Commissioner of Income Tax vs Shri N.K. Mehra

Dr. B.P. Saraf, J.—By this reference u/s 256(1) of the Income Tax Act, 1961, made at the instance of the Revenue the Income Tax Appellate Tribunal, Bombay, Bench "B", Bombay, has referred the following question of law to this court for opinion :

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal has rightly held that the salary income of the assessee from Savita Chemicals Pvt. Ltd. is assessable in the hands of the assessee in the status of individual'' (sic) for each of the assessment years under consideration ?"

The assessee, Shri N. K. Mehra, was director of a company known as Savita Chemicals Pvt. Ltd. for which he received salary from the said company. In his individual assessments for the assessment years 1972-73, 1973-74 and 1974-75, the assessee claimed before the Income Tax Officer that the above salary was assessable in the hands of the "Hindu undivided family of Shri N. K. Mehra" of which he was the karta and not in his hands as an individual. The Income Tax Officer did not accept this claim of the assessee and assessed the salary income received by him from the aforesaid company in his hands in the status of "individual". For the assessment year 1975-76, though originally the aforesaid salary income was not included in his individual assessment, it was included later by reopening the assessment u/s 147 of the Act. The assessee appealed to the Appellate Assistant Commissioner. Before the Appellate Assistant Commissioner, it was pointed out by the assessee that on the February 5, 1969,440 shares of Savita Chemicals Pvt. Ltd., which were initially owned by him in his individual capacity, were thrown into the common stock of the Hindu undivided family of which he was the karta. It was also pointed out that thereafter the said Hindu undivided family acquired 550 shares by way of bonus shares and purchased another 1,000 shares, thus making the total shareholding of the family in the said company at 1,990 shares. The case of the assessee was that since the shares held by him were impressed with the character of Hindu undivided family property, the salary received by him from the said company was not assessable in his hands as an individual. The further contention of the assessee was that there was a diversion of income at source in so far as the income from salary was concerned and, therefore the income from salary was not assessable in his hands as an individual but was assessable in the hands of the Hindu undivided family. The Appellate Assistant Commissioner accepted the contention of the assessee and held that the salary income of the assessee from Savita Chemicals Pvt. Ltd. was assessable in the hands of the Hindu undivided family. He, therefore, deleted the same from the individual assessment of the assessee for each of the assessment years under consideration, aggrieved by the order of the Appellate Assistant Commissioner, the Revenue appealed to the Income Tax Appellate Tribunal ("the Tribunal"). The Tribunal following its earlier decision in the case of the assessee himself in appeal against the assessment for the subsequent year, viz., assessment year 1976-77, agreed with the Appellate Assistant Commissioner and held that the salary income of the assessee from the said company was assessable as the income of the Hindu undivided family and not in the hands of the assessee as his individual income. Aggrieved by the above order of the Tribunal, the Revenue sought for reference of the question of law arising out of the order of the Tribunal to this court. The Tribunal, on being satisfied that the question sought to be referred was a question of law arising from its order has referred the question set out above to us for opinion. Though the order of the Tribunal in the assessee''s own appeal for the assessment year 1976-77, which has been followed by the Tribunal in its order for the years under consideration, is not annexed to the statement of the case by the Tribunal, a copy thereof, accepted to be a true copy; has been supplied to us by counsel for the parties. By consent of the parties, we have taken the same on record, as the reasons in support of the order of the Tribunal from which this reference has arisen, are contained in it.

We have perused the above order of the Tribunal as also the order for the relevant assessment years. It appears that the assessee was an employee of the company much before the shares of that company were impressed by him with the character of the Hindu undivided family. The salary was paid by the company to the assessee for the services rendered by him as an individual. Even according to the resolution of the company dated May 30, 1967, which governs the rates of salary and allowances, it was payable to the assessee as an individual for the services rendered by him. It has no nexus whatsoever with the 440 shares held by him. In such a situation, in our opinion, the change of ownership of those shares from the assessee to the Hindu undivided family and the acquisition of further share of the said company by the Hindu undivided family cannot make the receipt of salary by the assessee income of the Hindu undivided family. The test for determining whether the remuneration received by an individual is income of the individual or that of the Hindu undivided family of which he is a coparcener is well-settled by now. The broad principle to be followed for this purpose, as stated by the Supreme Court in Shri Raj Kumar Singh Hukam Chandji Vs. Commissioner of Income Tax, Madhya Pradesh, , is whether the remuneration received by the coparcener in substance though not in form was btu one of the modes of return made to the family because of the investment of the family funds or whether it was compensation made for the services rendered by the individual coparcener. If it is the former, it is income of the Hindu undivided family but if it is the latter then it would be the income of the individual coparcener. If the income was essentially earned as a result of the funds invested, the fact that a coparcener had rendered some service would not change the character of the receipt. But if, on the other hand, it is essentially a remuneration for the services rendered by a coparcener, the circumstance that his services were availed of because of the reason that he was a member of the family which had invested funds in that business or that he had obtained the qualifying shares from out of the family funds would not make the receipt, income of the Hindu undivided family.

Applying the above test to the facts of the present case, it is abundantly clear that the salary income was the individual income of the assessee and not of the Hindu undivided family of which he was the karta, as he was a director even before the shares came to be held by the Hindu undivided family. In fact, his appointment was not in any way related to the shareholding, nor is there any material to show that he continued to be a director after he invested the 440 shares by him with the character of a Hindu undivided family property, by reason of the fact that on receipt of bonus shares and acquisition of further 1,000 shares, the family came to hold in all 1,990 shares of the said company. There is nothing to show that he held the directorship on behalf of the family or by reason of the shareholding of the family. On the contrary, from the facts of the case, it is clear beyond all doubts that he received the salary for the personal services rendered by him as in the past. In the premises the income from salary received by him cannot be held to be the income of the Hindu undivided family. We are, therefore, of the clear opinion that it was the income of the assessee and it was rightly assessed by the Income Tax Officer as his individual income. The Appellate Assistant Commissioner and the Tribunal were not correct in reversing the said finding of the Income Tax Officer and holding it to be the income of the Hindu undivided family.

We have perused the decision of the Gujarat High Court in V. J. PATEL AND P. J. PATEL Vs. COMMISSIONER OF Income Tax., relied upon by the assessee. We, however, fail to understand how the above decision supports the decision of the Tribunal. In the above case, the Gujarat High Court followed the test laid down by the Supreme Court in Shri Raj Kumar Singh Hukam Chandji Vs. Commissioner of Income Tax, Madhya Pradesh, and reiterated that if the income earned by a member of a Hindu undivided family is essentially a remuneration for the services rendered by him, even the circumstance that his services were availed of because he was a member of the family which had invested funds in that business or that he had obtained the qualification shares out of family funds would not make the receipt the income of the family. This decision, in our opinion rather goes against the contentions of the assessee.

So far as the alternative submission of learned counsel for the assessee based on the principle of diversion of income by overdoing title is concerned, we are of the opinion that it is wholly misconceived. The real controversy in this case is whether the income can be held to be income of the Hindu undivided family because of its shareholding in the company from which the salary was received by the assessee or it would be the income of the assessee individual. Considering the facts of the case in the light of the well-settled principles governing such determination, we have already held that it was the income of the assessee individual and not of the Hindu undivided family. No question of diversion of income can arise in such a case.

This court had occasion to consider the question whether there was a diversion of income by overriding title in Commissioner of Income Tax Vs. V.G. Bhuta, . In that case, it was held that the true test for finding out if there has been diversion of income by an overriding charge is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt there are in every case, but it is the nature of the obligation which is the decisive factor. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where, by the obligation, income is diverted before it reaches the assessee, it is deductible; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law does not follow. Applying the above test, we are of the clear opinion that the principle of diversion of income by overriding the title has no application to the facts of the present case.

Learned counsel for the assessee also referred to the observations of the Tribunal in its order in appeal for the assessment year 1976-77 to the effect that the continuance of the assessee as a director of the company was entirely attributable to the shareholding of the company. It was urged that this is a finding of fact which is binding on this court. We have carefully considered the above submission. We, however, do not find any merit in the same because from a perusal of the order of the Tribunal it is quite clear that it is not a finding of fact. It is a legal conclusion arrived at by the Tribunal by applying the test laid down by the Gujarat High Court in V. J. PATEL AND P. J. PATEL Vs. COMMISSIONER OF Income Tax., . This inference, on the face of it, is erroneous inasmuch as in the present case neither the appointment nor the continuance of the assessee as a director of the company was attributable to the shares of the company held by the Hindu undivided family. No judicial Tribunal, properly instructed, could have arrived at such a finding in the uncontroverted facts and circumstances of the case appearing on the face of the record. While deciding a question of law referred to it, the court need not act on such patently erroneous assumptions based on a patently incorrect factual foundations. Such findings, in fact and in law, are no findings at all on which the opinion of the court on a question of law can be founded. In such a situation, the court can peruse the basic facts of the case set out in the order of the Tribunal and decide the legal controversy in the light thereof without laying undue emphasis on the supposed finding of fact.

Having regard to the above discussion, we answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee.

In the facts and circumstances of the case, there shall be no order as to costs.