Commissioner of Income Tax vs Dr. Gurbux Singh

S. Ranganathan, J.—At the request of the Commissioner of income tax, the income tax Appellate Tribunal has referred the following question for our decision: Whether, on the facts and circumstances of the case, the Tribunal was right in holding that income from property, dividend and interest and capital gains could not be included in the total income of the assessee in the status of an individual for the assessment year 1962-63?

The facts leading to the reference may now be briefly stated.

Dr. Gurbux Singh, the respondent-assessee, was being assessed as an individual for the assessment years 1942-43 to 1961-62. He was being so assessed in respect of his salary income, property income, dividend income and interest income. The present reference relates to the assessment year 1962-63, for which the previous year ended on March 31, 1962. During the proceedings for this year, the assessee put forward a claim that all the above items of income, except salary, i.e., the property, dividends and interest was really the income of the HUF, consisting of himself, his wife and his son, Shri Jarnail Singh, who had been born in 1955. This claim, which had not been put forward in the early years, was not accepted by the income tax Officer but the AAC and the Appellate Tribunal have accepted the claim and hence the present reference. In the assessment year 1962-63, apart from income from property, dividend and interest, there was also an item of capital gain which had to be considered, the capital gain having been made by the assessee on the sale of a property situated at Barakhamba Road, New Delhi, for Rs. 8,80,000.

Dr. Gurbux Singh was the youngest son of one Mool Singh, who died in 1953. Shri Mool Singh and his four sons, Shri Aya Singh, Shri Kesar Singh, Shri Sohan Singh and Shri Gurbux Singh constituted an HUF. The first three sons, Aya Singh, Kesar Singh and Sohan Singh, got separated from the joint family accepting certain assets in lieu of their shares of the family property and abandoning all interests and rights in the other property belonging to the joint family. Thus, we start with the position that, at the beginning, Mool Singh and Dr. Gurbux Singh constituted a joint Hindu family and it is also clear from the record that this family had certain properties.

Dr. Gurbux Singh was born in 1914. It appears that he went to Japan in 1936, with a cousin of his, one Ranjit Singh. There the assessee was able to obtain an agency for the sale in India of the products of M/s. Shenogi & Co. The assessee came back to India and entered into a partnership with Shri Jaswant Singh and Ranjit Singh in order to run the business of selling agency. This was done in the name and style of M/s. Ranbaxi & Co.

In 1940, M/s. Shenogi & Co. expressed their intention of establishing their own sales organisation in India and their unwillingness to renew the agency agreement. Thereupon, it is said that by an agreement dated May 20, 1940, the business of M/s. Ranbaxi & Co. was sold to M/s. Shenogi & Co., as a running concern, one of the terms of the agreement being that Jaswant Singh and Ranjit Singh should be employed by the purchaser for a period of 20 years. However, within a short period of two months, on July 6, 1940, the Japanese concern sold back the business of M/s. Ranbaxi & Co., to the assessee. For this, the assessee had to pay only a nominal consideration of Rs. 1,000 but he had to undertake the vendor''s obligation to Ranjit Singh and Jaswant Singh.

This agency business was admittedly the nucleus of all the further prosperity of Dr. Gurbux Singh. He started carrying on the business as already stated on July 6, 1940. By 1947, the business had improved tremendously and the assessee formed a public limited company and sold the business to the company for a consideration of Rs. 1,79,405 towards the goodwill, the card index utility, the stocks and other assets of the company. This consideration was received by the assessee partly in cash and partly in the form of shares. The cash was utilised in the construction of a house property at Pusa Road. Shares of Rs. 1,00,000 were subsequently sold to one Shri Mohan Singh for Rs. 2,50,000. The assessee purchased a house at Barakhamba Road, New Delhi, for Rs. 2,10,000. Subsequently, the assessee resigned from the company and was able to sell his rights and other shares to Mohan Singh for Rs. 1,00,000. With this money, the assessee started a new business under the name and style of M/s. Gurco Pharma Limited in 1955. In 1957, the property at Pusa Road was sold for Rs. 1,55,000. In May, 1961, the Barakhamba Road property was sold for Rs. 8,88,000 out of which a sale commission of Rs. 90,000 had to be paid. In short, after 1947, Dr. Gurbux Singh became very prosperous. However, it was for the first time only in the assessment year 1962-63 that he put forward the claim that all these assets which had been acquired out of the initial nucleus of the selling agency business belonged to the joint family.

The income tax Officer rejected the assessee''s claim principally for the reason that the claim had not been put forward in earlier years. He also perhaps found it a little suspicious that the claim had been put forward in a year when a substantial amount of capital gain came to the assessee. According to the income tax Officer, Dr. Gurbux Singh must have been deriving some professional income. That apart, he had acquired the business of selling agency for a small sum of Rs. 1,000 which must have come out of his individual earnings. The business needed no capital investment and by his own personal efforts, Dr. Gurbux Singh built up the business. He accumulated a capital of Rs. 9,000 by 1944. Though a claim had been made in the assessment year 1942-43 that a loss of Rs. 27,088 had been sustained in the said business, the assessment had been made on an income of Rs. 22,985. This indicated that the business was doing very well and since the business had been built entirely on the personal efforts of Dr. Gurbux Singh, the income tax Officer was of the opinion that all the properties belonged to the individual. On behalf of the assessee, it had been pointed out that a sum of Rs. 20,000, belonging to Shri Mool Singh, had been brought to the books of the business in November, 1944, but the income tax Officer was of the opinion that this amount had been utilised for starting a film business which had turned out to be unsuccessful and which was closed down sometime in 1950. For the reasons mentioned above, the income tax Officer came to the conclusion that the income in question had to be assessed in the hands of the individual and not the joint family.

As against this, the AAC and the Appellate Tribunal have arrived at the conclusion that all the properties in question had been built up out of the nucleus belonging to the joint family. In support of his conclusion, the AAC pointed out several circumstances. In the first instance, he pointed out that Dr. Gurbux Singh did not have any professional income or any other income by way of service. In fact, it appears that he held no medical degree at all and there was no scope for his having professional income. This was made clear at the stage of the Tribunal. Secondly, though the details of the terms and conditions on which the selling agency was obtained are not available on record it is clear that the assessee went to Japan with the help; of joint family funds. Thirdly, between 1940, when the business of M/s. Ranbaxi & Co., was taken over by the assessee, and 1947, by which time the business became very prosperous, substantial amounts belonging to the family had been channelled into the business. The first of these was a sum of Rs. 29,981, realised by the sale of family jewellery in June, 1944. This fact was proved by reference to the original document before the Tribunal. In November, 1940, a sum of Rs. 20,187 was transferred to the assessee''s bank account from the bank account of the father. Thirdly, in 1946, the father sold certain lands and the sale proceeds of Rs. 9,000 was given to Dr. Gurbux Singh. Some time later (the exact date is not available) Dr. Gurbux Singh received a sum of Rs. 10,500 from the Ministry of Rehabilitation in respect of certain Pakistani assets of the family. In view of the fact that these substantial funds had been utilised by Dr. Gurbux Singh for running the business, the AAC and the Tribunal came to the conclusion that all the assets were traceable to the joint family nucleus. The Commissioner has come up on reference, being dissatisfied with the conclusion of the Tribunal.

On behalf of the applicant, Mr. S. Mukherjee contends that there was nothing to show that Dr. Gurbux Singh had invested any joint family funds for acquiring the selling agency of M/s. Ranbaxi & Co. Initially, it had been obtained apparently for no investment at all and even subsequently Dr. Gurbux Singh had to pay only Rs. 1,000 to get the business from the Japanese concern. The business, according to the counsel, was built up purely by personal efforts of Dr. Gurbux Singh. The amount received from the father by way of fixed deposit was utilised by the assessee for running a film business. The sum of Rs. 9,000 was a personal gift by the father to his son and constituted individual property in his hands. The sum of Rs. 10,500 was received after the death of Shri Mool Singh by which time the business had prospered substantially. In the light of these facts, it is urged that the conclusion of the AAC and the Tribunal that the assets as well as the income were not derived by detriment to the joint family assets is based on no evidence. We are, however, of the opinion that the conclusion of the AAC and the Tribunal are fully supported by the material on the record. Their conclusion is essentially a conclusion of fact. We are unable to agree with the contention of the learned counsel for the applicant that the Tribunal has misdirected itself or has arrived at a perverse conclusion which cannot flow from the established facts. There is no direct evidence regarding the state of affairs when the business of M/s. Ranbaxi & Co. started was either originally or on July 6, 1940, when it was taken over by Dr. Gurbux Singh. However, with regard to this amount, the AAC has given a finding that since there is nothing to show that Dr. Gurbux Singh had any individual sources, the sum of Rs. 1,000 should have come out of the joint family itself. But even assuming, with the counsel for the applicant, that Dr. Gurbux Singh had originally obtained the agency for nothing and that he had saved a sum of Rs. 1,000, therefrom to enable him to purchase the selling agency, there is no material to snow that the entire prosperity of the business grew out of this small investment. Between 1940 and 1947, the business had been built up to a very substantial extent. The evidence on record shows that the business was very tardy in the beginning. Till June 30, 1944, the business had not made substantial profits. The capital account as on June 30, 1944, only showed a sum of Rs. 9,108. However, in 1944, as already stated, family funds were ploughed into the business to a substantial extent. The family jewellery was sold and there appears to be no reason for a sale of this family jewellery except that it was needed for the expansion of the business. It is also in evidence that the fixed deposit of the father was transferred to the business. It may be, that subsequently some funds were withdrawn from the business for investment in the business for distribution of films, but this does not obliterate the fact that in November, 1944, the funds belonging to the father were invested in the business of M/s. Ranbaxi & Co. Again in 1946, the sale proceeds of the lands were also invested in the business. The conclusion of the income tax Officer that the gift of sale proceeds would be an individual gift in favour of Dr. Gurbux Singh would not be correct. There is no finding that Shri Mool Singh had any assets of his own. As pointed out, initially all the assets, in the hands of Shri Mool Singh, belonged to joint family of himself and his son. Now, these assets were slowly transferred and put into the business. It is also very clear that the business could not have taken such leaps and strides after its initial slow progress but for the utilisation of these funds belonging to the family to improve its position. There is no dispute that all the assets, which are presently in question, were acquired out of the proceeds of this business which had such a humble beginning. For the reasons mentioned above, we are of the opinion that there are a large number of facts on the record which clearly show that the business was developed only by detriment to the joint family funds. We, therefore, concur with the opinion given by the Tribunal and answer the question which is referred to us in the affirmative and against the applicant. The applicant will pay costs of this reference to the assessee. Counsel''s fee Rs. 500.