Case Note & Summary
The appeal before the Supreme Court arose from a reference under Section 66(1) of the Indian Income-tax Act, 1922, made by the Income-tax Appellate Tribunal to the Calcutta High Court. The dispute concerned the assessment of managing director's remuneration received by B.K. Rohatgi, the karta of a Hindu undivided family, for the assessment year 1943-44. The Hindu undivided family, Kalu Babu Lal Chand, was the respondent assessee. In 1930, B.K. Rohatgi became interested in India Electric Works, a business carried on by third parties. A company, India Electric Works Ltd., was floated to take over the business, with B.K. Rohatgi as one of the promoters. He took over the business on behalf of the proposed company and carried it on using joint family funds. The company was incorporated on December 19, 1930, as a private limited company. Of the 950 ordinary shares, 326 stood in the name of B.K. Rohatgi and 356 in the name of his brother R.K. Rohatgi; all shares were acquired with funds belonging to the assessee family, and the family enjoyed dividends on those shares. The Articles of Association provided for B.K. Rohatgi to be the first managing director with a remuneration of Rs. 6,000 per annum or 15% commission on net profits. Prior to the accounting year relevant to the assessment year 1943-44, the managing director's remuneration was credited in the books of the Hindu undivided family, just like dividends. For the assessment year 1943-44, the assessee claimed for the first time that the remuneration of Rs. 61,282 was personal earnings of B.K. Rohatgi. The Income-tax Officer rejected the claim, and the Appellate Assistant Commissioner concurred. The Income-tax Appellate Tribunal took a middle course, holding that the amount comprised remuneration for family services in floatation and financing and for personal services; it apportioned Rs. 30,000 to personal services and the balance to the family. On reference, the Calcutta High Court answered the first question in the negative, rejecting apportionment, and answered the second question in favour of the respondent assessee. The Revenue appealed to the Supreme Court. The assessee argued that under the Indian Companies Act, a Hindu undivided family cannot be a managing agent, and the office of managing director involved a personal element, making the remuneration personal income. The Revenue relied on the findings that the company was floated and financed with joint family funds and that the family had consistently treated the remuneration as its income up to 1942-43. The Supreme Court held that vis-à-vis the company, the managing director was the individual, but as between the karta and the family, the character of the remuneration depended on whether it was earned with the help of joint family assets. Since the promotion, taking over, and financing of the company were all done with joint family funds, and B.K. Rohatgi made no personal contribution, the remuneration belonged to the Hindu undivided family. The Court rejected apportionment and held that the entire amount of Rs. 61,282 was assessable in the hands of the Hindu undivided family. The appeal was allowed, and the High Court's answer to the second question was reversed.
Headnote
A) Hindu Law - Joint Family Property and Income - Karta's Remuneration from Company - Indian Income-tax Act, 1922, Section 66(1) - The core issue was whether remuneration received by the karta as managing director of a company floated and financed with joint family funds was personal income or Hindu undivided family income - The Court held that as between the karta and the family, the character of the income depended on whether it was earned with the help of joint family assets; since the shares were acquired with family funds, the company was floated with family funds, and the family had treated the remuneration as family income up to 1942-43, the entire remuneration was assessable in the hands of the Hindu undivided family - Held that the amount received by the karta was the income of the Hindu undivided family and not his personal earnings. (Paras Not mentioned) B) Company Law - Appointment of Managing Director - Personal Office vis-à-vis Company - Indian Companies Act, 1913, Section 2(9-A) - The assessee contended that under the Indian Companies Act a Hindu undivided family cannot be appointed a managing agent and that the office of managing director involves a personal element - The Court held that vis-à-vis the company the managing director was undoubtedly the individual person appointed, but this did not determine the character of the remuneration as between the karta and the members of the family - Held that the personal nature of the office did not preclude the income from being treated as family income if earned with joint family assets. (Paras Not mentioned) C) Income Tax - Assessment of Income - No Apportionment of Managing Director's Remuneration - Indian Income-tax Act, 1922 - The Income-tax Appellate Tribunal had apportioned the remuneration between the family and the individual, allocating Rs. 30,000 to personal services - The High Court and the Supreme Court rejected apportionment, holding that the income must be treated wholly as income of one assessee - Held that since the promotion and financing of the company were done with joint family funds, the entire managing director's remuneration was assessable as income of the Hindu undivided family. (Paras Not mentioned)
Issue of Consideration
Whether the managing director's remuneration received by B.K. Rohatgi, the karta of the assessee Hindu undivided family, was his personal income or the income of the Hindu undivided family, and whether the Income-tax Appellate Tribunal was justified in apportioning the sum between the two.
Final Decision
The Supreme Court allowed the appeal, reversed the Calcutta High Court's answer to the second question, and held that the managing director's remuneration of Rs. 61,282 received by B.K. Rohatgi was the income of the Hindu undivided family and assessable in its hands, not as his personal income.
Law Points
- Legal points not extracted
- Remuneration earned by karta using joint family assets is Hindu undivided family income
- personal office vis-à-vis company does not alter character as between family members
- apportionment of remuneration between individual and family is not permissible when source of earnings is joint family funds
- income of Hindu undivided family arises when asset acquisition and business promotion financed from joint family funds
