Commissioner of Income Tax, Tamil Nadu-II vs V.S. Thyagaraja Mudaliar

Sethuraman, J.—In pursuance of a direction of this court, the following questions of law has been referred under s. 256 of the I.T. Act,

1961.

Whether, on the facts, and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the remunerations paid to the

karta of the family by M/s. Thiru Arooran Sugars Ltd. and M/s. Trichy Distilleries and Chemicals Ltd. and M/s. Venkatesa Thyagaraja Ltd., is not

on account of the investment in these companies by the family, but due to the individual services rendered by Shri v. S. Thyagaraja Mudaliar and

should not be taxed in the assessment of the assessee Hindu undivided family ?

Shri Thyagaraja Mudaliar belongs to an affluent family in the Thanjavur District. There was an HUF consisting of himself, his wife, his sons and

others. There was a partition in this family when his sons became separated and thereafter from the assessment year 1970-71 he had been

assessed in the status of an HUF consisting of himself and his unmarried daughter.

Thyagaraja Mudaliar was receiving a remunerations of Rs. 42,000 per annum as managing directors from M/s. Trichy Distilleries and Chemicals

Ltd., and a sum of Rs. 36,000 per annum as managing directors from M/s. Venkatesa Thyagaraja (Private) Ltd., for the assessment year 1970-

For the next assessment year 1971-72 the amount received from M/s. Trichy Distilleries and Chemicals Ltd., was Rs. 42,000 and the amount

received from M/s.Thiru Arooran Sugars Ltd., was Rs. 72,000. The ITO was dealing with the ""individual"" and the ""HUF"" assessment received by

Thyagaraja Mudaliar was for the services rendered as ""managing directors"" of the said companies and that the remuneration could be assessed

only in his hands as ""individual"" income and not as the income of the ""HUF"". The ITO negatived this contention for various reasons which are

summarized in the case stated.

On appeal, the AAC held that the companies came into being because of the efforts of Thyagaraja Mudaliar and certain other who acted as

promoters, that the promoters had invested funds to bring the companies into existence and that but for the family funds being invested in the

companies they would not have come into being. The remuneration was, therefore, considered to be attributable to the detriment suffered by the

family inasmuch as the fund of the family had been invested in them. The AAC thus confirmed the assessment. The matter was carried on further

appeal to the Tribunal and the same contentions were urged. The Tribunal, for the reasons stated in his order, came to the conclusion that the

remunerations paid to Thyagaraja Mudaliar was commensurate with the vast experience and the services rendered by him to the company and that

the mere circumstance that he was a member of the family which had invested fund of the family from out of the family funds would not result in the

remuneration received being (liable to be) taxed as the income of the HUF. The result was that the assessee claim that the remuneration was

assessable in the hands of the individual, Thyagaraja Mudaliar, succeeded. The amounts were, therefore, deleted or excluded from the assessment

of the HUF, and were directed to the assessed in the hands of the individual. The Commissioners of Income Tax had obtained a reference on the

above question. There are four tax cases because there are two assessment of the family and two assessment of the individual. The question is

identical in respect of all the assessments.

In the course of the order of the Tribunal, there is a reference to Thyagaraja having experience in the sugar industry and his having been

nominated as a director by the Government in other co-operative factories. There is also a reference to his having experience in the filed of

banking, insurance and other financial institution as the was a directors of the Central Board of the Reserve Bank of India and the Industrial

Development bank of the India and the President of the southern area of the local board of the Reserve bank of India of also a director of the

United India Fire and General Insurance Company Ltd., and the Central Govt., had nominated him as a members of the Organic Chemicals

Industry panel for the Development Wings. He was thus possessed of a stature in public life and had also acquired experience in running several

industries and businesses. The Tribunal has also found that the appointment of Thyagaraja Mudaliar as managing directors in the respective

companies was not traceable to his shareholding. It is in the light of these fact that we have to considered the question before us.

The question as to whether the remuneration received by a persons for services rendered to a company in which the family has invested funds

has been considered by the Supreme Court on a number of occasions. It is enough for out purpose to refer to the last of the judgment of the

Supreme Court in Shri Raj Kumar Singh Hukam Chandji Vs. Commissioner of Income Tax, Madhya Pradesh, . In that case, the assessee was an

HUF. It was allotted considerable share in a company which had taken over certain business of the larger family which was partitioned among the

several components. The karta was the managing directors in son of the companies and the question that arose for the decision of the Supreme

Court was, whether the income was liable to be assessed in the hands of the HUF or in the hands of the erstwhile karta as an individual. At pp. 43,

44 of the report, the Supreme Court refer to the several tests enumerated that are to be applied in this connections and they are:

The other tests enumerated are:

(1) Whether the income received by coparcener of a Hindu undivided family as remuneration had any real connection with the investment of the

joint family funds;

(2) Whether the income received was directly related to any utilization of family assets;

(3) Whether the family had suffered any detriment in the process of realization of the income; and

(4) Whether the income was received with the aid and assistance of the family funds.

In our opinion, from the subsidiary principles, the broader principle that emerges is, whether the remuneration received by the coparcener in

substance though not in form was but one of the modes of return made to the family because of the investment of the family funds in the business or

whether it was a compensation made for the services rendered by the individual coparcener. If it is the former, it is an income of the Hindu

undivided family, but if it is the latter, then it is the income of the individual coparcener. If the income was essentially earned as a result of the funds

invested, the fact that the 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 the coparcener, the circumstance that his services were availed of because of the reason

that he was a member of the family which had invested fund in that business or that he had obtained the qualification share from out of the family

funds would not make the receipts, the income of the Hindu undivided family.

Applying these tests in that particular case, the Supreme court held that the income in question was the individual income of Rajkumar who was

the ""karta"" of the family and who was the managing director in several companies. It was pointed out that he had not become the managing

directors of the firm the mere reason that his family had purchased considerable shares in the firm and he had been elected as the managing

directors by the board.

In the light of the assets enunciated by the Supreme court, the only matter that it required to be considered is, whether the remuneration paid to

Thyagaraja Mudaliar arose from the holding of share in the respective companies or is traceable to the investment by the family of its funds or

whether the income is referable to the personal service rendered by him and the investment by the family. In the present case, we have already

noticed that Thyagaraja Mudaliar was a person who had acquired considerable experience in running several business. The Tribunal had also

found as a fact that the shareholder did not play a part in making him cannot be traced to the joint family. The fact that he happens to be the ""karta

of the joint family cannot cloud the issued. Having regard to the particular facts in the present case, we are satisfied that the Tribunal acted properly

in holding that the remuneration was liable to be assessed only in the individual hands of Thyagaraja Mudaliar. The question is accordingly

answered in favour of the assessee. Counsel''s fee Rs. 500 one set.