M/S. Piyare Lal Adishwar Lal Vs. The
Commissioner of Income-Tax, Delhi  INSC 90 (26 April 1960)
CITATION: 1960 AIR 997 1960 SCR (3) 669
CITATOR INFO :
R 1963 SC 683 (7,21,26,30) R 1965 SC 360 (9)
D 1966 SC 798 (10,12) RF 1968 SC 678 (2,4) R 1969 SC 893 (9) R 1971 SC1454 (9)
RF 1973 SC 637 (7)
Income Tax-Agreement between Treasurer and
Bank-Construction-Treasurer, whether servant of Bank- Treasurer furnishing
security of joint family property- Emoluments received by Treasurer, whether
income of joint family-Indian Income-tax Act, 1922 (II of 1922), ss. 7, 10.
S was the karta of the Hindu undivided
family, consisting of himself and his younger brother. Their father was the
Treasurer of a Bank till his death in 1950. During his father's lifetime S was
employed as an overseer in the Bank on a salary of Rs. 400 a month, and,
subsequently, after his father's death he was appointed Treasurer of the Bank
at Delhi and sixteen other branches of the Bank. As Treasurer he furnished
security to the Bank of certain properties of the Hindu undivided family. The
agreement dated September 19, 1950, between him and the Bank, showed that he
was appointed Treasurer on a monthly salary of Rs. 1,75o and he was also paid
certain sums of money for guaranteeing the conduct of the cashiers and other
members of the Cash Department Staff which he was required to employ with the
approval of the Bank. He was to carry out his duties as directed by the Bank
and if in the discharge of his duties he caused any loss to the Bank he was
liable to make good the loss. He was not required to serve personally, but his
services could be terminated by notice. In the year of account 1950-51 he
received from the Bank a sum of RS. 23,286 as Treasurer. The Income-tax
authorities considered that this sum was not the individual income of S as
salary but was part of the income of the Hindu undivided family and taxed if as
such on the grounds (1) that the agreement between S and the Bank showed that
the relationship between them was not one of master and servant but that of an
employer and independent contractor and that the emoluments received by the
Treasurer were profits and gains of business, (2) that S was appointed Treasurer
not on account of any personal qualification but because his father was a
Treasurer of the Bank before him, and (3) that as the security furnished by S
came out of the joint family properties, the emoluments could not be said to
have been earned without detriment to the family property and therefore were
part of the Hindu undivided family:
Held, (1) That on the true construction of
the agreement dated September 19, 1950 the Treasurer was a servant of the Bank.
Shivanandan Sharma v. The Punjab National
Bank Ltd.  1 S.C.R. 1427 and Dhayangadhara Chemical Works Ltd. v. State
Of Saurashtra,  S.C.R. 52, relied on.
(2) That in view of the fact that there was
nothing to show that S had received any particular training at the expense of
the 87 670 family funds or that his appointment as Treasurer was the result of
any outlay or expenditure of or detriment to the family property, but on the
other hand his previous experience as an overseer of the Bank was indicative of
personal fitness for his appointment as Treasurer, the mere fact he had lodged
joint family property by way of security would not make his earnings as
Treasurer part of the income of the Hindu undivided family.
The use of the words " risk of "
and " detriment to " in Gokul Chand v. Firm Hukum Chand Nath Mal,
(1921) L.R. 48 I.A. 162, explained.
Commissioner of Income-tax v. Kalu Babu Lal
Chand,  1 S.C.R. 32o, distinguished.
Accordingly, the emoluments received by S
were in the nature of salary and therefore assessable under s. 7 of the Indian
Income-tax Act, 1922, and not under s. 10 of the Act as profits and gains of
business, and the salary was the income of the individual, S, and not the
income of the Hindu undivided family.
CIVIL APPELLATE JURISDICTION: Civil Appeal No.123
Appeal from the judgment and order dated May
12, 1955, of the Punjab High Court in Civil Reference No. 17/1953.
A. V. Viswanatha Sastri, S. N. Andley, J. B.
Dadachanji, Rameshwar Nath and P. L. Vohra, for the appellants.
C.K. Daphtary, Solicitor-General of India, R.
Ganapathy Iyer and D. Gupta, for the respondent.
1960. April 26. The Judgment of the Court was
delivered by KAPUR, J.-This is an appeal against the judgment and order of the
High Court of Punjab made on a reference under s. 66(1) of the Indian
Income-tax Act which was answered in favour of the Commissioner of Income-tax.
The appellant is the assessee-a Hindu undivided family-with Sheel Chandra as
its Karta and the respondent is the Commissioner of Income- tax.
The appeal relates to the assessment year
1951-52. The appellant, a Hindu undivided family, consisted of Sheel Chandra
and his Younger brother. Their father, Adishwar La], upto his death on April
16, 1950, was the Treasurer of several branches of the Central Bank of India
(which in the judgment will be referred to as the Bank). During his father's
lifetime Sheel Chandra was employed as an Overseer in the Bank on a salary of
Rs. 400 a month. Sheel Chandra was appointed Treasurer of the Bank at Delhi and
sixteen 671 other branches of the Bank. As Treasurer he furnished security to
the Bank of certain properties of the Hindu undivided family, which consisted
of title deeds of immovable properties in Chandni Chowk, Delhi, and Government
of India securities of the value of Rs. 75,000. The Hindu undivided family owns
considerable property. Its income from house property alone is Rs. 50,000 per
annum and it owns stocks, shares and Government securities also of considerable
value. As Treasurer Sheel Chandra received in the year of account from the Bank
a sum of Rs. 23,286 and the question for decision is whether this sum is the
individual income of Sheel Chandra as salary or it is part of the income of the
Hindu undivided family. The Income-tax Authorities held this sum to be the latter
and taxed it as such. The Income-tax Appellate Tribunal in upholding this view
held that on a proper construction of the written agreement between Sheel
Chandra and the Bank, the emoluments received by the Treasurer were profits and
gains of business and it further held that as the security furnished by Sheel
Chandra came out of the joint family proper. ties, the emoluments could not be
said to have been earned without detriment to the family property and therefore
were part of the income of the Hindu undivided family. At the instance of the
appellant the Tribunal referred under s. 66(1) the following two questions to
the High Court:- (1)" Whether in the facts and circumstances of the case
and on a true construction of the agreement between the Central Bank of India
and Sheel Chandra the salary and other emoluments received by Sheel Chandra as
Treasurer of the said Bank are assessable under the head ' salary ' or under
the head 'Profits and gains of business'." (2)" Whether in the facts
and circumstances of the case, Sheel Chandra's emoluments as Treasurer of the
Central Bank of India Ltd. were rightly assessed in the hands of the Hindu
undivided family of which he is the Karta".
Both questions were answered against the
On a consideration of the various clauses of
the agreement between Sheel Chandra and the Bank, the 672 High Court held that
the relationship between them was not one of master and servant but that of an
employer and independent contractor and therefore the emoluments received by
Sheel Chandra as Treasurer were not salary but profits and gains of business.
As to the second question the High Court was of the opinion that the emoluments
were the income of the Hindu undivided family because Sheel Chandra was :not
appointed Treasurer on account of any personal qualification but he was
appointed because (a) his father was a Treasurer of the Bank before him and (b)
he had furnished substantial security which was part of the property of the
Hindu undivided family. Against this judgment and order the appellant has come
in appeal to this Court.
The nature of the employment of Sheel Chandra
has to be gathered from the agreement dated September 19, 1950, between him and
the Bank. It shows that on his application for appointment as a Treasurer at
Delhi and sixteen other branches of the Bank, the Bank appointed him Treasurer
for those branches and he could ' by mutual agreement, be appointed at other
branches in the Punjab, U. P. and Rajasthan. The appointment took effect from
April 16, 1950.
Sheel Chandra undertook to perform the duties
and be responsible as Treasurer of the various branches of the Bank and was
required to engage and employ subordinate staff called the Cash Department
Staff such as Head Cashiers, Potdars, Guaranteed Peons, Godown Keepers,
Assistant Godown Keepers, Chowkidars and Clerks and other persons necessary for
the efficient working of the said offices. He had the power to " control,
dismiss and change" this Staff at his pleasure but he could not engage or
transfer any member of the Staff except with the approval of the Bank and had
to dismiss any such member if so required by the Managing Director of the Bank
or Agent of the Office.
The Treasurer and the Cash Department Staff
were to do and be responsible for all work in connection with receipts and
payments of monies and bad to do ouch other work as was customarily done by
cashiers 673 and shroffs of Banks. The Treasurer was also responsible for the
correctness and genuineness of all hundies and cheques bearing signatures and
endorsements in vernacular and for genuineness of all signatures and writings
in any language or character or any securities, voucher deeds, documents and
writings which the Treasurer or the Cash Department Staff dealt with and in
case of any loss or damage arising out of any forged signatures and
endorsements on any document accepted or dealt with by the Cash Department
Staff as correct and genuine, the Treasurer was responsible to make good the
loss. He was also required, when asked by the Bank, to engage the necessary
staff, to look after the goods pledged with the Bank and he was responsible for
the good conduct of such staff. It was also his duty to make enquiries and
report upon the identity, credit and solvency of persons dealing with the Bank and
was liable for any loss arising out of any wilful misrepresentation or
negligence in the enquiry or report made by him or his representative in any
matter arising in the course of employment. He or his representative were also
required, when asked, to give reliable information in regard to hundi business
but he was not responsible for any damage or loss arising there from. He also
undertook when required by the Officers of the Bank to value and give correct
certificate in regard to the genuineness, fineness and weight of bullion and
gold ornaments and other valuables pledged with the Bank. He was responsible
for any loss to the Bank in case of any wilful misrepresentation or negligence
in regard to this branch of his duty. He further undertook to supply to the
Bank as many persons as were required at the various branches of the Bank which
the Bank opened in future. He undertook responsibility for the safe custody of
the monies and ornaments and other valuables kept with or pledged with the Bank
as also for the bills of exchange, promissory notes, hundies or other
Besides this he was required to satisfy the
Agent or the Manager of the branch that all the monies of the Bank and other
valuable securities which had not been duly 674 used and accounted for were
intact and in their proper places.
Sheel Chandra was paid a salary of Rs. 1,750
per mensem for all the branches he was employed in. Besides this he was paid
certain sums of money for guaranteeing the conduct of Godown Keepers, Assistant
Godown Keepers and Chowkidars supplied by him. If the branches or out-agencies
were increased he was to receive such increase in salary as might mutually be
agreed upon. On the closing of any branch there was to be a corresponding
reduction in the remuneration.
The members of the Cash Department Staff were
to be paid travelling allowance according to the rules of the Bank. In addition
to the remuneration above mentioned the Treasurer or his authorised
representative when visiting different branches were to get actual railway
fare. The various members of the Cash Department Staff were to be paid their
salary directly by the Bank but the Bank was not bound to pay more than the
scale laid down by it. The permanent members of the Cash Department Staff were
to get the usual increments and benefit of Provident Fund and travelling
allowance in accordance with the rules of the Bank. The Treasurer was required
to engage members of the Cash Staff on salaries laid down by the Bank and if he
paid anything more than the usual Bank scale he had to pay it himself.
The Treasurer was also entitled to nominate
and appoint a representative to carry on the duties undertaken by him at the
various offices of the Bank but these appointments were Subject to the approval
of the Bank.
The Treasurer was responsible for the acts of
omission and commission and for neglect and default of his representatives and
for each and every member of the Cash Department Staff. There are various
clauses in the agreement requiring the Treasurer or his representative to
perform their duties efficiently, honestly and in a proper manner. The
Treasurer and the Cash Department Staff were under the control of the Bank.
They were required to make entries in the books of account which were furnished
by the Bank giving full particulars of all monies received and paid 675 by them
and in such manner as the Agent of the Bank might from time to time direct in
writing. The Treasurer had to carry out his duties faithfully and any
communication made by the Bank to any member of the Cash Department Staff was
to be considered as a communication made to the Treasurer himself and he was
bound to take notice of it. The agreement could be terminated by three calendar
months' notice in writing by either side but in the event of any breach of any
condition of the agreement by the Treasurer his services could be terminated
forthwith; but his liability was to continue. There was also an arbitration
Counsel for the appellant contended that the
various provisions of the agreement showed that Sheel Chandra was a servant of
the Bank and not an independent contractor. He laid particular emphasis on the
fact that he was appointed a Treasurer on a monthly salary and his services
could be terminated forthwith in certain circumstances. Besides this he was to
carry out his duties as directed by the Bank and was to discharge his duties
faithfully and if in the discharge of his duties he caused any loss to the Bank
he was liable to make good the loss. These factors, according to him, showed that
he was not an independent contractor or an agent of the Bank but was a salaried
servant. The contention on behalf of the respondent on the other hand was that
the agreement showed that Sheel Chandra was carrying on a business in that he
was supplying cashiers and other members of the Cash Department Staff for a
monetary con- sideration. He guaranteed their fidelity which was an insurance
undertaken by him. He was to get certain sums of money for supplying each
member of certain classes of servants to the Bank and the agreement between the
Bank and Sheel Chandra could be terminated by notice and there was an
arbitration clause and he was not required to serve personally.
Undoubtedly there are some terms in the
agreement which are unusual as ordinary agreements of service go but in the
case of an agreement between a Bank and a Treasurer they are riot so Unusual.
There was 676 an agreement with very similar clauses in Shivanandan Sharma v.
The Punjab National Bank Ltd. (1) and it was held to be an agreement of service
and not of agency.
Now, the duties of Sheel Chandra under the
agreement are such as are peculiar to the employment of Treasurers. It is true
that as Treasurer, Sheel Chandra had also undertaken to indemnify the Bank not
only for his own default but also for the default of the members of the Cash
But Banks have to deal with monies, valuable
securities, gold and other valuables and must necessarily employ servants whose
honesty is guaranteed and it is necessary for the Bank to have someone in its
employment who can perform these duties in a responsible manner and be
answerable to the Bank for negligence and default in the performance of this
class of work. In the very nature of things one man cannot do all this work,
not even at one branch, what to say of several branches; other people have
therefore to be employed and although the persons employed in the Cash
Department are servants of the Bank they do the work which Treasurers
ordinarily and customarily do and consequently the Treasurer is made
responsible for any damage which the Bank suffers due to the default of the
Treasurer or of those employed to do the work of the Cash Department.
It is difficult to lay down any one test to
distinguish the relationship of master and servant from that of art employer
and independent contractor. In many cases the test laid down is that in the
case of master and servant the master can order or require what is to be done
and how it is to be done but in the case of an independent contractor an
employer can only say what is to be done but not how it shall be done. But this
test also does not apply to all cases, e.g., in the case of Ship's master, a
chauffeur or a reporter of a newspaper. It was pointed out in Cassidy v.
Ministry of Health (2) that in the case of contract of service " a man is
employed as part of the business, and his work is done as an integral part of
the business whereas under a contract for services the contractor is not (1)
 1 S.C.R. 1427.
(2)  2 K.B. 343, 352-3.
677 integrated into the business but is only
accessory to it".
In certain cases it has been laid down that
the indicia of a contract of service are (a) the master's power of selection of
the servant; (b) the payment of wages or other remunerations; (c) the master's
right to control the method of doing the work and (d) the master's right of
suspension or dismissal: Short v. J. and Henderson Ltd. (1). Bhagwati, J., in
Dharangadhara Chemical Works Ltd. v. State of Saurashtra (2) said that in all
cases the correct method of approach is whether having regard to the nature of
work there was due control and supervision by the employer.
We have given above the duties of the
Treasurer in the present case, his obligations and the manner of control
exercised over him and the staff employed by him to carry out the work of the
Cash Department of the Bank. It is no doubt true that the Treasurer guaranteed
his fidelity, good faith and honesty of the persons who were employed in the
Cash Department of the Bank but that was a part of the duty that he undertook
and that is peculiar to the very nature of his employment. Applying the test
which was laid down by Bhagwati, J., in Dharangadhara Chemical Works Ltd. v.
State of Saurashtra (2) that having regard to the nature of the work whether
there was due control and supervision of the Bank over the Treasurer, the
Treasurer in the instant case must be held to be a servant of the Bank. What we
have to see is the effect of the agreement as a whole and taking the various
clauses together it must be held that Sheel Chandra, the Treasurer, was a
servant of the Bank. In view of this it is not necessary to discuss in detail
the various cases that were cited at the bar. K. P. Bhargava v. The
Commissioner of Income-Tax, U. P. (3) was the case of a Treasurer of the
Central Bank of India at Agra. There he was paid a salary of Rs. 100 and a
commission for his work as a Guarantee Commission Agent but the terms of the
contract were different and that was clearly a case of a Guarantee Commission
(1) 62 T L.R. 427, 429. (2)  S.C.R.
(3)  26 1 T.R. 489.
88 678 Lala Jeewan Lal v. Commissioner of
Income-tax(1) was also a case of commission agency and in the peculiar
circumstances of that case it was held to be business within s. 2(5) of the
Excess Profits Tax Act. The assessee there was paid a commission of 4 annas per
cent. on the value of the contracts secured by him. Subsequently the commission
was increased to Re.1 per cent. and for this extra commission he agreed to
reimburse the mill in case of failure of a person purchasing through him to pay
the price. Counsel for the respondent also relied on Commissioner of Income-tax
V. Kalu Babu Lal Chand (2) where the Managing Director's remuneration was held
to be the income of a joint family to be assessed as such in its hands. That
case is distinguishable. There the karta of a Hindu undivided family took over
a business as a going concern and carried on the business till the company was
incorporated. The shares in the name of karta and his brother were acquired
with the funds of the joint family. The company was floated with the funds of
the joint family and was financed by it and the remuneration received was
credited in the books of the family. The office of the Managing Director itself
was assignable. The Articles of Association provided that the karta or his
assigns or successors in business " whether under his name or any other
style or firm " would be the Managing Director of the Company and he was
to continue for life until removed because of fraud or dishonesty. Thus the
acquisition of business, the flotation of the Company and the appointment of
the Managing Director were inseparably linked together. The facts of that case
were quite different from that of the present case which are akin to the facts
in Shivanandan Sharma v. Punjab National Bank Ltd.
The next question for decision is whether the
salary of Sheel Chandra as Treasurer of the Bank is assessable as part of the
income of Hindu undivided family of which he is the karta or as his separate
income. Both the Appellate Tribunal and the High Court were of the opinion that
the emoluments as Treasurer were not acquired without any detriment and risk to
the (1)  24 I.T.R. 217. (2)  1 S.C.R. 320 (3)  1 S.C.R. 1427.
679 family property and therefore formed part
of the income of the Hindu undivided family. Treasurership is an employment of
responsibility, trust and fidelity and personal integrity and ability and mere
ability to furnish a substantial security is not the sole or even the main
reason for being appointed to such a responsible post in a Bank like the
Central Bank of India. On the other hand his previous experience as an Overseer
of the Bank and his being appointed on his applying for the post are indicative
of personal fitness for it.
There is nothing to show that Sheel Chandra
had received any particular training at the expense of the family funds or his
appointment was the result of any outlay or expenditure of or detriment to the family
property. But it was argued on behalf of the respondent that because he had
lodged joint family property by way of security his earnings as Treasurer
became a part of the income of the Hindu undivided family for the reason that
the acquisition was not without risk to the family estate. He 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 the joint family entered the
Civil Service and that was made possible by the expenditure of family funds
which enabled him to acquire the necessary qualifications and it was that fact
which made his earnings part of the family income. The following passage in
that judgment at p. 168 was emphasised:- " It may be said to be direct in
the 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 the Hindu law, as would warrant
the exclusion of gains of science as such from the category of partible
Counsel particularly relied on the words
'risk of and contended that by reason of the family property being given in
security, the risk as understood in that judgment hadarisen, because-it-became liable
for any loss that might be incurred during the course of employment of Sheel
Chandra. The word 'risk' in that (1) (1921) 48 I.A. 162.
(2)  1 S.C.R. 320, 680 judgment must be
read in the context in which it was used.
Family estate was used and expenditure was
incurred for equipping one of its members to join the Indian Civil Service. It
was in that connection that the words 'risk of' or 'detriment to' family
property were used. The latter case, Kalu Babu Lai Chand's case(1), has already
been discussed. The facts and circumstances of that case were different.
The cases which the Privy Council relied upon
in Gokul Chand's case (2) were all cases where joint family funds had been
expended to fit a member of the joint family for the particular profession or
avocation the income of which was the subject matter of dispute but the
respondents were not able to refer to any decision in which it was held that
the mere fact of giving joint family property in security for the good conduct
of a member of the family employed in a post of trust was sufficient to make
the emoluments of the post joint family property because of any detriment to
family property or risk of loss. It has not been shown that in this case there
was any detriment to the family property within the meaning of the term as used
in decided cases.
In our opinion the judgment of the High Court
was erroneous on both questions which were referred to it and they should both
have been decided in favour of the appellant.
The emoluments received by Sheel Chandra were
in the nature of salary and therefore assessable under s. 7 of the Income- tax
Act and not under s. 10 of the Act as profits and gains of business and the
salary was the income of the individual, i.e., Sheel Chandra and not the income
of the Hindu undivided family.
We therefore allow this appeal and set aside
the judgment and order of the High Court. The appellant will have its costs in
this Court as well as in the High Court.
(1)  1 S.C.R. 320.
(2) (1921) 48 I.A. 162.