1932-1933 to Rs. 1,10,178 in 1960-1961. By virtue of the share qualification he had, he also became a director in a number of these companies and the sitting fees received by him as a director increased from Rs. 12 in the year 1932-1933 to Rs. 8,708 in the assessment year 1960-1961.

2. On May 16, 1957, in relation to the assessment year for 1957-1958, the assessee wrote to the Filth Additional Income Tax Officer., Coimbatore, stating:

“Until the year ended 31st March 1956, I was describing my status as “individual” assessee.

I hereby declare that from 31st March, 1956, I have changed the status into a ‘Joint Hindu Family’ consisting of myself and my sons. All the properties both movable and immovable belong to the said joint family consisting of myself, my sons, T.R Natanasabapathy, aged about 34, T.R Dorairaj, aged about 23, and T.R Thiagaraj, aged about 17. I am the head and manager of this joint family.

My wife, Srimathi Rajeswari, my married daughter Srimathi Saraswathi and my daughter, Kumari Devikarani, aged about 15, are residing with the said joint family”.

3. He also addressed the officer another letter dated August 10, 1957, in which, inter alia, he stated:

“In connection with the above, I wish to give you the following additional particulars. The ancestral nucleus I got is comparatively small being about half an acre of narija land, which I disposed of a few years ago. The proceeds were utilised to discharge my liability. All these liabilities which I incurred were for the purpose of acquiring shares in public limited companies and immovable properties. My eldest son, T.R Natanasabapathy, who is also an advocate, and my wife have stood guarantee for some of my liabilities.

All my sons, daughters and my wife are living with me under my protection, having common mess, common lodging and worship. All my properties both movables and immovables have been thrown into the common stock. I may mention that ancestral nucleus is not absolutely necessary for joint family status. I have of my own volition and intention waived and surrendered any special right which I may have to any of my properties acquired in my name….

In view of my unequivocal declaration, I request you to recognise my status as an assessee as being that of a karta of a joint Hindu family”.

4. The effect of these two letters of the assessee was that he abandoned all his separate interests in the properties owned by him as an individual and threw them into the family hotchpot. His status was, therefore, taken for the assessment year 1957-1958, as that of a joint Hindu family. His income from profession and sitting fees, however, was assessed in his status as an individual from 1957-1958. But, for the assessment year 1960-1961, with which we are now concerned, the Income-tax Officer, in view of Commissioner of Income-tax v. Kalu Babu Lal Chand, 1960-1 SCR 320 : (AIR 1959 SC 1289), as he thought, treated the income horn sitting fees as that of the Hindu undivided family and assessed it on that basis. The Appellate Assistant Commissioner of Income-tax and the Tribunal concurred with him at the instance of the assessee, the Tribunal has referred to us the following question;

5. Whether the inclusion of the sitting fees earned by T.T Rathnasabapathy Pillai as a director in several companies in the total income of the Hindu undivided family of which he is the karta is correct?” Before we proceed to consider the question, we shall notice the factual findings recorded by the Tribunal. By reason of the unequivocal declarations of the assessee, all the shares held by him as an individual became the property of the Hindu undivided family from May 16, 1957, and no share was left with him as an individual. In every one of the companies in order to qualify for directorship, a certain qualification shares are a pre-requisite. As far as the Tribunal was able to see, there was no company in which he was a director which did not insist upon director's qualification shares as a condition for becoming a director. From May 16, 1957, he changed his status into a joint Hindu family consisting of himself and his sons, and all his properties, both movables and immovables, including all the shares, belonged from that date to the said joint family of which he was the karta. If the assessee was a director by virtue of holding shares, the Tribunal observed, it could only be as karta of the Hindu undivided family. As a matter of fact, he returned the income from the sitting fees of Rs. 8,133-8-4 in the assessment year 1957-1958 as belonging to the Hindu undivided family. He thus impressed all the assets with the character of Hindu undivided family and reserved nothing for himself as an individual. No proof was offered that the assessee was appointed as a director irrespective of holding of shares in the company. On these facts found by it, the Tribunal was of the opinion:

“Therefore, if the holding of shares is connected with directorship and the sitting fees with the directorship, there can be no question but that the income belongs to the person who owned the shares and that person is the Hindu undivided family… In the present case, after all had been done, shares had been acquired, directorship has been acquired, the assessee went all out to say that the shares, the qualification shares and even the sitting fees of the directors belonged to the Hindu undivided family. We do not see how, in the face of this, it would be possible for us to give a finding that the assessee had reserved this part of the income alone to himself. On the other hand, the evidence is all the other way. We therefore uphold the order made below and dismiss the appeal.”

6. In coming to that conclusion, the Tribunal purported to follow 1960-1 SCR 320 : (AIR 1959 SC 1289) and did not accept the assessee's contention that he received the sitting fees not by virtue of his being a member or karta of a Hindu undivided family but by reason of his qualifications and vast experience in business and that even granting that the holding of qualification shares entitled the assessee to become a director in the companies, by virtue of which he earned the sitting fees, such holding of shares, for the purpose of qualification, formed an insignificant fraction of the total holdings of the company.

7. Before us it is contended for the assessee (1) that his declarations were limited to his movable and immovable properties and did not include the sitting fees, (2) that the original acquisition by the assessee of the shares was without any detriment to his status of Hindu undivided family and (3) that Piyare Lal Adishwar Lal v. Commissioner of Income tax, 1960-3 SCR 669 : (AIR 1960 SC 997), and not 1960-1 SCR 320 : (AIR 1959 SC 1289) that governs the facts of this case. On the other hand for the revenue, the argument is: (1) if the shares belong to the joint family, as they do, and the shares provide the qualification for the assessee to become a director, the sitting fees earned by him belong to the joint family, and (2) whatever the origin of the shares, inasmuch as to continue as a director, the requisite as to share qualification should continue to be satisfied, the sitting tees earned by him were referable to the shares held by the joint Hindu family and will therefore belong to it.

8. As regards the first contention, it is true the assessee's declarations stated nothing about the vesting of income or throwing the office of the director in the several companies into the hotchpot. Learned counsel for the assessee is right in his submission that the sitting fees pertain to the office of director. There is no doubt that the sitting fees may and can be blended with the assets of the joint Hindu family but, for such blending, the fee must exist: Murugappa Chetty and Sons v. Commissioner of Income-tax, (1952) 21 ITR 311 : (AIR 1952 Mad 828); Mallesappa v. Mallappa, AIR 1961 SC 1268 (1272). It is therefore stated that as the sitting fees accrue to the assessee from time to time every year, what did not exist on the dates of his declarations cannot be regarded as blended with the joint family funds or assets. But the case for the revenue is not rested on the doctrine of blending. No one has said that as and when the sitting fees are received by the assessee, he has blended them with the joint family assets and so they are chargeable to tax as income of the family. Nor does the revenue say that the office of the director itself was thrown into the hotchpot by the assessee and, therefore, the income from the sitting fees belongs to the joint family.

9. It may be that the sitting fees pertain to the office of the director and are paid in a sense for the service rendered by the director in attending the meetings of the board of directors and participating in its deliberations and decisions. As between the company and the director, the relationship is contractual and is regulated in a measure by the provisions of the Companies Act. Where a karta of a joint Hindu family is a director, the Joint Hindu family has nothing to do with the company in relation to it. The Supreme Court in 1960-1 SCR 320 : (AIR 1959 SC 1289) observed:

“It is now well settled that a Hindu undivided family cannot as such enter into a contract of partnership with another person or persons. The karta of the Hindu undivided family however, may and frequently does enter into partnership with outsiders on behalf and for the benefit of his joint family. But when he does so, the other members of the family do not, vis-a-vis the outsiders, become partners in the firm. They cannot interfere in the management of the firm or claim any account of the partnership business or exercise any of the rights of a partner. So far as outsiders are concerned, it is the karta who alone is, and is in law recognised as, the partner. Whether in entering into a partnership with outsiders, the karta acted in his individual capacity and for his own benefit or he did so as representing his joint family and for its benefit is a question of fact. If for the purpose of contribution of his share of the capital in the firm the karta brought in monies out of the till of the Hindu undivided family, then he must be regarded as having entered into the partnership for the benefit of the Hindu undivided family and as between him and the other members of his family, he would be accountable for all profits received by him as his share out of the partnership profits and such profits would be assessable as income in the hands of the Hindu undivided family”.

10. This position of law applies equally to a case in which a member or karta of a Hindu undivided family is a director or a managing director of a company. So far as the company is concerned, the karta is the shareholder and the joint family will have nothing to do with it. But, as between the karta and the joint family, the relationship between them vis-a-vis the shareholder in the company is one of fact depending on whether the karta acquired the shares on behalf of and for the benefit of the family by utilising or not the funds belonging to such family. The assessee cannot, therefore, succeed by merely contending that the directorship in a company is office and sitting fees pertain to it, the liability in regard to the same being a contractual one. We find, therefore, no force or substance in the first contention of the assessee. In relation to the second contention of the assessee what is stated is that the acquisition by him of the qualification shares and his becoming a director by reason of such holding was not with joint family funds and, therefore, was not to the detriment of the family. Subsequent transfer of the shares, since their acquisition, to the Hindu undivided family, according to the assessee, does not entitle the family to lay claim to the sitting fees earned by him as a director. It is stated that the sitting fees were not earned by the assessee by utilising the joint family property or utilising it to its detriment. Learned counsel for the assessee stresses that “detriment” in the context should be in relation to acquisition and not with reference to something intermediate or continuous. In support, he relies on Sivaramakrishnan v. Kaveri Ammal, 1956-1 Mad LJ 152 : (AIR 1955 Mad 705). We are unable to subscribe to this view of the doctrine of “detriment and we do not think that the decision relied on by learned counsel for the assessee is of assistance to him. After referring to the textual authority relating to the doctrine of self-acquisition, Mayne's Hindu Law (11th Edition) says that the test of self-acquisition is that it should be “without detriment to the father's estate”, and “accordingly all acquisitions made by a coparcener or coparceners with the aid of a joint estate become joint family estate.” That is what 1956-1 Mad LJ 152 : (AIR 1955 Mad 705) plgo stated:

“….it might be taken therefore that what is acquired ‘without detriment to the father's estate’ belongs to the acquirer himself.”

11. No decision has been cited to us that the applicability of the doctrine of detriment should be confined to the stage of original acquisition. We fail to see why a case of deriving income by a member of a Hindu undivided family by utilisation directly or indirectly of its funds or assets is not within the doctrine. In any case, where it is shown that, though the acquisition of the office of a director in a company by an individual was not by means of qualification shares owned by his undivided Hindu family, he could not continue to be, a director without the qualifying shares and the shares after the purchase were thrown by him into the family hotchpot and thus came to be owned by the family, we are of the view that, in such circumstances, the qualifying shares, which are so owned by the family, being the very basis for continuing to hold the office of a director which yields sitting fees, the fees so earned should be regarded as earned by utilising the family assets and that inasmuch as in that way the family suffered a detriment, the fees partake the character of income of the family.

12. In our opinion, the principle of 1980-1 SCR 320 : (AIR 1959 SC 1289) governs this reference. That was a case of a karta of a Hindu undivided family who acquired a going concern, promoted and floated a company with the funds of his joint family, acquired shares in his name as the karta and financed the company from the joint family assets. To this company was transferred the going concern as part of the agreement with the company, the karta became the managing Director and the remuneration received by him was credited in the books of the family. The office of the managing director under the articles of association was assignable. The Supreme Court held that the remuneration so received by the managing director as between him and his Hindu undivided family was the income of the family and should be assessed in his hands. In reaching that conclusion the Supreme Court dissented from Commissioner of Income-tax, Madras v. Sankaralinga Iyer, 1950-18 ITR 194 : (AIR 1950 Mad 610) and did not accept the view that the mere fact that the assessee nad a particular quantity of shares as manager of a joint family did not ipso facto enable him to function as the managing director, that his personal qualifications were mainly responsible, in addition to the holding of snares, for his selection and appointment as the managing director of the bank and that the remuneration was really quid pro quo for the work which he did under the contract of service with the bank. Das, C.J, who spoke for the Supreme Court, after stating that a question relating to the character of the remuneration would only arise as between the karta and the members of his family and not between the company and the family, observed:

“….the answers to the question will depend on whether the remuneration or prolit was earned with the help of joint family assets.”

13. It was pointed out that 1950-18 ITR 194 : (AIR 1950 Mad 610), overlooked the principles laid down by the Judicial Committee in Gokal Chand v. Hukam Chand, 48 Ind App 162 : (AIR 1921 PC 35), where it was pointed out that “there could be no valid distinction between the direct use of the joint family fund and the use which qualified the member to make the gains on his own efforts.” The decision of the Supreme Court that the remuneration belonged to the joint family was rested on the finding that the promotion of the company, the taking over of the concern and the financing of it were all done with the help of the joint family funds and the karta did not contribute anything out of his personal funds. The principle the Supreme Court laid down in this case, as we understand the decision, is that if remuneration was earned with the help of the joint family assets, the remuneration will be income of the family and for this purpose there would be no difference between the direct use of the joint family funds and the use which qualified the member to make the gains on his own efforts. In this case there can be no doubt, as we are inclined to think, that the shares owned by the family of the assessee continued to qualify him as a director and thus enabled him to earn the sitting fees. In our opinion, the use of joint family funds for acquisition of qualifying shares for directorship and the use of the shares transferred to the joint family by the original holder-director, and, therefore belonging to the joint family for continuance of his qualification to and of the directorship stand on the same fooling and on principle no intelligible differentiation between the two cases will be justifiable.

14. We do not think that (1960) 40 ITR 17 : (AIR 1960 SC 997), on which reliance for the assessee is placed, helps him. The decision there went upon particular facts and it was considered that the mere fact that the joint family property was utilised for furnishing security for holding the office of a treasurer did not mean that the salary earned by the treasurer of a bank constituted income of the family. It could not be said that furnishing security provided qualification for the treasurership which earned the salary unlike this case in which holding a stated number of shares is a pre-re-quisite and provides the very qualification for directorship so that the assessee can only hold the directorship so long as he holds the qualifying shares which belong to the family. Commissioner of Income-tax v. Palaniappa Chettiar, 1964-53 ITR 581 (Mad) decided by a Division Bench of this court, related to sitting fees received by a managing director of accompany. No special qualification was prescribed by the articles of association for a director except the holding of not less than 25 shares. The managing director, who was the karta of a joint Hindu family, included the silting fees received by him in his individual return. This court held:

“The true view is that the manager of a joint family cannot gain a pecuniary advantage by utilising the family assets or funds, and claim that advantage as his own separate property, merely on the ground that in the process of gaining that advantage an element of personal service or skill or labour is involved. The character of the income has to be determined, taking into account the basic foundation from which it emanates and in all cases where the income is traceable to the family property, it must partake of the joint family character, and it would not be open to the manager or any other member of the family to claim it as his own individual and separate income”.

15. We are in respectful agreement with these observations which apply to the facts in this case. We are of the view, therefore, that the Tribunal was correct in its conclusion that the sitting fees received by the assessee during the accounting year are chargeable to tax in the hands of the Hindu undivided family. The question referred to us is answered against the assessee with costs. Counsel's fee Rs. 250.

FK/AGJ/D.V.C

16. Reference answered.