COMMISSIONER OF INCOME TAX Vs. SANGHAVI C D

JUDGEMENT

(1.) AT the instance of the revenue, the following question has been referred under s. 66(1) of the Indian I. T. Act, 1922, and s. 256(1) of the I. T. Act, 1961, since it arises out of the assessment for the assessment years 1960 -61, 1961 -62 and 1962 -63 :

(2.) ORIGINALLY , there was a HUF consisting of one Doulatrai H. Sanghavi and his three sons, Champaklal D. Sanghavi, M. D. Sanghavi and Rasiklal D. Sanghavi. Champaklal is the karta of a smaller HUF, which is the assessee. D. H. Sanghavi was a partner having 12 annas share in the firm of M/s. Champaklal and Co., which dealt in cotton waste. There was a partition in the assessment year 1948 -49 between Doulatrai and his sons and Champaklal became a partner in the firm of M/s. Champaklal and Co. to the extent of three annas share, the other brothers also being partners. Doulatrai retired from the firm in 1952 and the share of each of the three brothers, therefore, became equal to 4 annas. In the assessment year 1953 -54, a limited company by name M/s. Champaklal and Brothers Ltd. was floated and that company took over the cotton waste business of the partnership firm of M/s. Champaklal and Co. and the interest of the HUF, the assessee, in the partnership firm was taken over by the limited company. M/s. Champaklal and Co. became the managing agents of the limited company and after one of the partners, Shri L. A. Shah, retired some time before 1954 -55, the shares of the remaining partners increased to one -third each. The firm, Champaklal and Co., was dissolved on 28th February, 1955. The HUF of Champaklal holds 1,668 shares in the limited company. Champaklal was a director of the limited company and, by a resolution of the board of directors, he was appointed a director to manage and control the business and general administration of the company on a remuneration of Rs. 750 per month as from 1st of March, 1955. The two other brothers, M. D. Sanghavi and Rasiklal Sanghavi, were also appointed directors on similar remuneration. Champaklal was being assessed as individual in respect of the income from the firm, M/s. Champaklal and Co., and some dividends. In the year 1953 -54, Champaklal's income included one -third share in one property, his share in the firm, M/s. Champaklal and Co., and remuneration from the said limited company. In 1958 -59, he claimed that the property income and the income from the dividends should be assessed in his hands in the status of HUF. But the ITO did not accept this contention and the income was taxed in the hands of Champaklal as individual. Then in the assessment year 1959 -60 Champaklal pleaded for separating the HUF income, but having failed before the ITO, he went in appeal and, in appeal, the AAC ordered the ITO to assess the income from dividends and property in the hands of the HUF of which Champaklal was the karta. Similar direction was given in respect of the assessment years 1960 -61 and 1961 -62. However, the ITO, while making the assessments on the HUF for the assessment years 1960 -61 to 1962 -63, took the view that since the assessee had taken a stand that the income from dividends came from a corpus which belonged to the HUF, the matter with regard to the director's fees and remuneration received by Champaklal from the limited company had also to be reconsidered. The assessee's case was that director's fees and remuneration were paid to him in his individual capacity, but the ITO took the view that the assessee had utilise HUF funds for acquiring the shares in the limited company, though there was no necessity, according to the articles of association, for a director to have shareholdings. Thus, the ITO found that the remuneration and sitting fees flowed directly from and had nexus with the substantial shareholdings of the assessee in the limited company and rejected the assessee's contention that the director's fees and remuneration were liable to be taxed on individual basis. The order of the ITO was upheld by the AAC and the assessee filed an appeal before the Tribunal. The Tribunal took the view that merely because a HUF held some shares in a limited company and the karta of the said family was appointed as a director it cannot be said that he was so appointed because of the holding of his shares. The Tribunal, therefore, took the view that the remuneration received by a karta of the HUF should be considered his personal income and not that of the HUF. It is necessary to state that the ITO had found that there was no detriment to the joint family funds caused as a result of the appointment of Champaklal as a director. On these facts, the question reproduced above has been referred to this court.

(3.) MR . Mehta appearing on behalf of the assessee has relied on a decision of the Supreme Court in Raj Kumar Singh Hukam Chandji v. CIT : [1970]78ITR33(SC) , in which, according to the learned counsel, the legal position with regard to remuneration paid to the director of a company in a case where a HUF of which the director was a karta held shares has been laid down and, according to the view taken in that decision, it is contended that the Tribunal was right in treating the income from director's fees and remuneration as individual income.