Syllabus: Wherever remuneration was earned by a member of the family for personal services rendered, the said remuneration would belong to and be assessable in the hands of the individual irrespective of the fact whether or not the aid of family funds was taken in earning the said remuneration.
Madras High Court in The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, In that case, the assesses, the Karta of a Hindu undivided family earned remuneration as a managing director and fees as a director from a bank. The Income Tax authorities treated that income as income of the family on the ground that necessary shares to acquire the qualification of a managing director were purchased out of joint family funds. It was held that the remuneration earned in consideration of the services which he rendered to the bank was his personal income and not the income of his family of which he was the Karta, because no part of the family funds was spent or utilised for earning the remuneration and the fact that family funds were utilised for acquiring the qualification shares did not constitute such detriment to the family property as to make the said remuneration partible. The matter was considered by the Supreme Court for the first time in The Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand, . In that case, a company was floated with the funds provided by a joint family and the managing director acquired qualification shares also with the funds belonging to the family.
The Supreme Court held that the remuneration received by the Managing director was assessable as the income of the joint family. It was observed that–
“Here was the Hindu undivided family of which B. K. Rohtgi was the Karta. It became interested in the concern then carried on by Milkhi Ram and others under the name of India Electric Works. The Karta was one of the promoters of the company which he floated with a view to take over the India Electric Works as a going concern. In anticipation of the incorporation of that company the Karta of the family took over the concern, carried it on and supplied the finance at all stages out of the joint family funds and the finding is that he never contributed anything out of his separate property, if he had any. The articles of association of the company provided for the appointment as managing director of the very person who, as the Karta of the family, had promoted the company. The acquisition of the business, the floation of the company and the appointment of the managing director appear to us to be inseparably linked together. The joint family assets were used for acquiring the concern and for financing it and in lieu of all that detriment to the joint family properties the joint family got not only the shares standing in the names of two members of the family but also, as part and parcel of the same scheme, the Managing directorship of the company when incorporated. It is also significant that right up to the accounting year relevant to the assessment year 1943-44 the income was treated as the income of the Hindu undivided family. It is true that there is no question of res judicata but the fact that the remuneration was credited to the family is certainly a fact to be taken into consideration. It appears to us that the case is governed by the principles laid down in HARIDAS PURSHOTTAM IN RE., . The recitals in the agreement also clearly point to the fact of B. K. Rohtgi having been appointed managing director because of his being a promoter or the company and having actually taken over the concern of India Electric Works from Milkhi Ram and others. The finding in this case is that the promotion of the company and the financing of the concern and the taking over of it were all done with help of the joint family funds and the said B. K. Rohatgi did not contribute anything out of his personal funds if any. In the circumstances, we are clearly of opinion that the managing director’s remuneration received by B. K. Rohatgi, was as between him and the Hindu undivided family, the income of the latter and should be assessed in its hands. …… …”
The point again arose before the Supreme Court in Piyare Lal Adishwar Lal Vs. The Commissioner of Income Tax, Delhi, . There, an individual was appointed as a treasurer of a bank and property of the Hindu undivided family of which he was a member was furnished by him as security. It was held that he was an employee of the bank and there was nothing to show that he received any training at the expense of the family funds or that his appointment was the result of any outlay or expenditure of or detriment to the family property and, therefore, the salary paid to the treasurer belonged to and was assessable as his individual income and not as the income of the family. Giving of Joint family property in security for the good conduct of the treasurer was held not to constitute any detriment to the family property or risk of loss within the meaning of the term as used in the various decided cases so as to make his income partible. Dealing with The Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand, the Supreme Court said,
“That case is distinguishable. There the Karta of a Hindu undivided family took over a business as going concern and carried on the business till the company was incorporated. The shares in the name of the Karta and his brother were acquired with the funds of the joint family. The company was floated with the funds of the joint family and was financed by it and the remuneration received was credited in the books of the family. The office of the managing director itself was assignable. The articles of association provided that the Karta or his assigns or successors in business ‘whether under his name or any other style or form’ would be the managing director of the company and he was to continue for life until removed because of fraud or dishonesty. Thus the acquisition of business, the floatation of the company and the appointment of the managing director were inseparably linked together …..”
Then came the latest decision of the Supreme Court in Mathra Prasad’s case, Civil Appeal No. 10 of 1965, D/- 9-12-1965 (SG). In that case, Hindu undivided family partitioned their property in business and as a result of that partition one-sixth share was allotted in the assets to a smaller Hindu undivided family of which Mathura Prasad was the manager. After partition, the managers of sis branches joined as partners to carry on business formerly conducted on behalf of the larger Hindu undivided family. Clause 8 of the partnership agreement provided —
“That the business of a place shall be managed by one of members who reside at a place of the business to the best of his or their ability. The allowances of the Managing partners of a particular place shall be debited to the profit and loss account of that place at the end of the year. But such allowance shall not be more than profits disclosed by the business of that place in that particular year. If the business is managed by more than one partners, such allowances shall be divided equally between them. The member or members shall be entitled to withdraw for such allowance a sum of money monthly which will approximately he proportionate to the expected profits of the year. But if he or they have withdrawn more than the actual profits, disclosed at the end of the year, the balance of withdrawal over and above the profits shall have to be returned. At the Agra office i. e. Aggarwal Iron Works Shri Mathura Parsad who will manage, the whole affairs will be entitled to a monthly allowance of Rs. 1,500/- but for him too the terms mentioned above will apply i. e. if the profits disclosed at the place do not justify the withdrawals in the manners mentioned above, he will have to refund the excess of the withdrawals over the profits.”
Mathura Prasad claimed that income received by him as remuneration from the firm was his individual income. The Supreme Court held that in view of the finding of the tribunal that Mathura Prasad, the manager, became a partner in the firm with the help of joint family funds and as a partner he was entrusted with the management of a particular business, the allowance received by him was directly related to the investment of the family funds in the partnership business and, therefore, taxable as income of the family. Dealing with Piyare Lal Adishwar Lal Vs. The Commissioner of Income Tax, Delhi, , it was observed that
“We see no analogy between a case in which the property of the Hindu undivided family is sought to be encumbered for obtaining a benefit which is essentially personal to the manager, and a case in which with the aid of the family funds the manager of the family is able to enter into a partnership and to earn allowance, which he would not otherwise have been entitled to receive.”
Another contention raised before the Supreme Court was that Mathura Prasad earned the allowance because of the special aptitude he possessed for managing the particular branch of business and was not earned by use of joint family funds. The Supreme Court declined to go into that question on the ground that no such contention was raised before the High Court. It is necessary to recur for a moment to The Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand, , and to see the treatment accorded to the two decisions of the Patna High Court and the decision of the Madras High Court in The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, . SIRDAR BAHADUR INDRA SINGH Vs. COMMISSIONER OF Income Tax, BIHAR AND ORISSA., was distinguished on the ground that it was expressly provided in the articles of association of the company that the remuneration of the managing director would be his personal income while COMMISSIONER OF Income Tax, BIHAR AND ORISSA Vs. DARSANRAM AND OTHERS., on the ground that there was a finding of fact that the joint family property had not been utilised in earning the managing director’s remuneration.
There has been a considerable controversy not only before us but before other High Courts as well as to whether or not the Supreme Court overruled The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, . In one part of the judgment, their Lordships of the Supreme Court observed that the decision did not help the assessee because of the facts found in that case. After discussing the facts, their Lordships did express themselves by saying that the learned Judges of the Madras High Court overlooked the principle laid down by the Judicial Committee in Amar Nath’s case AIR 1921 PC 35, where it had been pointed out that there was no valid distinction between the direct use of the joint family funds and the use which qualified the member to make the gains on his own efforts.
Shorn of all details, it does appear that Court were inclined to the extreme view that wherever remuneration was earned by a member of the family for personal services rendered, the said remuneration would belong to and be assessable in the hands of the individual irrespective of the fact whether or not the aid of family funds was taken in earning the said remuneration. To that extent, as pointed out by their Lordships of the Supreme Court in The Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand, , the Madras High Court, and, if I may say so also the Patna High Court did ignore the principle laid down by the judicial committee, in Amar Nath’s case AIR 1921 PC 35 . It follows that if the learned Judges deciding those cases had been invited to bear that principle in mind, they would not have laid down a rigid rule of law that in all cases such remuneration must belong to and be assessed in the hands of the members as their individual income but would have directed their attention to the facts found with a view to enquiring: did the joint family funds qualify the member to earn the remuneration in question ? As I understand the observations of their Lordships of the Supreme Court about The Commissioner of Income Tax Vs. S.N.N. Sankaralinga Ayyar, , I think what their Lordships pointed out was that the High Court decided the question in disregard of the principle that if the family funds qualified the member to earn that remuneration, the same would be taxable in the hands of the family even though earned by the member for services rendered by him.
The following principles, in my opinion, emerge from the decisions of the Supreme Court and the judicial committee–
(1) that the income of a member of a joint family would be a separate property if it has been obtained by his own exertions and without any detriment to the father’s estate, that is, without the aid of joint family property;
(2) that it would be a joint family income if earned at the expense of the joint family funds:
(3) that where the family funds have been used either for earning the income or for qualifying the member to earn the income, the presumption is in favour of partibility and in favour of detriment to the patrimony;
(4) that partibility dose not depend on causa proxima and is not negatived by the intervention of the personal element of the individual member’s character or, in other words, when the income arises both by reason of use of family funds and personal exertion, the presumption would be that the income belongs to the family; and
(5) that if the facts show that a member would not have been put in such a position as to be able to earn the income in question without the aid of the family funds, it would be the income of the family and, consequently, where a member becomes a partner with the aid of family funds and earns remuneration, though for services rendered, the income would belong to the family if it appears that he would not have earned that remuneration had he not been a partner. On the other hand, if the facts show that the income was the result, entirely or predominantly, of the personal exertion of the member which it would be for the member to prove, the income will not be partible, as happened in Piyare Lal Adishwar Lal Vs. The Commissioner of Income Tax, Delhi, . In other words, if there exists an inseparable link between the investment of the patrimony and the earning, the earning would be partible.
(6) Where a member can establish that he earned the remuneration not because of his being a partner, but solely or predominantly because of special qualifications personal to him, the income would be impartible.
I would like to add one example to illustrate my point. Take a case of a partnership firm, engaged in the construction work, consisting of four partners, three of whom are not at all experienced or qualified for any construction work and the fourth is a qualified civil engineer. Such a firm takes a contract for execution of certain works and all the partners do some work or the other in this connection every day and are paid for the same. The qualified engineer partner says to the other partners,–“You have employed an engineer to do overtime work at night, for which you pay him Rs. 2,000 a month. I am as qualified as he is, and if you pay me half of that remuneration I will do that overtime work.” And the other partners agree. In such circumstances, it may be possible for that engineer partner to show that ‘this income is entirely the result of my personal exertion and it cannot be said that I would not have earned this amount if I were not a partner.” In such a case, I think, the presumption in favour of partibility may possibly be rebutted.
Of course, it would be a question of fact to be decided in each case and all that I say is that exceptions cannot be completely ruled out. Again, a member may be appointed to do a particular job not because he is a partner but because of the special aptitude possessed by him to do the job. I cannot understand why, in such circumstances, such a partner cannot say that ‘my income is not the result of any use, direct or indirect, of the family funds.’
After The Commissioner of Income Tax, West Bengal Vs. Kalu Babu Lal Chand, , and before Piyare Lal Adishwar Lal Vs. The Commissioner of Income Tax, Delhi, , came the decision of this Court in S. Bhagwant Singh Vs. Commissioner of Income Tax, . In that case a Division Bench of this Court took, what may be understood, as the other extreme view, namely, that where the monies of the family have been invested in the partnership, the remuneration earned by the partner a member of a joint Hindu family would always belong to the family. The reading of the judgment shows that the learned Judges thought that no exception was possible.
It was observed that–
“It has been established on the record of this case that S. Bhagwant Singh was a member of a joint Hindu family, that he invested a part of the joint family funds in this partnership, that it was in consequence of this investment that he became a partner in this enterprise, and that it was in consequence of his being a partner that he became entitled to draw his salary. The investment of family funds in the partnership business and the salary earned by S. Bhagwant Singh are related to each other as cause and effect. The right to draw a salary was made possible by the use of joint family funds which enabled him to become a partner and to claim remuneration for the services rendered by him. In other words, his right to draw salary flowed directly from the joint family funds. This is another way of saying that the income on account of salary was acquired with the aid of joint family property.”