A R BALAKRISHNAN Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) ONE Balakrishnan was originally a member of a Hindu undivided family along with the father and brothers. The said Hindu undivided family owned business of the "Balakrishna Mills". There was a partition in the said family in 1946, and after this partition the family business was converted into a private limited company. The shareholders of the said private limited company were the members of the erstwhile Hindu undivided family, the total number of equity shares being 3, 601, held by them as follows A. H. S. Ramaswamy (Father) 700 sharesA. H. S. R. Rukmani Ammal (Mother) 101 "A. R. Balakrishnan 700"A. R. Ramakrishnan 700 "A. R. Radhakrishnan 700"A. R. Rathinam 700 "The father, Ramaswamy, was the first managing director of the company as per article 93 of the articles of association. After his death in 1951, his eldest son, Balakrishnan, was elected as the managing director on September 30, 1952. The shareholding of Balakrishnan, his mother and brothers after the death of the father, was as followsA. H. S. R. Rukmani Ammal 241 sharesA. R. Balakrishnan 840 "A. R. Ramakrishnan 840"A. R. Radhakrishnan 840 "A. R. Rathinam 840"The share income from the company as well as the remuneration received by Balakrishnan as managing director of the company were being assessed in his hands as an individual up to the assessment year 1957-58. On March 31, 1958, a son was born to him and from the assessment year 1958-59 onwards, till the assessment year 1962-63, the share income from the company was assessed in the hands of the Hindu undivided family consisting of Balakrishnan and his son and the remuneration received by Balakrishnan as managing director was assessed in his hands as an individualHowever, for the first time in the assessment year 1963-64, the Income-tax Officer took the view that the remuneration received by Balakrishnan as managing director of the company ought to have been assessed in the hands of the Hindu undivided family of Balakrishnan and his son. He, therefore, reopened the assessments for the years 1959-60 to 1962-63 and following the decision of the Supreme Court in Commissioner of Income-tax v. Kalu Babu Lal Chand and of this court in S. Rm. Ct. Pl. Palaniappa Chettiar v. Commissioner of Income-tax, he included the remuneration received by the karta as managing director of the mills in the income of the Hindu undivided family consisting of himself and his son. On the same ground the original assessments for 1963-64 and 1964-65 were also completed including the remuneration of the karta as managing director in the income of the Hindu undivided familyThe Hindu undivided family, the assessee, preferred appeals to the Appellate Assistant Commissioner against the orders of the Income-tax Officer and contended, firstly, that the reopening of the original assessments for the assessment years 1959-60 to 1962-63 was illegal, and, secondly, that the inclusion of the remuneration earned by the karta as managing director of the company in the income of the Hindu undivided family was not legal. The Appellate Assistant Commissioner rejected both the contentions. He held that the decision in Palaniappa Chettiar's case was in the nature of information justifying the reopening of the original assessments and that the assessment of remuneration in the hands of the Hindu undivided family was also justified in the light of the decisions of the Supreme Court and of this court above referred toThe assessee preferred appeals to the Appellate Tribunal contending that the reassessment proceedings under section 147 in respect of the assessment years 1959-60 to 1962-63 were illegal and that the assessment of the remuneration received by the karta as the managing director of the company in the hands of the Hindu undivided family was not justified. As regards the first contention, the Tribunal held that the original assessments were made on the basis of the decision of this court in Commissioner of Income-tax v. S.N.N. Sankaralinga Iyer which is inconsistent with the decision of the Supreme Court in Kalu Babu Lal Chand's case and, therefore, the original assessments being based upon an erroneous rule of law, the correct position of law as enunciated by this court in Palaniappa Chettiar's case amounted to information within the meaning of section 147(b) and that, therefore, the reassessment proceedings were quite valid. As regards the second contention, it was urged by the assessee that, at the point of time when Balakrishnan became the managing director of the company, the Hindu undivided family had no claims over the remuneration earned by the karta and that the remuneration earned by Balakrishnan had no relation to the holding of the shares in the company by the family.

(2.) THE Tribunal observed that out of 840 shares held by Balakrishnan, 700 shares were obtained by him in the partition between himself and his father and brothers and the remaining 140 shares came to him by way of inheritance on the death of his father and that, therefore, all the said 840 shares were ancestral and had become the joint family property of himself and his son. In support of this view the Tribunal relied on the decision of the Supreme Court in Gowli Buddanna's case. As regards the other contention that the remuneration earned by Balakrishnan as managing director of the company has no relation with the family, the Tribunal observed that the managing director of the company can be appointed only from and out of the directors of the company, that in order to become a director one has to hold at least 100 shares of the company in his own right, that it was open for a company to prescribe such qualification for the director, that Balakrishnan was appointed as managing director only because he possessed the basic qualification and he continued to hold that office since the family continued to hold the required number of shares, that, therefore, the holding of the office of the managing director by Balakrishnan was dependent upon the holding of the minimum number of shares of the company by the family and that the principle laid down by the Supreme Court in Kala Babu Lal Chand's case has to be applied and the remuneration received by the karta as managing director of the company has to be treated as income of the Hindu undivided family. At the instance of the assessee the following questions have been referred to this court"

(3.) THE resolution appointing him as the managing director does not show that he has been elected as managing director on behalf of his family. THE appointment could not have been on behalf of the family as there was no joint family on the relevant date. He cannot also be said to have become managing director of the company only for the reason that his family owns 840 shares, for the other three brothers owned the same number of shares as Balakrishnan's family holds and if that 840 shares held by Balakrishnan alone is the reason for his being elected as the managing director, the other three brothers who owned the same number of shares are entitled to claim to be appointed as managing director. THErefore, it is not possible to say that Balakrishnan has been elected as managing director merely because he was holding 840 shares in the company. When an election to the managing director has taken place as between the persons holding equal number of shares, it cannot be said that the election of one of them was only because he held 840 shares in the company. Further, the main test propounded by the Supreme Court in the above decision is to see whether the remuneration received by Balakrishnan is in substance one of the modes of the return for the shares held by the family. As already stated, in this case, there are three other persons who owned the same number of shares each and if the remuneration is treated as a return for the shares held by Balakrishnan's family, then the other brothers will also be entitled to claim equal return for their investments. We, therefore, feel that the remuneration received by Balakrishnan in this case cannot be treated as a return for the shares held by the familyIt is urged by the revenue that there is no evidence in this case to show that the remuneration has been paid for any personal service rendered by Balakrishnan as the managing director, and that even the articles of association proceed on the basis that the managing director will be entitled to his remuneration of Rs. 1, 500 per month without doing any service to the company. We are not inclined to agree with the said contention. Article 93 of the articles of association states that the affairs and business of the company shall be managed by the managing director, who shall have the authority to exercise all the powers, authorities and discretions vested in the directors generally by the articles. Article 94 provides a monthly remuneration of Rs. 1, 500 per month to the managing director and article 95 provides a commission on the net profits of the company in addition to the monthly remuneration provided under article 94. In this case the assessee, right from the beginning, contended that the remuneration was paid to Balakrishnan for the actual services rendered but the authorities below have proceeded on the basis that even if services have been rendered, the remuneration will have to be treated as income of the family for the reason that the family owns the qualification shares.