# S. RM. CT. PL. PALANI APPA CHETI1AR v. THE COMMISSIOl'll'ER OF INCOME-TAX, MADRAS

- **Citation:** [1968] 2 S.C.R. 55
- **Court:** Supreme Court of India
- **Decided:** 1967-10-26
- **Case number:** Civil Appeal No. 1055 of 1966
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/s-rm-ct-pl-palani-appa-cheti1ar-v-the-commissiol-ll-er-of-income-tax-madras-4235
- **Pages:** 7

## Headnote

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S. RM. CT. PL. PALANI APPA CHETI1AR
v.
THE COMMISSIOl'll'ER OF INCOME-TAX, MADRAS
October 26, 1967
B
[K. N. WANCHOO, C.J., R. S. BACHAWAT,
V. R.AMASWAMI,
c
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G. K. MITTER AND K. S. HEGDE, JJ.j
Indian Incon1e-tax Act ( 11 o/ 1922)-Hindu undil,.ided famil_v .. rhares
acquired fro111 funds o/-Re111unera1ion of karta as A-fanaging DirectorWhetlter inco111e of the family.
Out of the funds of ·a Hindu undivided family, 90 shares out of 300
!'hares of :i. company were purchased. After a fe\ll years the Karta of
the family became a director of the company and y:a.~ later appointed its
Managing Director. The Income-tax Officer added the remuneration of
the karta for the assessment of the Hindu undivided family and on the
basis of the decision of this Court in The C.l.T. West Bengal v. Kalu Bahu
Lal Chand held that the remuneration was to be treated as income of the
family. The assessec appealed unsuccessfully to the Appellate Assistant
Commissioner, but the Tribunal accepted the assessee's plea.
On referw
ence, the High Court answered in favour of the Revenue holding that it.
decision in C.J.1'. Madras v. S. N. N. Sankcralinga Iyer wa~ not authoritative as this Court has subsequently impliedly
overruled that decision in
The C.l.T. West Be111tal v. Kalu Babu Lal Chand and the later decision of
this Court in MI s. Piyare Lal A dish war Lal v. The ·c.1. T. Delhi was distinguishable.
In appeal, this CourtHELD : The remuneration of the Managing Director could not
be
treated a'\ an accretion to the income of the joint family and taxed in ill\
hands.
The shares. in this case, were purchased by the joint family not
with the object that the karta should become the M\inaging Director but
in the ordinary course of investment.
There was no real conaection betwoon the investment of joint family funds in the purchase of the shares
and the appointment of karta as managing director of the com.pany.
Applying the doctrine of Hindu Law, the remuneration of the managjng
diriX:tor
was not earned by any
d~triment to the joint family
assets.
I 59H-60B. Fl
The present case did not fall within the principle of this Court's decision in C./. T. West Bengal v. Ka/u Babu Lal Chand but bore analogy to
this C.ourt's decision in Mis. Piyare Lal Adishwar Lal v. The C.l.T. Delhi.
The deci•ion of the Madras High Court in
C.l.T. Madras v. S. N. N.
Sankara/ing" Iyer was not impliedly over-ruled by this Court in CJ.T.
West Bengal v. Ka/11 Bahu Lal Chand but was distinguished. The facts in
the present case are almost paraJlcl to thoSc in C./. T. i\fadr<zs v. S. N. N.
Sankaralinga Iyer.
[60D·F]
MI s. Piyare Lal Chand Adhishwar Lal v. The C.l.T., Delhi [1960] 3
S.C.R. 669, followed.
.
The C.I. T. West Bengal v. Kali• Babu Lal Chand
[1960] 1 S.C.R.
320, distinguished.
. C.l.T. Madrav v. S. N. N. Sankaralinga Iyer, 18 I.T.R. 194 referred
H
lb.

## Text

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A
S. RM. CT. PL. PALANI APPA CHETI1AR
v.
THE COMMISSIOl'll'ER OF INCOME-TAX, MADRAS
October 26, 1967
B
[K. N. WANCHOO, C.J., R. S. BACHAWAT,
V. R.AMASWAMI,
c
D
E
F
G
G. K. MITTER AND K. S. HEGDE, JJ.j
Indian Incon1e-tax Act ( 11 o/ 1922)-Hindu undil,.ided famil_v .. rhares
acquired fro111 funds o/-Re111unera1ion of karta as A-fanaging DirectorWhetlter inco111e of the family.
Out of the funds of ·a Hindu undivided family, 90 shares out of 300
!'hares of :i. company were purchased. After a fe\ll years the Karta of
the family became a director of the company and y:a.~ later appointed its
Managing Director. The Income-tax Officer added the remuneration of
the karta for the assessment of the Hindu undivided family and on the
basis of the decision of this Court in The C.l.T. West Bengal v. Kalu Bahu
Lal Chand held that the remuneration was to be treated as income of the
family. The assessec appealed unsuccessfully to the Appellate Assistant
Commissioner, but the Tribunal accepted the assessee's plea.
On referw
ence, the High Court answered in favour of the Revenue holding that it.
decision in C.J.1'. Madras v. S. N. N. Sankcralinga Iyer wa~ not authoritative as this Court has subsequently impliedly
overruled that decision in
The C.l.T. West Be111tal v. Kalu Babu Lal Chand and the later decision of
this Court in MI s. Piyare Lal A dish war Lal v. The ·c.1. T. Delhi was distinguishable.
In appeal, this CourtHELD : The remuneration of the Managing Director could not
be
treated a'\ an accretion to the income of the joint family and taxed in ill\
hands.
The shares. in this case, were purchased by the joint family not
with the object that the karta should become the M\inaging Director but
in the ordinary course of investment.
There was no real conaection betwoon the investment of joint family funds in the purchase of the shares
and the appointment of karta as managing director of the com.pany.
Applying the doctrine of Hindu Law, the remuneration of the managjng
diriX:tor
was not earned by any
d~triment to the joint family
assets.
I 59H-60B. Fl
The present case did not fall within the principle of this Court's decision in C./. T. West Bengal v. Ka/u Babu Lal Chand but bore analogy to
this C.ourt's decision in Mis. Piyare Lal Adishwar Lal v. The C.l.T. Delhi.
The deci•ion of the Madras High Court in
C.l.T. Madras v. S. N. N.
Sankara/ing" Iyer was not impliedly over-ruled by this Court in CJ.T.
West Bengal v. Ka/11 Bahu Lal Chand but was distinguished. The facts in
the present case are almost paraJlcl to thoSc in C./. T. i\fadr<zs v. S. N. N.
Sankaralinga Iyer.
[60D·F]
MI s. Piyare Lal Chand Adhishwar Lal v. The C.l.T., Delhi [1960] 3
S.C.R. 669, followed.
.
The C.I. T. West Bengal v. Kali• Babu Lal Chand
[1960] 1 S.C.R.
320, distinguished.
. C.l.T. Madrav v. S. N. N. Sankaralinga Iyer, 18 I.T.R. 194 referred
H
lb.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1055 of
1966.
5 fi
SUPREME COURT REPORTS
il968] 2 S.C.R.
Appeal from the judgment and order dated October 17, 1963
A
or the Madras High Court in T.C. No. 151 of 1962.
R. Gopa/akrishnan, for the appellant.
T. A. Ramachandran and "R. N. Sachthey, for the respondent.
The Judgment of the Court was delivered by
Ramaswami, J.
This appeal is brought, by certificate, from
the judgment of the Madras High Court in T.C. No 151 of 1962
d:1ted October 17, 1963.
B
The appellant (hereinafter referred to as the 'assesscc') is a
Hindu Undivided Family consisting of the father and four major·
sons.
The assessee became a share-holder in
the Trichv-Sri
C
Rangam Transport Company Ltd. (hereinafter referred to as the
·company·) in 1934 and owned 90 shares out of the 300 sham;
of the company.
The shares were acquired with the funds of the
Hindu Undivided family of the father and hio; four major sons.
There were initially four shareholders including the assessee, two
of whom were directors.
On the death of one of the Directors, the
assessee became a director in 1941 and on the death of another
director who was managing the business the assessee became the
Managing Director with effect from 1942.
By a resolution dated
April 16, I 944 the company granted him an honorarium of
Rs. 3,000 for the year 1943-44 and subsequently rai.sdd it gradually till it became .Rs. 1,000 per month with 12!% commission
on the net profits of the company.
The Managing Director had
control over the financial and administrative affairs of the company and the only qualification required was set out under Art. 19
of the Articles of Association of the company which was to the
following effect :
"The qualification of a Director including the first
Director shall be the holding in his own right alone and
not jointly with BDY, other person of not less than 25
shares and the qualification shall be acquired within two
months of appointment."
From 1938-39 to 1959-60 the assessee had been submitting returns in the status of Hindu undivided family and upto 1949-50
the assessments were completed in that status.
For the assessment
years 1950-51 to 1955-56, the assessments were completed in the
status of individual, though returns were submitted in the status of
Hindu undivided family and the remuneration was included in
those assessments.
For the assessment year 1956-57, the assessee
submitted the return in the status of Hindu undivided family but
claimed for the first time that the remuneration and sitting fees
from the company should be assessed separately in the karta's
hands.
The. claim was accepted and a separate assessment made
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PALANI APPA v. C.I.T. (Ramaswami, J.)
57
on him as an individual in respect of the remuneration and commission received from the company.
This continued till the
assessment for the year 1958-59. For the year ended April 13.
1959 which was the previous year for the assessment year 195960, the asse.%ee family returned an income of Rs. 26,780 which
did not include the Salary, Commission and Sitting fees received
by the karta which amounted to Rs. 18,683.
The Income-tax
Officer added the remuneration of the karta for the assessment of
the Hindu undivided family and on the basis of the decision of
this Court in The C.l.T., West Bengal v. Kalu Babu Lal Chand(')
held that the commission was to be treated as income of the family.
The assc;scc appealed to tile i\;irdlaic t\ssistulli Commissioner but
rhc. appc::il \V:tS dis111is:;~d.
The assc'->'i\.:;: toPk the n1attcr in furthc1appeal to the Income-tax Appellate Tribunal, Madras Bench.
The Tribunal held that the case was governed by the decision of
the Madras High Court in C.l.T. Madras v. S. N. N. Sankaralinga
Jyer(") and that the remuneration of the Managinj! Director ought
not to be treated as income of the family.
The Tribunal came to
the conclusion that the judgment in C.l.T .. Madras v. S. N. N ..
Sankara/inga lyer( ") was not affected by the decision of this.
Court in The C.l.T. West Bengal v. Kalu Babu Lal Chand('). At
the instance of the assessee the Appellate Tribunal stated a case
to the Madras Court on the following question of Jaw :
"Whether sums of Rs.
9.000,
Rs.
8, 133
and
Rs. 1.550 received by the assessec as Managing Director's remuneration, commission and sitting fees are assessable as the income of the Hindu undivided family of
which R,1laniappa Chettiar is the Karta ?"
The High Court took the view that the decision in C.l.T., Madras
v. S. N. N. Sankarali11ga Iyer(") was not authoritative a~ this
Court had subsequently impliedly overruled that decision in The
C.l.T., West Bengal v. Kalu Babu Lal Chand(') and the later
decision of this Court in M/s. Pivare Lal Ad;.v/nvar Lal v. The·
C.l.T., Delhi(") was distinguishable.
The High Court held that
the case wa~ governed by the ruling of this Court in The C.l.T.,
West Bengal v. Kalu Babu Lal Chand(') and accordingly decided
the question of law against the assessee and in favour of the·
Income-tax Department.
On behalf of the w.sessee Mr. Gopalakrishnan put fonvard the
argument that the High Court was in error in holding that the
present case was governed by the decision of this Court in The
C.l.T., West Bengal v. Kalu Babu Lal Chand('), that the remuneration earned by the Managing Director wa~ not earned as a
11) [1960] l'S.C.R. 320.
(2! 18 l.T.R. 194."
(3) [1960] 3 S.C.R. 669.
Lf0Sup.(Cll'68-·5
58
SUPREME COURT REPORTS
[1968] 2 s.c.R.
result of the utilisation of the joint family funds in the business and
there was no detriment to the joint family a~sets or the use of the
ioint family assets in the business.
It was not therefore a right
proposition to state that under the principle of Hindu Law the
remuneration of the Managing Director in the present law was
directly an accretion from the utilisation of the joint family funds
and therefore constituted the income of the Hindu joint family.
It was pointed out that in C.f.7' .. West Bengal v. Kalu Babu Lal
Chand( 1 ) the income of the Managing Director arose directly
from the use of joint family funds, but the material facts in the
present case are different.
la our opinion, the argument of the
appellant is well-founded and must be accepted as correct.
In The C.l.T., West Bengal v. Kalu Babu Lal Chand('), one
Rohatgi, manager of a Hindu undivided family, who took over a
husiness as a going concern, promoted a company which was to
take over the business.
The articles of association of the company
provided t~at Rohatgi would be the first managing director at a
remuneration specifi~ in the articles.
The shares which stood
in the name of Rohatgi and his brother were acquired with funds
belonging to the joint family and the joint family was in enjoyment of the dividends paid on those shares, and the company was
floated with funds provided by the family, and was at all material
times financed by the family.
In proceedings for assessment of
tho Hindu undivided family, it was claimed that the managing
director·s remuneration constituted the personal earnings of
Rohatgi and could not be added to the income of the Hindu undivided family.
The claim wa~ rejected by this Court and it was
held that the managing director's remuneration received by
Rohatgi was, as between him and the Hindu undivided family, the
income of the family and should be assessed in its hands.
In other
words, the Court held that there was a real and sufficient connection between the investment of the joint family funds and the
appointment of Rohatgi as the managing director and hence the
managing director's remuneration was, as between him and the
Hindu undivided family, the income of the family and was taxable
in its· hands. That is the true ratio decidendi or the principle
upon which the case was decided.
At pages 331-332 of the
Report S. R. Das, C.J. speaking for the Court set out the basis of
the decision in the following passage :
"The karta was one of the promoters of the Company which he floated with a view to take over the
India Electric Works as a going concern.
In anticipation of die incorporation of that Company the karta of
the family took over the concern, carried it on and
supplied the finance at all stages out of. the joint family
(l) (t960) I S.C.R. 320.
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PALAN! APPA v. C.J.T., (Ramam·ami, J.)
funds and the finding is that he never contributed anything out of his separate property, if he had any.
The
Articles,.of Association of the Company provided for the
appointment as managing director of the very person
who, as the karta of the family, had promoted the
Company.
The acquisition of the business, .the floatation of the Company and appointment of the managing
director appear to us to be inseparably linked together .
.The joint family assets were used for acquiring the concern and for financing it and in lieu of all that detriment
to the joint family properties the joint family got not
only the shares standing in the names of two members
of the family but also, as part and parcel of the same
scheme, the managing directorship of the company when
incorporated. . . . . . . . . . The recitals in the agreement
also clearly point to the fact of B. K. Rohatgi having been
appointed managing director because of his being a promoter of the company and having actually taken over
the concern of India Electric Works from Milkhi Ram
and others.
The finding in this case is that the promotion of the Company and the taking over of the concern
and the financing of it were all done with the help of the
joint family funds and the said B. K. Rohatgi did not
contribute anything out of his personal funds if any.
In
the circumstances, we are clearly of opinion that the
managing director's remuneration received by B. K.
Rohatgi was, as between him and the Hindu undivided
family, the income of. the latter and should be assessed
in its hands."
59
Now, what are the facts found by the Appellate Tribunal in the
present case ? In 1934, the joint family had acquired 90 shares
out of the 300 shares of the company.
The shares were acquired
with the funds of the Hindu undivided family of which the father
was the karta.
On the demise of one of the directors, the assessee
became a director in 1941 and on the death of another direct0r
who was managing the business the assessee became the Managing
Director with effect from 1942. It is apparent therefore that the
joint family had control only of 90 out of 300 shares and the
shares were purchased in the ordinary course of business and not
for the purpose of qualification of the karta to become a director.
The shares were purchased in 1934, about 8 years before the karta
was appointed as the managing director. It is apparent that the
shares were purchased by the joint family not with the object that
the karta should become the managing director but in the ordinary course of investment.
To put it differently, there. was no real
connection . between the investment of joint family funds in the
6()
SUPRL\1F. COURT REPORTS
[1%8] 2 S.C.R.
purchase of the shares an<l the appointment of the karta as
managing director of the company. Applyin)' the doctrine of
Hindu law, the remuneration of the managing director was not
earned by any detriment to the joint family assets.
We are therefore of the opinion that the High Court was in error in holding
that the presont case falls within the principle of the decision of
thi' Court in The C.I. T. West Bcngal v. Ka/11 Bab11 Lal Cha11d(').
On the contrar)', we arc of the opinion that the present case bears
analogy to the decision of this Court in M/.1. Piyarc Lal Adislrwar
Lnl v. Tire C.l.T., Delhi(").
In that case, a member of a Hindu
umiivided family had furnished as security the properties of the
family under an agreement whereby he was appointed treasurer
of a b;mk.
Remuneration received by the manager of the family
for working as a treasurer was claimed to be income of the Hindu
undivided family, because the properties of the family were furnished a' security, but this claim was rejected by this Court on the
ground that there was no detriment and risk to the joint family
property and the emoluments of the treasurer could not be treated
as an accre,tion to the incmae of the Hindu undivided family. We
consider it also nece.~sary to state that the decision of Madras
High Court in C.l.T. Madras v. S. N. N. Sqnkaralinga Iyer(')
was not impliedly overruled by this Court in C.1.T., West Be11gal
v. Ka/11 Babu Lal Cha11d(' ). It was merely pointed out that the
material facts of that case were different from those of Kalu Babu
I.al Cfla11d's case('). It was, for instance, found in C.1.T. Madrns v. S. N. N. Sankarali11ga Iyer(') that the remuneration of the
managing director wa' earned by rendering services to the bani..
and no part of the family funds were utilised except that the neces-
'ary shares to acquire the qualification of a managing director
were purchased out of joint family funds.
It was held that there
was no detriment to the family property in any manner or to any
extent.
In view of this finding it follows that the remuneration
of the managing director could not be treated as an accretion to
the income of the joint family and taxed in its hands.
The proce.''
of reasoning of the Madn:s High Court in C.l.T., Madras v. S. N.
N. Sankara/inga Iyer(") may be open to criticism and may not
be sound but. in our opinion, the actual decision in that case is
correct and is supported by the principle that there is no detriment
to the family property and no part of the family funds had been
spent or utilised for acquiring the remuneration of the managing
director.
The facts in the present case arc almost parallel to those
in C./.T. Madras v. S. N. N. Sa11karali11ga Iyer() and there i' no
detriment to the joint family assets and no part of the joint family
property was spent in earning the remuneration or making the
acquisition. !t therefore follows that the principle of the decision
< 1l (196011 S.C.R. JW.
(~l {196Uj 3 S.C.R. 669.
(ll 18 l.T.R. 19~.
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PALANI APPA v. C.I.T. (Ramas1rami, J.)
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in The C.J.T., West Bengal v. Kalu Babu Lal Chand(') cannot
be applied for deciding the question presented for detennination
in this case.
For these reasons we hold that amounts of Rs. 9.000, Rs. 8, 133
and Rs. 1,550 received by the assessee as managing director's
remuneration, conuni~sion and sitting fees respectively are not
assessable as income of the Hindu undivided family of which
Palaniappa Chettiar is the brta. We accordingly
allow
this
appeal, set aside the judgment of the High Court and answer the
question in f<!vour of the assessee and against the Income-tax
Department.
The appellant is entitled to costs here and in the
High Court.
Y.P.
Appeal allowed.
(I) [1960] I S.C.R. 320.