SETHURAMAN J.


In pursuance of a direction of this court, the following question 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 remuneration 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 service 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 has been assessed in the status of an HUF consisting of himself and his unmarried daughter


Thyagaraja Mudaliar was receiving a remuneration of Rs. 42, 000 per annum as managing director from M/s. Trichy Distilleries and Chemicals Ltd. and a sum of Rs. 36, 000 per annum as managing director from M/s. Venkatesa Thyagaraja (Private) Ltd. for the assessment year 1970-71. 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" assessments for the two years. Before him, it was contended that the remuneration received by Thyagaraja Mudaliar was for the services rendered as "managing director" 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 summarised in the case statedOn appeal, the AAC held that the companies came into being because of the efforts of Thyagaraja Mudaliar and certain others 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 funds of the family had been invested in them. The AAC thus confirmed the assessments. 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 remuneration 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 funds 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's 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 be assessed in the hands of the individual. The Commissioner of Income-tax has obtained a reference on the above question. There are four tax cases because there are two assessments of the family and two assessments 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 field of banking, insurance and other financial institutions as he was a director of the Central Board of the Reserve Bank of India and the Industrial Development Bank of India and the President of the southern area of the local board of the Reserve Bank of India and also a director of the United India Fire and General Insurance Company Ltd., and the Central Govt. had nominated him as a member of the Organic Chemicals Industry panel for the Development Wing. 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 director in the respective companies was not traceable to his shareholding. It is in the light of these facts that we have to consider the question before usThe question as to whether the remuneration received by a person 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 our purpose to refer to the last of the judgments of the Supreme Court in Raj Kumar Singh Hukam Chandji v. CIT. In that case, the assessee was an HUF. It was allotted considerable shares in a company which had taken over certain businesses of the larger family which was partitioned among the several components. The karta was the managing director in some 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 refers to the several tests enumerated that are to be applied in this connection and they are


"The other tests enumerated are


(1) Whether the income received by a 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 realisation of the income ; and


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


In our opinion, from these 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 has 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 funds in that business or that he had obtained the qualification shares from out of the family funds would not make the receipt, 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 director of the firm for the mere reason that his family had purchased considerable shares in the firm and he had been elected as the managing director by the board


In the light of the tests enunciated by the Supreme Court, the only matter that is required to be considered is, whether the remuneration paid to Thyagaraja Mudaliar arose from the holding of shares 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 businesses. The Tribunal had also found as a fact that the shareholding did not play a part in making him the managing director. Therefore, the remuneration received by him cannot be traced to the joint family. The fact that he happens to be the "karta" of the joint family cannot cloud the issue. 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.