1. On requisition made by this court under sub-section (2) of section 66 of the Indian Income-tax Act (hereinafter referred to as the Act), the Income-tax Appellate Tribunal, Bombay, has submitted a statement of the case and referred to this court the following question of law arising out of its appellate order :
'Whether on the facts and circumstances of the case the payment of Rs. 7,500 (Rupees seven thousand five hundred) paid to Shri M. D. Dhanwatay for rendering services to the firm, could be included in the total income of the assessee family
2. The assessee before us is a Hindu undivided family of which Shri M. D. Dhanwatay (hereinafter referred to as Marotirao), is a karta. The assessment years is 1954-55, the relevant accounting period being the years ended September 30, 1953.
3. The facts in brief are : Marotirao was a partner in the partnership concern which carried on business under the name and style of Messrs. Shivraj Fine Art Litho Works. The share capital contributed by Marotirao was entirely contributed by the Hindu undivided family (hereinafter referred to as the assessee) of which he was a karta. The rights of the partners inter se were at the relevant time governed by the partnership agreement which according to the statement of the case is annexure 'A' to the statement. However, it appears that annexure 'A' which has been incorporated in the statement of the case is not a deed of partnership but a deed amending certain clauses of the deed of partnership wherein the remuneration paid to each partner has been altered. The deed of partnership dated April 1, 1951, which governed the rights of the partner has been filed on record by Mr. Joshi, counsel for the department. Mr. Bobde admits it to be a true copy of the deed of partnership and it has been agreed between the parties that it should be accepted on record as part of the statement of the case. We direct so.
4. The business done by the partnership is of lithography and art printing and is carried on by means of a press under the name and style of the Shivraj Fine Litho Works. It is a partnership for a period of 10 years. The total capital is Rs. 10,50,000. It may be stated that the partnership consists of Dhanwatays. Clause (4) of the partnership deed enumerates various capital contributions of the partners. The share contribution of Marotirao is shown as Rs. 1,96,875. As already stated, the said sum belonged to the Hindu undivided family. Clause (5) provides payment of interest at a certain rate to the partners on the share contribution. Clause (6) relates to the bankers of the business. Clause (7) provides that general management and supervision of the partnership business shall be in the hands of Vasantrao, one of the partners. Clause (8) provides that Marotirao Dattaji Dhanwatay shall be the manager in charge of the works and both he and Vasantrao Dhanwatay shall have power to make contracts, arrange terms with constituents or customers. Clause (9) enumerates duties which Shamrao Dattaji Dhanwatay, another partner, has to perform. Clause (10) empowers three partners, viz., Vasantrao, Marotirao and Shamrao, to appoint such person or persons on such salary as they deem fit for carrying on the work of the partnership and delegate to them such powers as they think proper. As regards clauses (11), (12), (13) and (14) it is not necessary to go into details of these clauses. Clause (15) provides that the various adult members of the partnership shall devote their whole time and attention to the partnership in the sphere of their respective duties. Clause (16) is the material clause and provides various amounts which are paid by way of remuneration to the partners mentioned therein, and further provides that these amounts of remuneration paid to the various partners will be paid to them out of the gross earnings of the partnership business. The remuneration provided to be paid to Marotirao in clause (16) is Rs. 1,250 per month. In the relevant accounting period in pursuance of this clause (16) Marotirao had been paid a sum of Rs. 7,500 and the question that arises in this case is whether the said sum which is paid to Marotirao under the said clause can be included in the income of the assessee.
5. In the return filed by the assessee, the salary of Rs. 7,500 received by Marotirao from the firm was show in section D of the return and it was contended by the assessee before the Income-tax Officer that the salary received by Marotirao, the karta of the assessee family, was received by him in his individual capacity and hence it was not taxable in the hands of the assessee. This contention raised on behalf of the assessee was not accepted by the Income-tax Officer. The Income-tax Officer found that the assessee of which Marotirao was the karta was a partner in the partnership concern of Shivraj Fine Litho Works, that Marotirao represented the assessee in the firm, that the funds contributed in the partnership belonged to the assessee, the salary paid to Marotirao was paid to him in the status of a partner and that there was no evidence to show that Marotirao rendered services to the partnership in his individual capacity. It was also found that what was paid to Marotirao in the form of salary was only for the purpose of adjustment of the rights inter se between the partners, and therefore, it was not open to the assessee to split up the share income from the firm in the manner suggested. The assessee took an appeal to the Appellate Assistant Commissioner but on the same line of reasoning the contention had been rejected. The assessee took the matter further in second appeal to the Appellate Tribunal. The contentions raised before the Appellate Tribunal were two-fold. In the first instance, the assessee contended that the said amount of Rs. 7,500 was the earning of Marotirao in his individual capacity and, therefore, it did not belong to the assessee and ought to be excluded from the total income. The Tribunal affirmed the view taken by the income-tax authorities that the said amount was not paid to him for the services rendered individually but it was part of the profits earned by him as a partner in the firm since the agreement of partnership provided remuneration to the partners who rendered service to the firm in carrying on its business.
6. The second contention which was raised was that the services rendered by Marotirao to the firm were rendered by him in his individual capacity as an employee of the firm. Placing reliance on a decision of this court in S. Magnus the Tribunal held that a partner cannot be an employee of a partnership and therefore, the remuneration received was not received as an employee. The Tribunal further, having regard to the fact in the deed of partnership it is provided that certain remuneration is to be paid to the partners for the services rendered by them, held that what each partners is paid for devoting his time and labour to the partnership business is really for the purpose of determining and adjusting the interest of the partners in the profits of the firm inter se and such a sum, though given under the name of remuneration to a partner, really forms part of his share in the profits of the firm. On this view of the case, the Tribunal held that the entire share of profits of Rs. 47,412 inclusive of the said sum of Rs. 7,500 is to be brought to tax in the hands of M. D. Dhanwatay. It further held that, since Marotirao represented his Hindu undivided family (the assessee before us), the said amount would be liable to be brought to tax in the hands of the assessee. In this view of the matter the Tribunal dismissed the appeal. The application made by the assessee under sub-section (1) of section 66 of the Indian Income-tax Act failed and on an application made to this court under sub-section (2) of section 66 the Tribunal on drawing up a statement of the case has submitted the aforesaid question on a requisition made by this court.
7. Mr. Bobde, appearing for the assessee, contends that the salary income earned by Marotirao was not the income of the Hindu undivided family at all and therefore was not liable to be taxed in the hands of the assessee family. The arguments is founded on the provisions of clause (a) of section 13 of the Partnership Act which provides :
'Subject to contract between the partners - (a) a partner is not entitled to receive remuneration for taking part in the conduct of the business.'
8. Mr. Bobde argues that here there is an agreement in the deed of partnership which provides for remunerations to be paid to each partner including Marotirao. That being the position, the amount paid to Marotirao by way of salary is deductible from the gross earning of the partnership firm, it being a revenue expenditure and therefore it does not enter in the amount of profits of the firm. Marotirao no doubt is a karta of the family and the share capital contribution falling to his share has been supplied by the family but family is entitled only to the profits which, according to the books of partnership, fall to the share of Marotirao. The amount of salary, according to the books of partnership did not fall to the share of profits of Marotirao. It is also a contention of Mr. Bobde that the remuneration earned by Marotirao does not flow from the investment made by the joint family in supplying to him the capital contribution and therefore Marotirao was not accountable to the firm for the amount of salary obtained by him. Mr. Bobde referred us also to the following decisions :
Dhanwatay v. Commissioner of Income-tax, Ratilal B. Daftari v. Commissioner of Income-tax, Piyare Lal Adishwar Lal v. Commissioner of Income-tax, and Commissioner of Income-tax v.Sitaldas Tirathdas.
9. Mr. Joshi, on the other hand, contends that there is no evidence on record to show that any service is rendered by Marotirao to the firm in his individual capacity. Referring us to clauses (7) to (10) and (15) and (16) of the deed of partnership Mr. Joshi argued that when these clauses are read together it is clear that the scheme is that certain work is allotted to each partner and he is paid remuneration for rendering this normal work of the partnership and the remuneration is paid to each of them for that service. It therefore, in the absence of any evidence to the contrary, necessarily follows that the services rendered by Marotirao are services rendered by him as a partner and not in his individual capacity. It is also his argument that it is the joint family fund which enabled Marotirao to be a partner in the partnership firm and the remuneration paid to him as a partner therefore is obtained by him with the aid of the joint family fund and therefore the amount of remuneration is the income of the joint family and is liable to be brought to tax in the hands of the joint family. Reliance is placed by Mr. Joshi on the decisions in S. Bhagwant Singh v. Commissioner of Income-tax, Commissioner of Income-tax v. Kalu Babu Lal Chand.
10. In our opinion, the answer to the question is afforded by the principle deducible from the two decision of the Supreme Court in Commissioner of Income-tax v. Kalu Babu Lal Chand, on which reliance is placed by Mr. Joshi and Piyare Lal Adishwar Lal v. Commissioner of Income-tax, on which reliance is placed by Mr. Bobde.
11. The facts in Kalu Babu's case were : R, the karta of a Hindu undivided family, was one of the promoters of a company to be floated, took over a business as a going concern and carried on the business on behalf of the company until it was incorporated in December 1930. The articles of association of the company provided that R would be the first managing director and specified his remuneration. The question was whether the remuneration received by R for the work of the managing director was the income of the Hindu undivided family of which R was the karta or was his personal earning. The facts found by the Tribunal were that the shares held in the name of R and his brother were acquired with the fund belonging to the joint family and the family was in enjoyment of dividend paid on these shares. It was also found that the company was floated with the funds provided by the family and R made no contribution in this respect.
12. The company was all along financed by the family. Prior to the accounting year relevant to the assessment year 1943-44 the managing director's remuneration received by R was credited in the books of the family. In the assessment year 1943-44 for the first time it was claimed that the whole of the managing director's remuneration constituted the personal earnings of R and should not be added to the income of the family. Their Lordships held that the managing director's remuneration received by R was, as between him and the Hindus undivided family, the income of the family and should be assessed in its hands. Their Lordships also considered when a karta of the Hindu undivided family joins a partnership with the aid of funds of the Hindu undivided family. In considering this question their Lordships observed :
'It is now well settled that a Hindu undivided family cannot as such enter into a contract of partnership with another person or persons. The karta of the Hindu undivided family, however, may and frequently does enter into partnership with outsiders on behalf and for the benefit of his joint family. But when he does so, the other members of the family do not, vis-a-vis the outsiders, become partners in the firm. They cannot interfere in the management of the firm or claim any account of the partnership business or exercise any of the rights of a partner. So far as the outsiders are concerned, it is the karta who alone is, and is, in law, recognised as, the partner. Whether in entering into a partnership with outsiders, the karta acted in his individual capacity and for his own benefit or he did so as representing his joint family and for its benefit is a question of fact. If for the purpose of contribution of his share of the capital in the firm the karta brought in monies out of the till of the Hindu undivided family, then he must be regarded as having entered into the partnership for the benefit of the Hindu undivided family and as between him and the other members of his family he would be accountable for all profits received by him as his share out of the partnership before and such profit would be assessable as income in the hands of the Hindu undivided family.'
13. We have already referred to the facts found in this case. It is not in dispute that Marotirao's share of the capital in the firm is brought from the till of the Hindu undivided family. He is the karta of that family. It therefore follows that it must be regarded that he entered into the partnership for the benefit of the Hindu undivided family and whatever is earned by him in his capacity as a partner he is accountable for all that to the joint family. The principle laid down by the Judicial Committee in Gokul Chand's case has been approved by their Lordships in this case and the principle is that whatever is earned by a member of a joint Hindu family directly with the aid of the joint family fund enures for the benefit of the family. Their Lordships of the Judicial Committee were considering a case that arose before the Hindu Gains of Learning Act was passed and the question that was being considered was whether the salary earned by a member of an undivided Hindu family as servant in the Indian Civil Service enured for the benefit of the Hindu undivided family. It was held that as education was obtained with the aid of the joint family funds, the salary obtained by a member in his capacity as a servant of the Indian Civil Service belonged to the Hindu undivided family. Here, but for the funds of the Hindu undivided family Marotirao would not have been able to be a partner of the firm and but for his being a partner he would not have been able to obtain remuneration. The remuneration obtained by him, in our opinion, would therefore be an income of the Hindu undivided family.
14. The facts in Piyare Lal's case in brief were : S's father was the treasurer of a bank until his death. During his father's lifetime, S was employed as an overseer in the bank. After the death of the father S was pointed treasurer of the bank at various branches on a monthly salary. Properties of the Hindu undivided family of which he was a member were furnished by him as security. Under the agreement between S and the bank, S was to engage and employ all subordinate staff. He had the power to control, dismiss and change this staff at his pleasure. The members of the staff were to be paid salary directly by the bank within the scale laid down by it. The treasurer was responsible for the acts and omissions of his representatives, whom he was entitled to appoint at the various branches with the approval of the bank and every member of the staff. He indemnified the bank against any loss incurred as a result of any neglect or commission on their part by offering properties of the Hindu undivided family of which he was a member. The treasurer and his staff were under the control of the bank. The treasurer was also responsible for the correctness and genuineness of the hundies cheques, etc. A question arose whether the salary received by the treasurer belonged to the Hindu undivided family. Their Lordships of the Supreme Court held that, having regard to the nature of his work and the control and supervision of the bank over the treasurer, the treasurer was a servant of the bank. Their Lordships further held that as there was nothing to show that S received any particular training at the expense of the family funds or that his appointment was the result of any outlay or expenditure of or detriment to the family property, the salary of S was not the income of the Hindu undivided family; the treasurer ship of the back was an employment of personal responsibility and ability and mere ability to furnish a substantial security was not the sole or even the main reason for appointment to such a responsible post. It would be seen that all what the family had done in the instant case was to stand surety for S who was a member of the family and there was no connection between the funds of the family and the employment secured by S in the bank. In the instant case, there is a direct connection between Marotirao being able to be a partner of the firm and the contribution made by the family. As already stated, but for funds supplied by the family to Marotirao as his share of the capital it would not have been possible for him to secure an entry in the partnership. The remuneration received by him as a partner is therefore directly connected with the funds of the family.
15. The view taken by us finds support in the decision reported in Bhagwant Singh v. Commissioner of Income-tax. The question that arose for consideration in that decision was identical with the one with which we are concerned here. The assessee was a Hindu undivided family. One of its member become a partner in a partnership firm by investing a part of the joint family under in the partnership and became a partner in consequence of that investment. He was paid a salary as remuneration for the services rendered by him to the partnership of which he was a partner. The question arose whether the salary received by him belonged to the joint family or that it belonged to him individually. It was held that the salary income belonged to the family. At page 446 of the report the learned judges observed :
'The investment of family funds in the partnership business and the salary earned by S. Bhagwant Singh are related to each other as cause and effect. The right to draw a salary was made possible by the use of joint family funds which enabled him to become a partner and to claim remuneration for the services rendered by him. In other words, his right to draw salary flowed directly from the joint family funds. This is another way of saying that the income on account of salary was acquired with the aid of joint family property.'
16. With respect, the observation would equally be applicable to the present case.
17. Turning to the decisions to which reference was made by Mr. Bobde, in our opinion, they are distinguishable on facts and are not helpful in taking the case of the assessee any further. Mr. Bobde placed reliance on the following observations at page 687 in Dhanwatay v. Commissioner of Income-tax :
'Therefore, the ratio is quite clear, that if it is established that the remuneration was for services rendered and without detriment to the family property, then it is the individual income of the karta and not that of the Hindu undivided family.'
18. Now, the facts of this case were that the karta of a Hindu undivided family was one of the partners in a partnership representing the family consisting of himself and his two minor sons. The partnership deed provided for the payment of remuneration to the karta, who was designated the general manager of the business, as well as the other partner at specified rates. The Appellate Tribunal found that there was no evidence whatever to show that the karta rendered any service to the partnership in his individual capacity and held that what was paid to him in the form of remuneration was only for the purpose of adjustment of the rights inter se between the partners. On these facts, it was held that the remuneration paid to the karta was the income of the Hindu undivided family. We are at a loss to see how this case is distinguishable from the present case or that it can be said on the facts of the present case that the remuneration paid to Marotirao is without any detriment to the family property. The facts found being that the share capital contributed by Marotirao came from the joint family till and no service in his individual capacity was rendered by Marotirao. But, on the other hand, all what was obtained by Marotirao by way of remuneration was obtained by him capacity as a partner for rendering services to the partnership as other partners did. We have already referred to Piyare Lal v. Commissioner of Income-tax, and discussed it above. It is not necessary to deal with it again.
19. The last decision to which reference was made, commissioner of Income-tax v. Sitaldas Tirathdas, is not relevant to the question which we have to consider. The question considered here related to the circumstance which gave rise to an overriding charge which resulted in diversion of income at source. In this case, the assessee in computing his total income for purposes of income-tax sought to deduct amounts paid by him as maintenance to his wife and children under a decree of court passed by consent in a suit. No charge on any property of the assessee was created by the decree of the court. It was held by their Lordships of the Supreme Court that there being no charge created by the decree, the assessee was not entitled to the deduction claimed by him. Laying down the true test for the application of the rule of diversion of income at the source by an overriding charge, their Lordship observed :
'The true test for the application of the rule of diversion of income by an overriding charge, is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation can not be said to be a part of the income of the assessee.
Where by the obligation income it reaches the assessee, it is deductible; but where the income is required to be applied to discharged an obligation after such income reaches the assessee, the same consequence, in law, does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied.'
20. With respect, we have been unable to see how this principle comes into play on the facts of the present case. Here Marotirao represents the family in the partnership and whatever is received by Marotirao is received by him for and on behalf of the family. There is no question of any diversion of the income at the source arising in the circumstances.
21. For the reasons stated above, in our opinion, the answer to the question referred to us is in the affirmative. The assessee shall pay the costs of the department.
22. Question answered in the affirmative.