M/S. Piyare Lal Adishwar Lal vs The Commissioner Of Income-Tax, Delhi

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No.123 of 1957

Decision Date: 26 April 1960

Coram: J.L. Kapur, S.K. Das, M. Hidayatullah

In the case titled M/S. Piyare Lal Adishwar Lal versus the Commissioner of Income‑Tax, Delhi, decided on 26 April 1960, the Supreme Court of India examined the taxability of payments received by a bank treasurer who also acted as karta of a Hindu undivided family.

The judgment was authored by Justice J L Kapur, and the bench comprised Justices J L Kapur, S K Das and M Hidayatullah. The petitioner was M/S Piyare Lal Adishwar Lal and the respondent was the Commissioner of Income‑Tax, Delhi. The official date of the judgment was 26 April 1960 and the decision is reported in 1960 AIR 997 as well as in the Supreme Court Reporter 1960 SCR (3) 669. Subsequent citations of the case appear in several later law reports, including R 1963 SC 683, R 1965 SC 360, D 1966 SC 798, RF 1968 SC 678, R 1969 SC 893, R 1971 SC 1454, RF 1973 SC 637 and related entries. The principal statutory provision discussed was the Indian Income‑Tax Act of 1922, specifically sections 7 and 10, concerning the definition of taxable income.

According to the headnote, the respondent S served as karta of a Hindu undivided family that consisted of himself and his younger brother. Their father had held the position of treasurer of a bank until his death in 1950. During their father’s lifetime, S worked for the same bank as an overseer, earning a monthly salary of Rs 400. After his father’s demise, S was appointed treasurer of the bank’s head office in Delhi and of sixteen additional branches.

In his capacity as treasurer, S furnished security to the bank using certain properties belonging to the Hindu undivided family. An agreement dated 19 September 1950, executed between S and the bank, appointed him as treasurer on a monthly salary of Rs 1,750. The same agreement provided that S would receive additional sums of money for guaranteeing the conduct of cashiers and other members of the cash department staff, whose employment required prior approval of the bank. The agreement required S to perform duties as directed by the bank and made him liable to compensate the bank for any loss caused by his actions. Although personal presence was not mandatory, the bank retained the right to terminate S’s services by notice.

For the financial year 1950‑51, the bank paid S a total of Rs 23,286 as remuneration for his treasurer duties. The income‑tax authorities held that this amount did not constitute S’s individual salary income but rather formed part of the income of the Hindu undivided family, and therefore it was taxed as such. The authorities based their view on three principal grounds. First, they argued that the agreement demonstrated a relationship of employer and independent contractor rather than that of master and servant, rendering the emoluments as profits and gains of a business. Second, they asserted that S’s appointment as treasurer was not due to his personal qualifications but stemmed solely from his father’s prior position as treasurer. Third, they contended that because the security furnished by S derived from joint‑family property, the emoluments could not be said to have been earned without detriment to the family property, and consequently should be treated as family income.

The Court held that, when the agreement dated 19 September 1950 was properly construed, the position of the Treasurer was that of a servant of the Bank. In reaching this conclusion, the Court relied upon the principles articulated in Shivanandan Sharma v. The Punjab National Bank Ltd. [1955] 1 S.C.R. 1427 and Dhayangadhara Chemical Works Ltd. v. State Of Saurashtra [1957] S.C.R. 52. Further, the Court observed that there was no proof that the petitioner had received any special training at the expense of the family’s joint funds, nor was there any indication that his appointment as Treasurer resulted from any outlay or expense that impaired the family property. On the contrary, his earlier service as an overseer of the Bank demonstrated his personal suitability for the role. Consequently, the mere fact that he had pledged joint‑family property as security did not render his remuneration part of the Hindu undivided family’s income. The Court explained that the expressions “risk of” and “detriment to” used in Gokul Chand v. Firm Hukum Chand Nath Mal (1921) L.R. 48 I.A. 162 were distinguished from the situation in Commissioner of Income‑tax v. Kalu Babu Lal Chand [1960] 1 S.C.R. 320. Accordingly, the earnings received by the petitioner were characterized as salary, and therefore fell within the scope of section 7 of the Indian Income‑tax Act, 1922, rather than section 10 as profits or gains of business. The salary was thus the individual income of the petitioner and not part of the income of the Hindu undivided family.

This appeal was filed under the civil appellate jurisdiction, bearing Civil Appeal No. 123 of 1957, and challenged the judgment and order dated 12 May 1955 rendered by the Punjab High Court in Civil Reference No. 17/1953. The appellant, a Hindu undivided family, was represented by counsel for the appellants, while the respondent, the Commissioner of Income‑tax, was represented by counsel for the respondent, including the Solicitor‑General of India. The judgment was delivered by Justice Kapur on 26 April 1960. The matter concerned the assessment year 1951‑52 and arose from a reference under section 66(1) of the Indian Income‑tax Act, which the High Court had decided in favour of the Commissioner. The Hindu undivided family comprised Sheel Chandra, who acted as its Karta, and his younger brother. Their father, Adishwar Lal, who died on 16 April 1950, had served as Treasurer of several branches of the Central Bank of India. During his father’s lifetime, Sheel Chandra was employed by the Bank as an overseer, receiving a salary of Rs 400 per month. Following his father’s death, Sheel Chandra was appointed Treasurer of the Bank at Delhi and sixteen other branches. As Treasurer he furnished security to

The Bank received as security from the Hindu undivided family certain properties, namely the title deeds to immovable land situated in Chandni Chowk, Delhi, together with Government of India securities valued at seventy‑five thousand rupees. The Hindu undivided family possessed a substantial amount of assets; its annual income from house property alone amounted to fifty thousand rupees, and it also owned a considerable portfolio of stocks, shares and additional Government securities. In his capacity as Treasurer, Sheel Chandra obtained from the Bank during the relevant financial year a sum of twenty‑three thousand two hundred eighty‑six rupees. The issue that the Court was called upon to decide concerned whether this amount should be treated as the individual salary of Sheel Chandra or whether it formed part of the income of the Hindu undivided family as a whole.

The Income‑Tax Authorities had concluded that the amount was part of the family income and consequently taxed it accordingly. The Income‑Tax Appellate Tribunal affirmed that position. The Tribunal reasoned that, when the written agreement between Sheel Chandra and the Bank was properly interpreted, the remuneration paid to the Treasurer constituted profits and gains of business rather than ordinary salary. Moreover, the Tribunal observed that the security furnished by Sheel Chandra originated from the joint family property; therefore, the earnings could not be said to have been derived without affecting the family’s assets and consequently must be regarded as income of the Hindu undivided family.

At the instance of the appellant, the Tribunal referred two specific questions to the High Court under section sixty‑six of the Income‑Tax Act. The first question asked whether, on the facts and circumstances and on a true construction of the agreement between the Central Bank of India and Sheel Chandra, the salary and other emoluments received by him as Treasurer should be assessed under the head “salary” or under the head “profits and gains of business”. The second question inquired whether, considering the facts and circumstances, the emoluments of Sheel Chandra as Treasurer of the Central Bank of India Ltd. were rightly assessed in the hands of the Hindu undivided family of which he was the Karta. Both questions were answered against the appellant.

In examining the various clauses of the agreement, the High Court held that the relationship between the Bank and Sheel Chandra was not that of master and servant but rather that of an employer and an independent contractor. Consequently, the Court concluded that the remuneration received by him as Treasurer did not constitute salary but fell within profits and gains of business. Regarding the second question, the High Court expressed the view that the emoluments formed part of the Hindu undivided family’s income because Sheel Chandra was not appointed Treasurer on the basis of any personal qualification. Instead, his appointment was attributable to two principal reasons: first, his father had previously served as Treasurer of the Bank; and second, he had furnished substantial security that derived from the property of the Hindu undivided family.

The appellant, dissatisfied with the High Court’s judgment and order, has therefore filed an appeal before this Court. To determine the true nature of Sheel Chandra’s employment, the Court must examine the agreement dated nineteenth September 1950, entered into between him and the Bank.

The Bank appointed Sheel Chandra as Treasurer for Delhi and sixteen other branches, and the appointment became effective on 16 April 1950. By mutual agreement, he could also be appointed Treasurer at further branches located in Punjab, Uttar Pradesh and Rajasthan. He undertook to perform the duties of Treasurer for all the branches of the Bank and was required to engage and employ subordinate staff known as the Cash Department Staff. The Cash Department Staff comprised persons such as Head Cashiers, Potdars, Guaranteed Peons, Godown Keepers, Assistant Godown Keepers, Chowkidars, Clerks and any other individuals necessary for the efficient operation of the offices.

Sheel Chandra possessed the authority to control, dismiss and change this staff at his pleasure, but he could not engage or transfer any member of the staff without obtaining the Bank’s approval. Moreover, he was obliged to dismiss any staff member if the Managing Director of the Bank or the Agent of the Office required such dismissal. The Treasurer together with the Cash Department Staff were responsible for all work connected with the receipt and payment of monies and bills, as well as any other work customarily performed by cashiers and shroffs of banks.

The Treasurer bore responsibility for the correctness and genuineness of all hundis, cheques, signatures and endorsements in any vernacular language or script, as well as the authenticity of all securities, voucher deeds, documents and writings handled by him or his staff. In the event of loss or damage arising from forged signatures or endorsements accepted as genuine, the Treasurer was required to make good the loss to the Bank. When requested by the Bank, he was to engage the necessary staff, look after goods pledged with the Bank and ensure the good conduct of such staff.

He also had a duty to make enquiries and report on the identity, credit and solvency of persons dealing with the Bank, and he was liable for any loss that resulted from willful misrepresentation or negligence in those enquiries or reports made by him or his representatives. Upon the Bank’s request, he and his representatives were required to give reliable information concerning hundi business, although he was not responsible for any damage or loss arising from that activity.

Further, when asked by Bank officers, he was to value and certify the genuineness, fineness and weight of bullion, gold ornaments and other valuables pledged with the Bank, and he was accountable for any loss to the Bank caused by willful misrepresentation or negligence in that duty. He also undertook to supply the Bank with as many persons as were required at the various branches that the Bank might open in the future.

He agreed to supply the personnel that the Bank would need at any branch that it might open later, and he also accepted responsibility for keeping safe the cash, ornaments and other valuables that were either stored with the Bank or pledged to it. In addition, he undertook to safeguard bills of exchange, promissory notes, hundies and any other securities that the Bank might hold. He further bound himself to assure the Agent or the Manager of each branch that every sum of money and every valuable security that had not been properly used or accounted for remained intact and was situated in the correct place. For all the branches in which he was employed, Sheel Chandra received a monthly salary of Rs. 1,750. Apart from this fixed salary, he was also paid additional sums of money as compensation for guaranteeing the conduct of the Godown Keepers, Assistant Godown Keepers and Chowkidars that he supplied to the Bank.

If the Bank expanded its network of branches or out‑agencies, his salary would be increased in accordance with a mutual agreement between the parties, and whenever a branch was closed his remuneration would be reduced correspondingly. The members of the Cash Department Staff were authorised to receive travelling allowances in line with the Bank’s established rules, and whenever the Treasurer or his authorised representative travelled to different branches, they were entitled to be reimbursed for the actual railway fare incurred. The Bank paid the salaries of the Cash Department Staff directly, but it limited the amount payable to the scale that it had prescribed. Permanent members of the Cash Department Staff were entitled to the usual increments, to the benefits of a Provident Fund and to travelling allowances, all as provided for in the Bank’s rules. The Treasurer was required to engage the Cash Staff on the salaries stipulated by the Bank; if he chose to pay any amount that exceeded the Bank’s scale, he was personally liable for the excess. He also had the authority to nominate and appoint a representative to perform his duties at the various offices of the Bank, although such appointments needed the Bank’s approval. The Treasurer bore responsibility for any omission, commission, neglect or default committed by his representatives or by any member of the Cash Department Staff. Various clauses in the agreement mandated that the Treasurer and his representatives perform their duties efficiently, honestly and properly, and that they remain under the Bank’s control. They were required to make entries in the books of account supplied by the Bank, providing full particulars of all monies received and paid, and to follow any written directions issued by the Bank’s Agent. The Treasurer had to discharge his duties faithfully, and any communication that the Bank sent to a member of the Cash Department Staff was to be deemed a communication addressed to the Treasurer himself, which he was bound to acknowledge.

The agreement required the Treasurer himself to acknowledge any communication from the Bank, and it stipulated that either party could terminate the arrangement by giving three calendar months’ written notice. However, if the Treasurer breached any condition of the agreement, his services could be terminated immediately, although his liability would continue thereafter. The contract also contained a clause providing for arbitration of disputes. Counsel for the appellant argued that the various provisions of the agreement demonstrated that Sheel Chandra was a servant of the Bank rather than an independent contractor. He emphasized that Sheel Chandra was appointed as Treasurer on a monthly salary, that his services could be terminated at once under certain circumstances, and that he was required to perform his duties as directed by the Bank and to discharge those duties faithfully. Moreover, the appellant pointed out that if Sheel Chandra caused any loss to the Bank while discharging his duties, he was obligated to compensate the Bank for that loss. According to this counsel, these circumstances indicated that Sheel Chandra was not an independent contractor or an agent of the Bank but a salaried servant. In contrast, counsel for the respondent contended that the agreement showed that Sheel Chandra was carrying on a business of supplying cashiers and other members of the Cash Department staff to the Bank for monetary consideration. The respondent argued that Sheel Chandra guaranteed the fidelity of those staff members, an assurance that functioned as an insurance undertaking, and that he received certain sums for supplying each class of servant to the Bank. The respondent further noted that the agreement could be terminated by notice, contained an arbitration clause, and did not obligate Sheel Chandra to serve personally. While acknowledging that some terms of the agreement were unusual compared with ordinary service contracts, the respondent observed that such terms are not unexpected in agreements between a bank and a Treasurer. The respondent cited a similar agreement in Shivanandan Sharma v. The Punjab National Bank Ltd., which had been held to be a service agreement rather than an agency agreement. The duties assigned to Sheel Chandra under the contract were described as peculiar to the employment of Treasurers. It was true that, as Treasurer, Sheel Chandra also undertook to indemnify the Bank not only for his own default but also for the default of the Cash Department staff. The respondent explained that banks must handle money, valuable securities, gold and other valuables, and therefore must employ servants whose honesty is assured. It is necessary for a bank to have an employee who can perform these responsibilities responsibly and who can be held answerable for negligence or default in this sphere of work. By the very nature of banking operations, a single individual cannot perform all such tasks at one branch, let alone across several branches; consequently, additional personnel must be employed, and although

In this case the Court observed that all individuals employed in the Cash Department were employees of the Bank and performed duties that a Treasurer would normally and customarily execute. Consequently, the Treasurer bore liability for any loss suffered by the Bank that resulted from his own default or from the default of the Cash Department staff under his supervision. The Court noted that no single test can universally differentiate a master‑servant relationship from that of an employer and an independent contractor. Frequently, the test applied is that a master may dictate both the task to be performed and the manner of performing it, whereas an employer of an independent contractor can specify only the result to be achieved and not the method. However, the Court warned that this criterion does not fit every situation; for example, it fails in the contexts of a ship’s master, a chauffeur, or a newspaper reporter. Referring to the judgment in Cassidy v. Ministry of Health, the Court explained that under a contract of service a person is engaged as an integral part of the business, while a contract for services involves a contractor who is merely accessory to the business. The Court also recalled that certain indicia have been identified to signal a contract of service: the master’s authority to select the servant, the payment of wages or other remuneration, the master’s right to control the manner of work, and the master’s right to suspend or dismiss the servant, as stated in Short v. J. and Henderson Ltd. Further, citing Bhagwati, J.’s observation in Dharangadhara Chemical Works Ltd. v. State of Saurashtra, the Court emphasized that the proper approach is to examine whether, considering the nature of the work, the employer exercised appropriate control and supervision. The Court reiterated that it had already described the Treasurer’s duties, his obligations, and the manner in which the Bank exercised control over him and over the staff he employed in the Cash Department. While it was undeniable that the Treasurer guaranteed the fidelity, good faith and honesty of the Cash Department personnel, the Court held that this guarantee formed part of the specific duties inherent in his employment. Applying the test articulated by Bhagwati, J., the Court concluded that, given the nature of the work and the Bank’s control and supervision over the Treasurer, the Treasurer must be regarded as a servant of the Bank. The next step, the Court said, was to examine the overall effect of the agreement taken as a whole.

Having examined the agreement in its entirety and considered each clause together, the Court concluded that Sheel Chandra, who held the position of Treasurer, was to be regarded as a servant of the Bank. Consequently, there was no need to discuss in detail the various authorities that had been cited during the proceedings. The case of K. P. Bhargava v. The Commissioner of Income‑Tax, U.P. (3) involved a Treasurer of the Central Bank of India at Agra who received a fixed salary of Rs 100 together with a commission for work performed as a Guarantee Commission Agent; however, the contractual terms in that matter were distinct, establishing a clear guarantee commission agency relationship. The citation (1) 62 T L.R. 427, 429 and the reference to the decision in Dharangadhara Chemical Works Ltd. v. State of Saurashtra (2) [1957] S.C.R. 152, 160 further illustrated that the nature of the agreement in the present case differed from those agency arrangements. Likewise, the decision in Lala Jeewan Lal v. Commissioner of Income‑tax (1) was identified as another commission‑agency case, where, under the specific circumstances, the transaction was treated as business within the meaning of section 2(5) of the Excess Profits Tax Act; there, the assessee earned a commission of four annas per cent on the value of contracts secured, which was later increased to Re 1 per cent, and the assessee agreed to reimburse the mill if a purchaser defaulted. Counsel for the respondent also relied on Commissioner of Income‑tax v. V. Kalu Babu Lal Chand (2) [1960] 1 S.C.R. 320, a case in which the Managing Director’s remuneration was held to be income of a joint family and assessed accordingly. That matter was distinguished because the facts involved a Hindu undivided family’s karta who took over a going‑concern business, continued it until incorporation, and used family funds to acquire shares and float the company; the Articles of Association made the office of Managing Director assignable and tied the acquisition, flotation, and appointment together inseparably. The Court observed that those facts were quite different from the present case, which more closely resembled the situation in Shivanandan Sharma v. Punjab National Bank Ltd. (3) [1955] 1 S.C.R. 1427. The remaining issue for determination therefore concerned whether the salary received by Sheel Chandra in his capacity as Treasurer should be taxed as part of the income of the Hindu undivided family of which he was the karta, or as his own separate income. Both the Appellate Tribunal and the High Court had held that the emoluments earned as Treasurer were not acquired without any detriment or risk to the family property and consequently formed part of the family’s income.

The Court further noted that the office of Treasurer in a bank required responsibility, trust, fidelity, personal integrity and capability, and that merely possessing a substantial security was neither the sole nor the principal reason for appointment to such a responsible post in an institution such as the Central Bank of India. It was emphasized that Sheel Chandra’s previous experience as an Overseer of the Bank and his selection after applying for the post indicated his personal fitness for the role. No evidence had been produced to show that he had received any special training financed from the family funds, nor that his appointment resulted from any expenditure, outlay or detriment to the family property. Nonetheless, the respondent argued that because Sheel Chandra had pledged joint‑family property as security, his earnings as Treasurer should be treated as income of the joint family. The Court considered this argument in light of the earlier findings that the remuneration was earned in the capacity of a servant of the Bank and that the family had not suffered any loss or risk in the acquisition of those earnings.

In this case the Court observed that the earnings of the petitioner were derived without any detriment or risk to the family property, as indicated by the cited authorities (1) [1953] 24 I.T.R. 217, (2) [1960] 1 S.C.R. 320 and (3) [1955] 1 S.C.R. 1427, and therefore the earnings formed part of the income of the Hindu undivided family. The Court explained that the post of Treasurer in a bank such as the Central Bank of India involved an employment that required responsibility, trust, fidelity, personal integrity and ability, and that merely having the ability to provide a substantial security was not the sole or even the main reason for appointment to such a responsible position. The Court further noted that the petitioner’s earlier experience as an Overseer of the bank and the fact that he applied for and was selected for the post were clear indicators of his personal fitness for the role. No evidence was shown that the petitioner had received any special training at the expense of the family funds, nor was there any proof that his appointment resulted from any outlay, expenditure or detriment to the family property. The respondent, however, argued that because the petitioner had lodged joint‑family property as security, his earnings as Treasurer should be treated as part of the family income on the ground that the acquisition was not without risk to the family estate. To support this contention the respondent relied on Gokul Chand v. Firm Hukum Chand Nath Mal (1) and Commissioner of Income‑Tax v. Kalu Babu Lal Chand (2). In the former case a member of a joint family entered the Civil Service, an achievement made possible by the expenditure of family funds to obtain the necessary qualifications, and that fact was held to make the member’s earnings part of the family income. A passage from that judgment at page 168 was quoted: “It may be said to be direct in one case and remote in the other, but if risk of or detriment to family property is the point in both cases, there appears to be no such merit in ‘science’, recognised by the sages of Hindu law, as would warrant the exclusion of gains of science as such from the category of partible acquisitions.” Counsel for the respondent particularly relied on the words ‘risk of’ and contended that because the family property had been given as security, the risk described in the earlier judgment arose, making the family liable for any loss that might occur during the petitioner’s employment. The Court held that the word ‘risk’ in that judgment, cited as (1) (1921) 48 I.A. 162 and (2) [1960] 1 S.C.R. 320, must be read in its original context, where family estate was spent to equip a member to join the Indian Civil Service, and the expressions ‘risk of’ or ‘detriment to’ family property were used in that specific circumstance. The Court further observed that the facts and circumstances of Kalu Babu Lal Chand’s case were different, and that the Privy Council cases relied upon in Gokul Chand’s case involved situations where joint family funds were expended to fit a family member for a particular profession, not merely pledged as security for a position of trust.

In the cases earlier referred to, the expenditure had been incurred to equip a member of a joint family for a specific profession or avocation, the income from which formed the subject of the dispute. However, the respondents were unable to point to any authority that held that merely providing joint‑family property as security for the good conduct of a family member occupying a post of trust was enough to convert the emoluments of that post into joint‑family property because of any alleged detriment to, or risk of loss of, the family estate. No evidence was produced to demonstrate that, in the present matter, there was any detriment to the family property within the meaning of the term as applied in decided cases. Consequently, in our view the judgment of the High Court was erroneous on both questions that had been referred to it, and both questions should have been decided in favour of the appellant. The emoluments received by Sheel Chandra were in the nature of salary; therefore, they fell within the scope of section 7 of the Income‑Tax Act and not within section 10 as profits and gains of business. The salary constituted the income of the individual, namely Sheel Chandra, and not the income of the Hindu undivided family. Accordingly, we allowed the appeal, set aside the judgment and order of the High Court, and awarded costs to the appellant in both this Court and the High Court. (1) [1960] 1 S.C.R. 320. Appeal allowed. (2) (1921) 48 I.A. 162.