Our karta is managing director of a company floated with family money. Is his remuneration his own income or the family's?
The family's, on these facts. The Supreme Court held that as against the company the managing director is the individual appointed, and the company has nothing to do with his family. But as between him and his family the question is whether the remuneration was earned with the help of joint family assets. Here the family funds acquired the business, floated the company and financed it at every stage, the karta put in nothing of his own, and the articles named him as first managing director. Acquisition, floatation and appointment were inseparably linked, so the whole of Rs 61,282 was assessable in the family's hands.
Decided by the Supreme Court (Supreme Court of India; S.R. Das CJ, N.H. Bhagwati and M. Hidayatullah JJ. Judgment by Das CJ) on 1959-05-15, reported as (1959) 37 ITR 123; AIR 1959 SC 1289; (1960) 1 SCR 320; 1960 SCJ 311. It bears on section 4, section 2(31) of the Income Tax Act 1961, in Assessment & Scrutiny and Salary & Perquisites matters.
This is the leading authority on when a karta's remuneration belongs to the family, and its framework is what every such dispute still uses. The Court separated the two relationships: the company or the outside partners deal only with the individual, and the character of the receipt as between him and his family is a different question altogether, answered by asking whether joint family assets helped earn it. It rejected two arguments that are still tried, that a managing directorship is inherently personal because it depends on individual skill, and that because a family cannot itself hold such an office the remuneration must be personal. It also applied Gokul Chand's principle that there is no valid distinction between the direct use of family funds and a use that merely qualified the member to make the gains by his own efforts, and on that footing doubted the reasoning in Sankaralinga Iyer. The contrary decisions were explained as turning on their own findings: no detriment to family property, or an article expressly making the remuneration personal.
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The assessee was a Hindu undivided family whose karta was B.K. Rohatgi. In 1930 he became interested in a concern called India Electric Works, carried on by Milkhi Ram and others, none of them members of the family. It was decided to float a company to take it over as a going concern, and Rohatgi was one of the promoters. Under an agreement with the vendors he took over the business on behalf of the company to be formed with effect from 1 March 1930 and carried it on until the company was incorporated as a private limited company on 19 December 1930. Article 132 named him as first managing director, to continue until resignation, removal or a finding of fraud or dishonesty; article 135 fixed his remuneration at Rs 6,000 a year or 15 per cent commission on net profits; article 136 set out his powers under twenty heads; and article 138 required an agreement with him, which was eventually executed on 31 January 1934 in substantially the same terms. Of 950 ordinary shares of Rs 500 each, 326 stood in Rohatgi's name, 356 in his brother's and 10 in an employee's. Until assessment year 1943-44 the remuneration was credited in the family's books, as were the dividends. For 1943-44 the remuneration of Rs 61,282 was claimed as Rohatgi's personal income. The Income-tax Officer and the Appellate Assistant Commissioner rejected the claim; the Tribunal apportioned Rs 30,000 to his personal services and the rest to the family. On a further statement of case the Tribunal found that all the shares were acquired with family funds and belonged to the family, that the family enjoyed the dividends, and that Rohatgi held the office as karta. The Calcutta High Court rejected the apportionment and held the whole sum assessable on Rohatgi personally.
The appeal was allowed with costs here and in the High Court. The answer to the second question was set aside and the whole of Rs 61,282 held assessable on the family. The answer to the first question, rejecting apportionment, was not challenged and stands. Vis-a-vis the company the managing director is the individual appointed, and the company is not concerned with his family, just as outside partners know only the karta. Whether the receipt is his personal income or the family's cannot arise between the company and him; it arises between him and the members of his family, and turns on whether the remuneration was earned with the help of joint family assets. That a family cannot itself be appointed a managing agent under the Companies Act definition, and that a managing directorship involves a personal element, were both held untenable as reasons for treating the receipt as personal. On the findings, the promotion of the company, the taking over of the concern and its financing were all done with joint family funds and Rohatgi contributed nothing of his own, so the remuneration was the family's income.
The Court built from the settled partnership position. A Hindu undivided family cannot itself be a partner, but a karta may join a firm on behalf of the family; the other members are not partners as against the outsiders and cannot interfere or claim accounts. Whether he joined for himself or for the family is a question of fact, and if he brought in capital from the family till he is treated as having joined for the family and is accountable, so that his share of profits is the family's income. The same reasoning had already been applied to a karta appointed treasurer of a bank and, in Haridas Purshottam, to a managing agency derived from or acquired with the help of joint family property. The Court saw no reason to treat a managing directorship differently. It then dealt with the authorities the other way. Murugappa Chetty turned on the absence of any finding that the agency was obtained for the family or that family property was used or put at risk. Indra Singh turned on an article expressly making the remuneration the managing director's personal income. Darsanram turned on a finding that no family property had been spent in earning the remuneration. Sankaralinga Iyer, on which the High Court had relied, was said not to help, and the Court respectfully doubted its reasoning, because the judges there had overlooked Gokul Chand v Hukam Chand Nath Mal, where the Judicial Committee held there is no valid distinction between the direct use of joint family funds and a use which merely qualified the member to make gains by his own efforts; a member who entered the Indian Civil Service by his own attainments still held his salary for the family because family funds had given him the qualification. Turning to the facts, the Court found the acquisition of the business, the floatation of the company and the appointment as managing director inseparably linked: in return for the detriment to the family properties the family got not only the shares in two members' names but, as part of the same scheme, the managing directorship. The recitals in the agreement pointed the same way, and the years of crediting the remuneration to the family, while not creating any res judicata, were a fact to be taken into account.
The acquisition of the business, the floatation of the Company and appointment of the managing director appear to us to be inseparably linked together.
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Handle my notice → Ask a CA on WhatsAppThe family's, on these facts. The Supreme Court held that as against the company the managing director is the individual appointed, and the company has nothing to do with his family. But as between him and his family the question is whether the remuneration was earned with the help of joint family assets. Here the family funds acquired the business, floated the company and financed it at every stage, the karta put in nothing of his own, and the articles named him as first managing director. Acquisition, floatation and appointment were inseparably linked, so the whole of Rs 61,282 was assessable in the family's hands. This was decided by the Supreme Court (Supreme Court of India; S.R. Das CJ, N.H. Bhagwati and M. Hidayatullah JJ. Judgment by Das CJ) and bears on section 4, section 2(31) of the Income Tax Act 1961. It is reported as (1959) 37 ITR 123; AIR 1959 SC 1289; (1960) 1 SCR 320; 1960 SCJ 311. This is the leading authority on when a karta's remuneration belongs to the family, and its framework is what every such dispute still uses. The Court separated the two relationships: the company or the outside partners deal only with the individual, and the character of the receipt as between him and his family is a different question altogether, answered by asking whether joint family assets helped earn it. It rejected two arguments that are still tried, that a managing directorship is inherently personal because it depends on individual skill, and that because a family cannot itself hold such an office the remuneration must be personal. It also applied Gokul Chand's principle that there is no valid distinction between the direct use of family funds and a use that merely qualified the member to make the gains by his own efforts, and on that footing doubted the reasoning in Sankaralinga Iyer. The contrary decisions were explained as turning on their own findings: no detriment to family property, or an article expressly making the remuneration personal. If it applies to you, the first step is this: Trace the funds. Show, with the books, who paid for the qualifying shares, who financed the company and whether the karta brought in any separate property; the finding on that decides the case.
The assessee was a Hindu undivided family whose karta was B.K. Rohatgi. In 1930 he became interested in a concern called India Electric Works, carried on by Milkhi Ram and others, none of them members of the family. It was decided to float a company to take it over as a going concern, and Rohatgi was one of the promoters. Under an agreement with the vendors he took over the business on behalf of the company to be formed with effect from 1 March 1930 and carried it on until the company was incorporated as a private limited company on 19 December 1930. Article 132 named him as first managing director, to continue until resignation, removal or a finding of fraud or dishonesty; article 135 fixed his remuneration at Rs 6,000 a year or 15 per cent commission on net profits; article 136 set out his powers under twenty heads; and article 138 required an agreement with him, which was eventually executed on 31 January 1934 in substantially the same terms. Of 950 ordinary shares of Rs 500 each, 326 stood in Rohatgi's name, 356 in his brother's and 10 in an employee's. Until assessment year 1943-44 the remuneration was credited in the family's books, as were the dividends. For 1943-44 the remuneration of Rs 61,282 was claimed as Rohatgi's personal income. The Income-tax Officer and the Appellate Assistant Commissioner rejected the claim; the Tribunal apportioned Rs 30,000 to his personal services and the rest to the family. On a further statement of case the Tribunal found that all the shares were acquired with family funds and belonged to the family, that the family enjoyed the dividends, and that Rohatgi held the office as karta. The Calcutta High Court rejected the apportionment and held the whole sum assessable on Rohatgi personally. The matter was decided on 1959-05-15 by the Supreme Court (Supreme Court of India; S.R. Das CJ, N.H. Bhagwati and M. Hidayatullah JJ. Judgment by Das CJ). On those facts the Supreme Court held as follows. The appeal was allowed with costs here and in the High Court. The answer to the second question was set aside and the whole of Rs 61,282 held assessable on the family. The answer to the first question, rejecting apportionment, was not challenged and stands. Vis-a-vis the company the managing director is the individual appointed, and the company is not concerned with his family, just as outside partners know only the karta. Whether the receipt is his personal income or the family's cannot arise between the company and him; it arises between him and the members of his family, and turns on whether the remuneration was earned with the help of joint family assets. That a family cannot itself be appointed a managing agent under the Companies Act definition, and that a managing directorship involves a personal element, were both held untenable as reasons for treating the receipt as personal. On the findings, the promotion of the company, the taking over of the concern and its financing were all done with joint family funds and Rohatgi contributed nothing of his own, so the remuneration was the family's income.
The Court built from the settled partnership position. A Hindu undivided family cannot itself be a partner, but a karta may join a firm on behalf of the family; the other members are not partners as against the outsiders and cannot interfere or claim accounts. Whether he joined for himself or for the family is a question of fact, and if he brought in capital from the family till he is treated as having joined for the family and is accountable, so that his share of profits is the family's income. The same reasoning had already been applied to a karta appointed treasurer of a bank and, in Haridas Purshottam, to a managing agency derived from or acquired with the help of joint family property. The Court saw no reason to treat a managing directorship differently. It then dealt with the authorities the other way. Murugappa Chetty turned on the absence of any finding that the agency was obtained for the family or that family property was used or put at risk. Indra Singh turned on an article expressly making the remuneration the managing director's personal income. Darsanram turned on a finding that no family property had been spent in earning the remuneration. Sankaralinga Iyer, on which the High Court had relied, was said not to help, and the Court respectfully doubted its reasoning, because the judges there had overlooked Gokul Chand v Hukam Chand Nath Mal, where the Judicial Committee held there is no valid distinction between the direct use of joint family funds and a use which merely qualified the member to make gains by his own efforts; a member who entered the Indian Civil Service by his own attainments still held his salary for the family because family funds had given him the qualification. Turning to the facts, the Court found the acquisition of the business, the floatation of the company and the appointment as managing director inseparably linked: in return for the detriment to the family properties the family got not only the shares in two members' names but, as part of the same scheme, the managing directorship. The recitals in the agreement pointed the same way, and the years of crediting the remuneration to the family, while not creating any res judicata, were a fact to be taken into account. In the words reproduced by the source cited on this page: "The acquisition of the business, the floatation of the Company and appointment of the managing director appear to us to be inseparably linked together."
It was decided by the Supreme Court on 1959-05-15 and is reported as (1959) 37 ITR 123; AIR 1959 SC 1289; (1960) 1 SCR 320; 1960 SCJ 311. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 4, section 2(31), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was allowed with costs here and in the High Court. The answer to the second question was set aside and the whole of Rs 61,282 held assessable on the family. The answer to the first question, rejecting apportionment, was not challenged and stands. Vis-a-vis the company the managing director is the individual appointed, and the company is not concerned with his family, just as outside partners know only the karta. Whether the receipt is his personal income or the family's cannot arise between the company and him; it arises between him and the members of his family, and turns on whether the remuneration was earned with the help of joint family assets. That a family cannot itself be appointed a managing agent under the Companies Act definition, and that a managing directorship involves a personal element, were both held untenable as reasons for treating the receipt as personal. On the findings, the promotion of the company, the taking over of the concern and its financing were all done with joint family funds and Rohatgi contributed nothing of his own, so the remuneration was the family's income. It arises in Assessment & Scrutiny and Salary & Perquisites matters, on section 4, section 2(31) of the Income Tax Act 1961, and was decided by Supreme Court of India; S.R. Das CJ, N.H. Bhagwati and M. Hidayatullah JJ. Judgment by Das CJ. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. If the remuneration is to be personal, say so expressly in the articles or the appointment agreement, as was done in Indra Singh, and be able to show the office was not part and parcel of the same scheme as the family's investment. Be consistent from the first year. Crediting the remuneration to the family for years and then claiming it personally was held to be a fact against the assessee, even though there is no res judicata. Do not argue for an apportionment between personal services and the family's contribution; counsel abandoned that middle course here and the High Court's rejection of it was not challenged. Where the office genuinely rests on the individual's own qualifications and no family property was spent or put at risk, plead those facts specifically, since that is the ground on which the contrary decisions were distinguished.
Still good law. The source page records the decision as cited in some eighty-five later cases and it remains the leading authority on whether a karta's remuneration is the family's income, applied to directors, partners, treasurers and managing agents alike. The question it decides is one of Hindu law and of whose income a receipt is, which the change from the 1922 Act to the 1961 Act did not affect; the charge is now in section 4 read with the definition of person in section 2(31). Its later history was not separately traced in this session. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The batch line gave the sections as 2(31), 4 and 15. The judgment turns on whose income the receipt is, under the charging provisions of the Indian Income-tax Act, 1922, whose 1961 equivalents are section 4 read with section 2(31); the head under which the remuneration was assessed, and therefore section 15, is not in issue and is not discussed. The Court did not decide whether apportionment between personal services and the family's contribution can ever be right, since the High Court's rejection of it was not challenged before it, though the reasoning leaves little room for it. It did not overrule Sankaralinga Iyer, saying only that its judges appear to have overlooked Gokul Chand and that it does not govern these facts. The judgment does not say why the agreement contemplated by the articles was not executed until January 1934, and the printed text is corrupt in places, including the closing words of the order. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was allowed with costs here and in the High Court. The answer to the second question was set aside and the whole of Rs 61,282 held assessable on the family. The answer to the first question, rejecting apportionment, was not challenged and stands. Vis-a-vis the company the managing director is the individual appointed, and the company is not concerned with his family, just as outside partners know only the karta. Whether the receipt is his personal income or the family's cannot arise between the company and him; it arises between him and the members of his family, and turns on whether the remuneration was earned with the help of joint family assets. That a family cannot itself be appointed a managing agent under the Companies Act definition, and that a managing directorship involves a personal element, were both held untenable as reasons for treating the receipt as personal. On the findings, the promotion of the company, the taking over of the concern and its financing were all done with joint family funds and Rohatgi contributed nothing of his own, so the remuneration was the family's income.
TaxSphere, “CIT v Kalu Babu Lal Chand”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-kalu-babu-lal-chand-karta-remuneration-family-income/ (validity last checked 2026-08-29)
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