COMMISSIONER OF INCOME TAX Vs. RATHAIAH G V

JUDGEMENT

(1.) : This reference under S. 256(1) of the IT Act, 1961, is at the instance of the CIT. It relates to the IT asst. yrs. 1973-74 and 1974-75.

(2.) THE assessee is an HUF. THE assessee family represented by its Karta and one M. Seshagiri Rao had been carrying on business in partnership in tobacco for over a period of fifteen years. That partnership was dissolved. On dissolution, the assets and liabilities of the partnership were taken over w.e.f. January 1, 1972, by a private limited company known as "M/s G. V. Rathaiah & Co., Tobacco Exporters (Pvt.) Ltd.", Guntur. In the company, out of 2,155 shares of the value of Rs. 100, the assessee-family owned 1,650 shares of the value of Rs. 1,65,000 and 500 shares of the value of Rs. 50,000 were held by Smt. G. Krishna Kumari, wife of the Karta. One P. Harihara Prasad was holding 5 shares of the value of Rs. 500. As per Art. 93 of the articles of association of the company, the Karta of the assessee-family is the first managing director ; the other director is the Karta's wife, Smt. G. Krishna Kumari. THE said article also provided that the Karta of the assessee-family shall be the managing director for a period of five years. THE company has been assessed to tax. In the previous years relevant for the income-tax asst. yrs. 1973-74 and 1974-75, the company paid remuneration of Rs. 18,000 and Rs. 12,000, respectively, to the Karta of the assessee-family for the services rendered by him as the managing director of the company. THE remuneration paid to the managing director was allowed as deduction in computing the income of the company.

(3.) THE CIT applied for and secured the present reference to this Court under S. 256(1) of the IT Act, 1961, questioning the correctness of the Tribunal's decision. THE Tribunal referred the following question of law for the opinion of this Court: