Govinda Bhat, J.:— This reference relates to the assessment year 1963-64, for which the relevant accounting year ended with March 31, 1963. Sri V.C Rajarathnam was a member of a Hindu undivided family along with his father, Shri V. Chinnaswamy Mudaliar, and his other brothers. There was a partition of the assets of the Hindu undivided family under the partition deed dated February 17, 1943. A copy of the partition deed is annexure “A” and forms part of the statement of the case. The partition deed recited that the movables belonging to the Hindu undivided family had already been divided and that the immovable properties were divided as per the schedules attached to the document. Thereafter, Rajarathnam and his sons constituted a Hindu undivided family. In 1946, Rajarathnam acquired 25 shares of the face value of Rs. 25,000, in the United Engineering Corporation (Pvt.) Ltd., hereinafter referred to as “the company”. Later, he acquired another 21 shares in the same company. Thus, he held 46 shares of the face value of Rs. 46,000 in the company. The dividend income from these shares was treated as the income of the Hindu undivided family consisting of Rajarathnam and his sons and it was so assessed in the hands of the family.

2. Rajarathnam was a director of the company and was drawing remuneration and sitting fees for services rendered as director. This remuneration and sitting fees were being assessed in the hands of Rajarathnam as an individual and were not included in the income of the Hindu undivided family. However, during the assessment year 1963-64, the Income-tax Officer treated an amount of Rs. 3,589 received as sitting fees and remuneration by Rajarathnam as the income of the Hindu undivided family on the ground that the qualifying shares in the company had been admittedly purchased out of the joint family funds. A copy of the order of the Income-tax Officer is annexure “B” and forms part of the statement of the case. The assessee preferred an appeal to the Appellate Assistant Commissioner and there contended for the first time that the shares of the company were not acquired with the funds of the Hindu undivided family. Its case was that Chinnaswamy Mudaliar had gifted to Rajarathnam a sum of Rs. 25,000 specifically for the purchase of the shares and that it was with this amount that the 25 shares in the company had been purchased. The Appellate Assistant Commissioner accepted this contention of the assessee and deleted the amount of Rs. 3,589 from the assessment of the joint family. It was included in the individual assessment of Rajarathnam. A copy of the order of the Appellate Assistant Commissioner is annexure “C” and forms part of the statement of the case.

3. The department preferred an appeal before the Tribunal against the decision of the Appellate Assistant Commissioner. The Tribunal found that the assessee had taken up contradictory positions before the Income-tax Officer and the Appellate Assistant Commissioner regarding the funds with which the shares have been purchased. It also noticed that the Hindu undivided family, of which Rajarathnam was the karta, was possessed of immovable properties which it got under the partition deed and had also cash and other immovables got under the partition. There was thus a joint family nucleus from and out of which the consideration could have been paid for purchasing the shares. The Tribunal further observed that the dividend income from the shares had always been treated as the income of the Hindu undivided family and that there was no acceptable evidence to show that Rajarathnam's father had given him cash with the intention that it was to enure to him personally. The Tribunal also considered the question whether it was reasonable to think that Rajarathnam held his office as director mainly by virtue of his holding the qualifying shares and came to the conclusion that he held the office as director mainly, if not solely, by reason of his holding the qualifying shares. Finally, the Tribunal, on a consideration of the entire circumstances and the legal position, came to the conclusion that the sitting fees and remuneration received by Rajarathnam were assessable in the hands of the Hindu undivided family. A copy of the order of the Tribunal is annexure “D” and forms part of the statement of the case.

4. …………(omitted as unnecessary).

5. The following question of law arises for consideration and is referred to the hon'ble High Court:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 3,589 received as sitting fees and remuneration is assessable in the hands of the Hindu undivided family for the assessment year 1963-64?”

6. …………(omitted as unnecessary).

[After setting out the statement of case, Govinda Bhat J.continued]

7. The question of law referred for our opinion under section 256(1) of the Income-tax Act, 1961 is:

“Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the sum of Rs. 3,589 received as sitting fees and remuneration is assessable in the hands of the Hindu undivided family for the assessment year 1963-64?”

8. In 1946, the assessee acquired 25 shares of the face value of Rs. 25,000 in the United Engineering Corporation (Private) Ltd., and another set of 21 shares in the same company at a subsequent period. The face value of the said 46 shares is Rs. 46,000. The dividend income from the said shares was treated as the income of the Hindu undivided family of the assessee. The investment of the funds for the acquisition of the shares proceeded from the Hindu undivided family of the assessee and that question is concluded by the order of the Tribunal.

9. Sri V.C Rajarathnam, karta of the assessee family, became a director of the aforesaid company and he drew remuneration and sitting fees for services rendered as director. The said remuneration and sitting fees were assessed in the hands of Rajarathnam in the status of an individual and they were not included in the income of the Hindu undivided family. However, during the assessment year 1963-64, the Income-tax Officer treated the sum of Rs. 3,589 received as sitting fees and remuneration by Rajarathnam as the income of the Hindu undivided family on the ground that the qualifying shares in the company had been admittedly purchased out of joint family funds. The Tribunal has held that the said income of Rs. 3,589 should be treated as the income of the Hindu undivided family on the ground that Sri Rajarathnam had no technical or other special qualifications for being appointed as a director of the company and that no material has been placed before the Tribunal to show that Sri Rajarathnam was appointed as director not because he possessed the qualifying shares, but because he possessed some special qualifications which are purely personal to him and therefore it is reasonable to hold that Sri Rajarathnam has held his office as director mainly, if not solely, by virtue of his holding the qualifying shares; in other words, in the opinion of the Tribunal, since the qualifying shares held by Sri Rajarathnam belonged to the Hindu undivided family, the remuneration and the sitting fees received by him as a director of the company should be treated as the income of the Hindu undivided family, in the absence of proof that Sri Rajarathnam was appointed as a director because he possessed some special qualifications.

10. The Tribunal, for its view, relied on the decision of the Madras High Court in Commissioner of Income-tax v. S. Rm. Gt. PL Palaniappa Chettiar [1964] 53 I.T.R 581 Mad... The said decision has been reversed by the Supreme Court in S.Rm.Ct.Pl Palani Appa Chettiar v. Commissioner Of Income Tax Madras. [1968] 68 I.T.R 221, and it was held that the amounts received by the assessee as managing director's remuneration, commission and sitting fees, resp???ctively, are not assessable as income of the Hindu undivided family of which Palaniappa Chettiar was the karta. In the said case, the facts are as follows:

The assessee was a Hindu undivided family consisting of a father and his four major sons. The father, Palaniappa Chettiar, was the manager of the family. In the year 1934, the family acquired 90 shares in a private limited company called “The Trichy Srirangam Transport Company (Private) Ltd.” The company issued in all 300 shares. The shares were purchased in the name of Palaniappa Chettiar, the manager of the family and there was no dispute that the value of the shares was paid from and out of the family funds. There were four shareholders in the company, two of whom were directors. On the death of one of the directors, Palaniappa Chettiar became a director in the year 1941. Another director also died and Palaniappa Chettiar became the managing director on and from 1942. As managing director, he was granted certain remuneration. The question was, whether his remuneration received as managing director and the sitting fees were to be treated as the income of the Hindu undivided family or as the individual income of Palaniappa Chettiar. The Supreme Court noticed the fact that the shares were purchased in 1934, about eight years before Palaniappa Chettiar was appointed as the managing director, and, therefore, it was apparent that the shares were purchased by the joint family not with the object that the karta should become the managing director, but in the ordinary course of investment. To put it differently, there was no real connection between the investment of joint family funds in the purchase of the shares and the appointment of the karta as managing director of the company.

11. The learned counsel for the assessee, relying on the decision of the Supreme Court in Palaniappa Chettiar's case, submitted that there is no material to hold that there is any real connection between the investment of joint family funds in the acquisition of shares and Rajarathnam becoming a director of the company, and, further, that the Tribunal was in error in the view it has taken that merely because the qualifying shares belonged to the Hindu undivided family it should follow that the remuneration and the sitting fees received by the director should also be regarded as the income of the Hindu undivided family. Sri S.R Rajasekhara Murthy, the learned counsel for the revenue, invited our attention to the decisions in V.D Dhanwatey v. Commissioner of Income-tax and P.N Krishna Iyer v. Commissioner of Income-tax [1969] 73 I.T.R 539, 545 S.C., wherein it was held that the income received by the managing partner in one case and the governing director in another case constituted the income of the Hindu undivided family. In Krishna Iyer's case, Shah J. reviewed the earlier cases of the Supreme Court and summarised the position thus:

“Income received by a member of a Hindu undivided family from a firm or a company in which the funds of the Hindu undivided family are invested, even though the income may be partially traceable to personal exertion of the member, is taxable as the income of the Hindu undivided family, if it is earned by detriment to the family funds or with the aid or assistance of those funds; otherwise it is taxable as the member's separate income.”

12. The learned counsel for the revenue urged that in Krishna Iyer's case, the view of the law stated in Palaniappa Chettiar's case has not been fully accepted, and according to the learned counsel, Krishna Iyer's case??? lays down that, if the qualifying shares were purchased from the funds of the Hindu undivided family, the income derived by the director should be regarded as the income of the Hindu undivided family. We have carefully perused the decisions of the Supreme Court and we are unable to agree with the submission made by the learned counsel for the revenue. One principle that is clear from all the decisions of the Supreme Court is that;the fees or other remuneration received by the karta as director of a company should not be necessarily treated as joint family income merely because the qualifying shares had been purchased out of the family funds; but in such cases, the fee, salary or other remuneration received by the karta as a director or partner, though it may be partially traceable to the personal exertions of the member, should be held taxable as the income of the family if, (1) it is earned by detriment to the family funds, (2) it is earned with the aid or assistance of those funds, or (3) there is a real connection between the income and the investment of the family funds. From the facts in Dhanwatey's case and Krishna Iyer's case, it is apparent that there was a real connection between the income received by the karta as a director or partner and the investment of the family funds and, therefore, it was held that the income of the director or partner should be held taxable as the income of the family. In Palaniappa Chettiar's case there was no such connection.

13. In the instant case, there is no material to hold that the shares in question were purchased by Rajarathnam with the object of becoming a director of the company. There is no material to show that there was a real connection between the investment of the joint funds and Rajarathnam becoming a director of the company. Therefore, the Tribunal was in error in the view it has taken that the sum of Rs. 3,589 received by Rajarathnam as remuneration and sitting fees during the assessment year 1963-64 should be held as the income of the Hindu undivided family. Accordingly, we answer the question referred in the negative and in favour of the assessee. The assessee is entitled to the costs of the reference. Advocate's fee Rs. 250.