THE COMMISSIONER OF INCOME-TAX, WEST BENGAL vs. KALU BABU LAL CHAND

CIVIL APPEAL No. 431/1957Supreme Court[1960] 1 S.C.R. 32015 May 1959Bench: 3 JudgesAuthor: NATWARLAL HARILAL BHAGWATI, S.K. DAS, M. HIDAYATULLAH13 pages
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What were the facts?

The assessee is a Hindu Undivided Family (HUF) of which B.K. Rohatgi was the karta. In 1930, B.K. Rohatgi became interested in the India Electric Works business. A company was floated to take over this business. B.K. Rohatgi, on behalf of the to-be-formed company, took over the concern and financed it using HUF funds. The company was incorporated in December 1930, with B.K. Rohatgi holding 326 shares and his brother 356 shares out of 950 ordinary shares. The Articles of Association appointed B.K. Rohatgi as the first managing director. For the assessment year 1943-44, the HUF claimed that the managing director's remuneration received by B.K. Rohatgi was his personal income, not income of the HUF. The Income-tax Officer rejected this claim. The High Court, on reference, answered the question in favour of the assessee.

What did the Supreme Court hold?

The Supreme Court held that while the managing director is an individual vis-à-vis the company, the question of whether the remuneration is personal income or income of the HUF depends on whether it was earned with the help of joint family assets. In this case, the promotion of the company, the takeover of the business, and its financing were all done using joint family funds, with no contribution from B.K. Rohatgi's personal funds. The appointment as managing director was inseparably linked to this scheme. Therefore, the managing director's remuneration received by B.K. Rohatgi was, as between him and the HUF, the income of the HUF and should be assessed in its hands. The Court set aside the High Court's answer and held that the entire sum should be assessed on the assessee HUF.

What were the issues?

1. Whether the remuneration received by B.K. Rohatgi as managing director of India Electric Works Ltd. is taxable as the income of the Hindu undivided family (assessee) or as his personal income. This issue turns on whether the remuneration was earned with the help of joint family assets. Assessee's Contentions: - Under the Indian Companies Act, an HUF cannot be appointed a managing agent. - The office of managing director involves a personal element, requiring personal skill and qualities, thus the remuneration must be personal earnings. Revenue's Contentions: - The promotion of the company, taking over the business, and financing were all done with joint family funds. - B.K. Rohatgi did not contribute any personal funds. - The appointment as managing director was part of the same scheme as the acquisition and financing of the business using HUF assets. - For prior assessment years, the remuneration was credited to the HUF.

Which sections of the Income-tax Act were involved?

Section 66(1)

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320 SUPREME COURT REPORTS [1960(1)) '959 suspicions, conjectures and surmises and acted without Lalchand Bhagat any evidence or upon a view of the facts which could Ambicat Ram not reasonably be entertained or the facts found were v. such that no person acting judicially and properly The Commissioner instructed as to the relevant law could have found, or of Income-ta• the finding was, in other words, perverse and this Court is entitled to interfere. :.

Bhagwali f.

We are therefore of opinion that the High Court was z959 May r5. clearly in error in answering the referred question in the affirmative. The proper answer should have been in the negative having regard to all the circumstances of the case which we have adverted to above. · The appeals will accordingly be allowed, the judg- ment and order passed by the High Court will be set aside and the referred question will be answered in the negative. The appellant will be entitled to its costs of the reference in the High Court and of these appeals in this Court as against the respondent.

Appeals allowed. THE COMMISSIONER OF INCOME-TAX, WEST BENGAL v. KALU BABU LAL CHAND (S. R. DAS, C. J., N. H. BHAGWATT

The order continues below.

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