COMMISSIONER OF INCOME TAX Vs. MOHAN LAL SANGANERIA

JUDGEMENT

(1.) This order will dispose of Income Tax References Nos. 48 and 49 of 1971, as the same question of law has been referred for opinion to this court. Two references have been filed because they relate to different assessment years. I.T.R. No. 48 of 1971 relates to the assessment year 1961 -62, while I.T.R. No. 49 of 1971 relates to the assessment year 1962 -63.

(2.) The assessee is a Hindu undivided family with Shri Mohan Lal Sanganeria as its karta. During the previous years relevant to the assessment years 1961 -62 and 1962 -63, it derived income from its shares in various firms. The assessee -Hindu undivided family also held shares in a limited company known as Sanganeria and Co. Ltd., of which Shri Mohan Lal Sanganeria was a director and received Rs. 3,000 as director's remuneration from the company in each year. The assessee -Hindu undivided family claimed that this amount of Rs. 3,000 was not its income but was the income of Shri Mohan Lal Sanganeria as an individual. The Income Tax Officer repelled this contention of the assessee and held that the assessee was a director of the company on account of shares acquired out of the funds invested by the Hindu undivided family and that the remuneration received was the income of the Hindu undivided family and not of Shri Mohan Lal Sanganeria as an individual. For this view, the Income Tax Officer relied upon the decision of their Lordships of the Supreme Court in Commissioner of Income Tax v/s. : [1959]37ITR123(SC) . He, accordingly, included the amount in the total income of the Hindu undivided family. The assessee filed an appeal which was allowed by the Appellate Assistant Commissioner on the ground that the remuneration in dispute was the salary belonging to Shri Mohan Lal Sanganeria in his individual capacity on account of services rendered by him to the company and not in consideration of the funds invested by the assessee -Hindu undivided family in the said company. The department filed an appeal before the Income Tax Appellate Tribunal which was dismissed with the observation that, in view of the terms of the articles of association of the company in regard to the qualification for directorship, it could not be held that the income belonged to the family even though the investment in shares was made by the family. On these facts, the following question of law has been referred to this court for its opinion by the Income Tax Appellate Tribunal in both the cases:

(3.) The facts of the Supreme Court judgment (See : [1959]37ITR123(SC) ) relied upon by the Income Tax Officer were these. Rohatgi, the karta of a Hindu family, took over a business as a going concern and carried on its business on behalf of a company to be promoted until it was actually incorporated in December, 1930. He was one of the promoters of that company, the articles of association of which provided that Rohatgi would be the first managing director, specified his remuneration and required the company to enter into an agreement with him. The agreement, however, was not actually entered into until January, 1934. It was found by the Appellate Tribunal that the shares held in the name of Rohatgi and his brother were acquired with funds belonging to the joint family and the family was in enjoyment of the dividends paid on those shares. Further, the company was floated with funds provided by the family and Rohatgi made no contribution in this respect. The company was all along financed by the family. Prior to the accounting year relevant to the assessment year 1943 -44, the managing director's remuneration received by Rohatgi was credited in the books of the family. In the assessment year 1943 -44, for the first time it was claimed that the whole of the managing director's remuneration constituted the personal earnings of Rohatgi and should not be added to the income of the family. It was held that the managing director's remuneration received by Rohatgi was, as between him and the Hindu undivided family, the income of the family and should be assessed in its hands. It will be noticed that the facts in that case were different, that is, the income of Rohtagi as managing director had been included in the income of the Hindu undivided family for a number of years, that is, for the assessment years 1931 -32 to 1942 -43, and it was only in the assessment year 1943 -44, for the first time that it was claimed that the remuneration of the managing director constituted Rohatgi's personal income and not that of the Hindu undivided family. In the instant case, Shri Mohan Lal Sanganeria and the assessee -Hindu undivided family claimed right from the beginning that his remuneration as director was his individual income and not that of the Hindu undivided family. Without distinguishing these facts, the Income Tax Officer included the remuneration of Shri Mohan Lal Sanganeria as director, in the income of the Hindu undivided family following the decision of the Supreme Court, referred to above. That decision was distinguished by their Lordships of the Supreme Court in S. Rm. Ct. PL Palaniappa Chettiar v/s. : [1968]68ITR221(SC) , the facts of which were: In 1934, the karta of a Hindu undivided family acquired 90 out of 300 shares in a transport company with the funds of the family. There were initially four shareholders including the karta and two of them were directors. On the death of one of them in 1941, the karta became a director of the company. On the death of another, who was managing the business of the company, he became the managing director of the company in 1942. At the relevant period he was entitled to a salary and a commission on the net profits of the company. The managing director had control over the financial and administrative affairs of the company and the only qualification under its articles of association for being a director was the holding of not less than 25 shares in his own right. The question was whether the managing director's remuneration and commission and sitting fees received by the karta were assessable as the income of the family. It was held :