S. RM. CT. PL. PALANI APPA CHETTIAR vs. THE COMMISSIONER OF INCOME-TAX, MADRAS

CIVIL APPEAL No. 1055/1966Supreme Court[1968] 2 S.C.R. 5526 October 1967Bench: 5 JudgesAuthor: K.N. WANCHOO, R.S. BACHAWAT, V. RAMASWAMI, G.K. MITTER, K.S. HEGDE7 pages
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What did the Supreme Court hold?

The Supreme Court held that the remuneration of the Managing Director could not be treated as an accretion to the income of the joint family and taxed in its hands. The shares were purchased by the joint family in the ordinary course of investment, not with the object of the Karta becoming the Managing Director. There was no real connection between the investment of joint family funds in shares and the appointment of the Karta as Managing Director. Applying the doctrine of Hindu Law, the remuneration was not earned by any detriment to the joint family assets. The present case was analogous to M/s. Piyare Lal Adishwar Lal v. The C.I.T. Delhi, where remuneration was not treated as income of the HUF due to no detriment or risk to joint family property. The Court clarified that CIT, Madras v. S. N. N. Sankaralinga Iyer was not impliedly overruled by CIT, West Bengal v. Kalu Babu Lal Chand, and its facts were parallel to the present case, where remuneration was earned by rendering services and no part of family funds were utilized except for acquiring qualification shares, with no detriment to family property. The amounts received by the assessee as Managing Director's remuneration, commission, and sitting fees are not assessable as income of the HUF. The appeal was allowed, the High Court's judgment set aside, and the question answered in favour of the assessee.

What were the facts?

The assessee, a Hindu Undivided Family (HUF), purchased 90 out of 300 shares of a company using HUF funds. The Karta of the HUF later became a director and subsequently the Managing Director. The company granted him remuneration, commission, and sitting fees. For assessment years 1950-51 to 1955-56, assessments were in the individual status of the Karta. However, for the assessment year 1959-60, the Income-tax Officer added the Karta's remuneration to the HUF's income, relying on the Supreme Court's decision in CIT, West Bengal v. Kalu Babu Lal Chand. The assessee appealed to the Appellate Assistant Commissioner, who dismissed it. The Income-tax Appellate Tribunal accepted the assessee's plea, holding that the remuneration was not income of the HUF. The High Court, on reference, ruled in favour of the Revenue, distinguishing M/s. Piyare Lal Adishwar Lal v. The C.I.T. Delhi and finding that CIT, Madras v. S. N. N. Sankaralinga Iyer was impliedly overruled by the Kalu Babu Lal Chand decision.

What were the issues?

1. Whether the remuneration, commission, and sitting fees received by the Karta as Managing Director are assessable as the income of the Hindu Undivided Family (HUF) of which he is the Karta? (Question of law) Assessee's contentions: The remuneration earned by the Managing Director was not a result of the utilization of joint family funds in the business, and there was no detriment to the joint family assets or their use in the business. Therefore, it was not appropriate to treat the remuneration as income of the HUF under Hindu Law. The High Court erred in holding that the present case was governed by CIT, West Bengal v. Kalu Babu Lal Chand. Revenue's contentions: The High Court was correct in holding that the case was governed by the ruling of the Supreme Court in CIT, West Bengal v. Kalu Babu Lal Chand, and that the decision in CIT, Madras v. S. N. N. Sankaralinga Iyer was impliedly overruled by the Kalu Babu Lal Chand decision. The later decision in M/s. Piyare Lal Adishwar Lal v. The C.I.T. Delhi was distinguishable.

Which sections of the Income-tax Act were involved?

Section 167A

AI-generated summary — verify with the full judgment below

.. • • ,_ A S. RM. CT. PL. PALANI APPA CHETI1AR v. THE COMMISSIOl'll'ER OF INCOME-TAX, MADRAS October 26, 1967 B [K. N. WANCHOO, C.J., R. S. BACHAWAT, V. R.AMASWAMI, c D E F G G. K. MITTER AND K. S. HEGDE, JJ.j Indian Incon1e-tax Act ( 11 o/ 1922)-Hindu undil,.ided famil_v .. rhares acquired fro111 funds o/-Re111unera1ion of karta as A-fanaging Director- Whetlter inco111e of the family.

Out of the funds of ·a Hindu undivided family, 90 shares out of 300 !'hares of :i. company were purchased. After a fe\ll years the Karta of the family became a director of the company and y:a.~ later appointed its Managing Director. The Income-tax Officer added the remuneration of the karta for the assessment of the Hindu undivided family and on the basis of the decision of this Court in The C.l.T. West Bengal v. Kalu Bahu Lal Chand held that the remuneration was to be treated as income of the family. The assessec appealed unsuccessfully to the Appellate Assistant Commissioner, but the Tribunal accepted the assessee's plea.

On referw ence, the High Court answered in favour of the Revenue holding that it. decision in C.J.1'. Madras v. S. N. N. Sankcralinga Iyer wa~ not

The order continues below.

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