JUDGMENT H.N. Seth, J.
1. The following question of law, based on identical set of facts, has been referred to this court for opinion in the above noted references :
"Whether the Tribunal, on the facts and in the circumstances of the case, was right in holding that the salary received by the assessee was the income of the Hindu joint family of which the assessee was the karta, and not his individual income ?"
2. The assessees are brothers and along with their father constituted a Hindu joint family. This joint family carried on business in the name and style of Kohinoor General Industries up to the assessment year 1959-60. Later, there was a partial partition in the family when the joint family business was converted into a partnership firm consisting of the two brothers and their father as partners. In July, 1961, a private limited company was formed in the name and style of M/s. Ghaziabad General Industries (P.) Ltd., which took over the business run by the partnership firm. The assessees and their father were appointed as lifetime directors of the company. Article 15 of the Articles of association provides that if any director is willing he may be called upon to perform extra services for the business of the company and may be remunerated for such services. The assessees agreed to render extra services and for the assessment year 1962-63, a remuneration of Rs. 5,400 was paid to each one of them. The assessees claimed that the remuneration so received by them was for personal exertion by rendering extra services to the company and, therefore, constituted their personal income and should be so assessed.
3. The Income-tax Officer rejected the contention and included the salary received by the assessees in the assessment of the joint family on the ground that the shares which qualified them to become directors of the company were acquired out of the joint family funds. The Appellate Assistant Commissioner affirmed the decision holding that there was direct connection between the shareholding of the company and the receipt of the remuneration. The Tribunal found that undisputedly the shares were acquired with the family funds and the appointment as a lifetime director was based upon the shares. If the assessees were not appointed as directors, which they could become by reason of their shareholding which they acquired with the funds of the joint family, the assessees would not have been able to perform any extra service. In the opinion of the Tribunal the performance of the extra services did not alter the character of the income. At the instance of the assessees the question set out above has been referred to this court for opinion.
4. A Bench of this court of which one of us was a member, by an order dated May 18, 1973, directed the Tribunal to record a finding on the material already on record as to whether the assessees rendered any service to the company and if so what was the nature and extent of service. The Bench took the view that the fact that the assessees acquired the shares which qualified them to become directors out of the joint family funds is not decisive nor is decisive the fact that there is a provision in the articles of association authorising such payments. The answer to the question would depend on the nature and extent of services rendered by the assessees to the company, namely, as to whether the services rendered were of such a nature as depended on the personal qualification of the assessees or were of a general nature.
5. The Tribunal has submitted a supplementary statement of the case. It referred to a letter of the assessec (P. V. Kakkar) dated February 22, 1967, addressed to the Income-tax Officer as the only relevant material on record. In the letter it was asserted that the assessee had good experience in the line of business carried on by the company and was actively engaged in the daily conduct and working of the company and that the holding of shares had nothing to do with his earning from the company as salary. The Tribunal, on an interpretation of its earlier order, took the view that the Tribunal may be said to have found it as a fact that some services were rendered by the assessee to the company. There is no finding with regard to the nature and extent of services rendered by the assessees to the company, namely, as to whether the services rendered were of such a nature as depended on the personal qualification of the assessees. The Tribunal may be said to have recorded a finding that the assessees rendered some service of a general nature.
6. The question of law arising for our decision, based on more or less similar set of facts, came up for consideration before the Supreme Court in P. N. Krishna Iyer v. Commissioner of Income-tax [1969] 73 ITR 539, 546 (SC). In that case the karta of a Hindu undivided family received salary, commission and sitting fees as governing director of a private company which carried on transport business. The shares which qualified the karta to become a member of the company were purchased with the aid of joint family funds. The entire capital assets of the company originally belonged to the joint family and were made available to the company in consideration of a mere promise to pay the amount for which the assets were valued. The Supreme Court observed :
"The income was primarily earned by utilising the joint family assets or funds and the mere fact that in the process of gaining the advantage an element of personal service or skill or labour was involved did not alter the character of the income."
7. It was held that the entire income earned by way of salary, commission and sitting fees along with the dividends were assessable in the hands of the Hindu undivided family.
8. In Raj Kumar Singh Hukam Chandji v. Commissioner of Income-tax [1970] 78 ITR 33, 43, 44 (SC) the Supreme Court after a review of earlier decisions, observed :
".....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 a 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 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 qualification shares from out of the family funds would not make the receipt, the income of the Hindu undivided family."
9. On the facts of the case the Supreme Court held that the income received by the assessee did not belong to the Hindu undivided family as the assessee did not become the managing director of the firm for the mere reason that his family had purchased considerable shares in the firm. He was elected managing director by the board of directors and there was no material to hold that he was elected managing director on behalf of the family. The finding recorded by the Tribunal was that he was not appointed as managing director as a result of any outlay or expenditure of or detriment to the family property. On facts, that case is clearly distinguishable and is of no assistance to the assessees.
10. A similar question arose for consideration before this court in Bimal Kumar Jain v. Commissioner of Income-tax [1974] 93 ITR 225 (All). In that case a Hindu undivided family owned almost half the shares of a company. The karta of the family was appointed a director under the articles of association of the company. He was appointed the general manager of the company and the remuneration payable to him was fixed by the board of directors consisting of the assessee and his father. There was no contract of service or evidence of personal service rendered by the assessee. It was held that the assessee became the general manager because of the shares held by the family and the remuneration received by him was an increased share of the income of the company paid to him as a representative of the family and the amount was, therefore, assessable as the income of the family.
11. The facts of the cases in hand are almost identical. The original joint family business after a partial partition in the family was converted into a partnership firm consisting of the assessees and their father as partners. The private limited company took over the business run by the partnership firm. The assessees and their father were appointed as lifetime directors of the company under the articles of association of the company and not by the board of directors subsequent to the formation of the company. The assessees did not contribute any amount towards the share capital of the company. No contract of service between the company and the assessees has been produced to show the nature and extent of services rendered by the assessees to the company. Except for the finding that the assessees rendered some service to the company ; there is no finding that the assessees possessed any special qualifications and the services rendered by them were of a specialised nature and not of a normal or routine nature. The remuneration payable to them was determined by the board of directors consisting of themselves and their father.
12. Keeping in view the principles enunciated in the cases referred to above it must be held that the remuneration paid to the assessees was because of the shares held by the family and not on account of their personal qualifications even though they rendered some service of a general nature. The real nature of the remuneration paid to them was an increased share of the income of the company paid to them as representing the family and not what it apparently purported to be.
13. We accordingly answer the question in the affimative, in favour of the department and against the assessees. The department is entitled to its costs which we assess at Rs. 200.