Per Shri T. V. Rajagopala Rao, Judicial Member - As common questions are involved in these appeals and cross-objections, and as the assessees are partners of the same firm K. Sobhanachalam & Sons, all the appeals and cross-objections can be conveniently taken up and disposed of by a common order. These appeals and cross-objections relate to the assessment years 1979-80 and 1980-81 in the matters in which Shri K. Nataraja Rao and Shri K. Panakala Rao are the assessees, whereas, in the appeal and the cross-objection in which Shri Sobhanachalam is the assessee, only the assessment year 1980-81 is involved.
2. There is a firm by name K. Sobhanachalam & Sons carrying on business to a major extent in hosiery goods and to a small extent in cloth, at Shop No. 67, Vasthralatha, Vijayawada. From the records, it appears that Shri K. Sobhanachalam, 73 years old, is the father and Shri K.Panakala Rao, at present 27, Shri K. Nataraja Rao, at present 25, Shri K. Venkateswara Rao, at present 23 and Shri K. Rama Subrahmanyam, at present 18, are divided sons of Shri Sobhanachalam. Originally, the first three were carrying on the said business under the partnership deed dated 29-4-1976 to which they have admitted the last two to the benefits of partnership as they were minors at that time. However, on 16-5-1978, the fourth among the above became a major and agreed to continue as a full-fledged partner of the firm. In order to enable him to do so, a change in the partnership was brought about by executing a partnership deed dated 17-5-1978 with which we are concerned in these matters. Under this deed, the first four are full-fledged partners and also persons who agreed to share the losses at one-fourth each. The fifth among them was admitted to the benefits of partnership and his share in the profits was stated to be 20 per cent. It is specifically stipulated that he had no share in losses. Clause 3 of the deed of partnership acknowledged that each of the partners including the minor contributed Rs. 10,000 towards capital in the firm. As the controversy centres round clause 9 of the partnership deed in all these matters, it is felt necessary to extract it which reads as follows : "That the first partner Shri Kopuravuri Sobhanachalam shall be the managing partner of the firm. The second and third partners shall co-operate and assist him in the conduct of the firms business. Thus, the first, second and third partners shall contribute their skill and labour for the better conduct of the partnership business. Therefore, the first, second and third partners shall be allowed to draw an amount of Rs. 4,000 each per annum towards remuneration. The sole and even the main reason for such remuneration is to regard them essentially for their personal skill and ability in making purchases and sales. The remuneration paid to the above three partners is in no way connected with their investments in the firm".
So, on a plain reading of the above clause, partners 1 to 3 are entitled to draw Rs. 4,000 each per annum towards remuneration.
Admittedly, Nataraja Rao, Panakala Rao and Sobhanachalam were being assessed as specified HUFs. Admittedly, the capital contribution made by them in the firm belonged to their HUFs. The share income returned by them includes interest on capital, remuneration received from the firm and share in net profits. Each of the three now before us claimed that the remuneration received by him was in the nature of personal allowance for the services rendered by him to the firm and so it should be considered in his individual hands and not as part of share income derived by his HUF. They plead for exclusion of the amounts of remuneration from the taxable income of their respective HUF.3. The ITO negatived the claim of the assessees. He held in each of the assessment orders relevant for our purposes, that the remuneration received by a partner for the services rendered is only a mode of adjustment in the share of the firms income and it continues to have the same status for purposes of charging in his hands. The ITO further held that the remuneration forms part of the total income of the firm which has to be shared between the partners. Remuneration received by a coparcener is one of the modes of return made to the family because of the investment of family funds in the partnership business.
4. In appeal, it was put forward before the AAC that the remuneration was given to each of them on account of individual services rendered and there was a specific clause in the partnership deed which provided that the remuneration will be paid for rendering independent services in regard to the business of the firm. The AAC held about the argument advanced before his as follows : "After due consideration of different facts, it appears that the plea of the appellant carries much weight, when it is seen that the remuneration was given to the appellant as per the partnership deed for the services being rendered in individual capacity and the same was not detrimental to the investment of the HUF funds".
He further held that there may not be any employee-employer relationship between the assessee and the firm, yet the fact cannot be lost sight of that the remuneration was given for rendering certain services in individual capacity and the same was not related to the HUF in investment as such. He directed deletion of the amount received as remuneration by each of the assessees from the hands of their HUF and allowed their appeals.
5. Aggrieved by the first appellate orders, the revenue has filed second appeal before this Tribunal whereas the assessees have filed cross-objections. In the cross-objections, the assessee seek no separate relief, but they only want to support the AACs orders. Thus, the matters stand for our consideration.
6. The learned departmental represen tative contended before us that there cannot be any employer-employee relationship between the firm on the one hand and the partners comprising the firm on the other, and, therefore, there is no question of any remuneration and for that proposition he cited CIT v. R. M. Chidambaram Pillai  106 ITR 292. In the said case, it was held by the Supreme Court that a firm is not a legal person even though it has some attributes of personality.
In income-tax law, a firm is a unit of assessment, by special provisions, but is not a full person. Since a contract of employment requires two distinct persons, viz., employer and employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. Payment of salary to a partner represents a special share of the profits. Salary paid to a partner retains the character of income of the firm. This argument, though appears to be appealing in the first instance, or at the first blush, on a minute scrutiny and on second thoughts, is liable to be rejected as irrelevant for our present purposes. We know that there is no possibility at all for an HUF to become a partner in a firm. It is only the manager of an HUF who is always competent to become a partner of a firm even though he invests funds of the HUF. For the purpose of the firm, it is only the karta of the HUF who is entitled to participate in the business. The relationship of partners inter se or the liability of the outside world in their dealings is quite different and distinct from the aspect of how far each of the partners is responsible to account for his own HUF, etc. Simply because HUF funds were invested, the members of the HUF are not entitled to participate in the affairs of the firm and they are also not entitled to look into the accounts of the firm or they cannot ask for dissolution of the firm. For the outside world, it is only the manager of the HUF who is the partner in the firm. We are not concerned here with a case on behalf of the firm in which event we have to simply apply the provisions of section 40(b) of the Income-tax Act, 1961 (the Act) and disallow the salary amount in the hands of the firm. The provisions of section 67(1) (a) of the Act, which deals with the method of computing a partners share in the income of the firm, are as follows : "67. (1) In computing the total income of an assesse who is a partner of a firm, whether the net result of the computation of total income of the firm is a profit or a loss, his share (whether a net profit or a net loss) shall be computed as follows :- (a) any interest, salary, commission or other remuneration paid to any partner in respect of the previous year, and, where the firm is a registered firm or an unregistered firm assessed as a registered firm under clause (b) of section 183, the income-tax, if any, payable by it in respect of the total income of the previous year, shall be deducted from the total income of the firm and the balance ascertained and apportioned among the partners;" According to the above provision, the salary paid to any partner has to be deducted from the total income of the firm and the balance only is to be ascertained and apportioned among the partners.
7. The next argument of the learned departmental representative was that because of the investment made by each of these three HUF, their managers were selected as employees of the firm and by virtue thereof they are getting the salary amounts. The duty to bring in capital and also the amount of remuneration which each of the three partners is entitled to, are all provided for as per the provisions of the partnership deed. In those circumstances, according to the majority decision of the Supreme Court in V. D. Dhanwatey v. CIT  68 ITR 365 and M. D. Dhanwatey v. CIT  68 ITR 385, the salary amounts should be deemed to have formed part of the profits derived by each of the three HUF involve these appeals. Firstly, we have to make it clear that neither the ITO nor the AAC in appeal, in the case of each of these three assessees, found that because of the investment made by each of them, their kartas were appointed as employees of the firm at a remuneration of Rs. 4,000 per annum and because of that fact the amount of remuneration should be considered as part of the share income derived by each of the assessees. We have already extracted the relevant clause of the partnership deed. It can be seen that investment made by each of the assessee-HUF was only Rs. 10,000, whereas partners 1 to 3 (Sobhanachalam, Panakala Rao and Nataraja Rao) were allowed to draw an amount of Rs. 4,000 each per annum towards remuneration apart from deriving share income. When we compare the amount of investment with the amount of annual remuneration, it does not appear to be probable that a mere Rs. 10,000 investment would get Rs. 4,000 remuneration. It is disproportionate and therefore, it suggests that it would not have been intention of the parties to concede Rs. 4,000 per annum for a mere Rs. 10,000 investment at the time of entering into partnership. Further, if that was to be true, even one of the major partners who had contributed Rs. 10,000 and one of the minors admitted to the benefits of partnership were not allowed remuneration as per the terms of the partnership deed. We were told at the time of hearing that prior to the coming into force of the partnership deed, there used to be an HUF concern under the same name and doing the same business.
Pages 6 to 9 of the paper book make the position very clear. At pages 6, profit and loss account of the HUF concern was provided. It shows that K. Sobhanachalam who used to be the manager of the firm, was allowed Rs. 6,000 as salary. K. Panakala Rao was allowed a salary of Rs. 2,534.35 whereas K. Nataraja Rao was allowed a salary of Rs. 2,233.50. At page 8 is given the extract of the return filed on behalf of K. Sobhanachalam for the assessment year 1975-76. It is significant to note that the assessable income returned was Rs. 43,209.42. At page 9 is given the extract of the assessment order dated 25-2-1976 for the assessment year 1975-76 of the HUF headed by K. Sobhanachalam. In that assessment, it is significant to note that neither remuneration of Rs. 6,000 received by K. Sobhanachalam nor Rs. 2,534.35 received by K.Panakala Rao nor Rs. 2,233.50 received by K. Nataraja Rao were included as the income of the bigger HUF which was the assessee in the assessment year 1975-76, though the assessment was made under section 143(3) of the Act.
8. Thus, all the above would lead us to believe that there would not have been any connection between the investment made by each of the partners in the firm and the remuneration received by the three managers of the assessees now before us. We hold that Shri K.Sobhanachalam, Shri K. Panakala Rao and Shri K. Nataraja Rao were having extensive experience in conducting sale and purchase of hosiery goods and because of their business acumen and managerial capacity, tact and skill in the trade, which they have acquired, they were given the provision of Rs. 4,000 towards remuneration per year and the remuneration has no connection whatsoever with the investment of Rs. 10,000 which proceeded from each of their HUF. This, the ratio of majority decision of the Supreme Court in V. D. Dhanwateys case (supra) and M. D. Dhanwateys case (supra) does not apply to the facts of these cases.
9. However, it is significant to keep in mind the minority decision of Justice Hedge in V. D. Dhanwateys case (supra) particularly the following portion : "So far as the partnership is concerned, it was Dhanwatey and not his joint family that was the partner. The partnership had nothing to do with his joint family. But the capital invested by Dhanwatey being that of his joint family Dhanwatey had to hold that capital and the accretions thereto as joint family property. But he need not make over to his family his personal earnings. Before an acquisition made by a coparcener of a Hindu family can be considered as family acquisition, as observed in the majority judgment, there must be real and sufficient connection between the family investment and the acquisition........" (p. 379) 10. After V. D. Dhanwateys case (supra), the Supreme Court itself had demarcated the line of distinction between the seemingly conflicting decisions rendered by the Supreme Court till then. In Raj Kumar Singh Hukam Chandji v. CIT  78 ITR 33, the Supreme Court made a review of the whole case law rendered by both the Privy Council and the Supreme Court on the subject. Their Lordships of the Supreme Court also listed out the seemingly conflicting decisions rendered by the Supreme Court on the subject and then proceeded to observe at page 43 of the reported decision that the line that demarcates these two lines of decisions is not very distinct but on a closer examination that line can be located. First, they held that the test laid down by the Privy Council in Amar Nath v. Hukam Chand Nathu Mal AIR 1921 PC 35 laying down that in considering whether gains are partible, there is no valid distinction between the direct use of the joint family funds and a sue which qualifies the members to make the gains by his own efforts is no more valid. Then the other tests of demarcation were found out to be as follows : "(1) whether the income received by a coparcener of a Hindu undivided family as remuneration had any real connection with the investment of the joint family funds; (2) whether the income received was directly related to any utilisation of family assets; (3) whether the family had suffered any detriment in the process of realisation of the income; and (4) whether the income was received with the aid and assistance of the family funds.
In our opinion from these subsidiary principles, the broader principle that emerges is whether the remuneration received by the coparcener in substance though not in form was but one of the modes of return made to the family because of the investment of the family funds in the business or whether it was a compensation made for the services rendered by the individual coparcener. If it is the former, it is an income of the Hindu undivided family but it is the latter then it is the income of the individual coparcener. If the income was essentially earned as a result of the funds invested the fact that a coparcener has rendered some service would not change the character of the receipt.
But if on the other hand it is essentially a remuneration for the services rendered by a coparcener, the circumstances that his services were availed of because of the reason that he was a member of the family which had invested funds in that business or that he had obtained the qualification shares from out of the family funds would not make the receipt, the income of the Hindu undivided family".
This case was decided on 11-8-1970. On the basis of the principles laid down in that case, their Lordships decided another case, Prem Nath v.CIT  78 ITR 319 (SC), on 12-8-1970 in which the facts as well as the decision were summarised in the had note correctly as follows" "The manager of the appellant, a Hindu undivided family, was a partner in a firm representing the family under the terms of the partnership he was entitled to an allowance of Rs. 700 per month for rendering services to the partnership. There was no evidence on the record that the remuneration agreed to be paid was not for services rendered to the firm. The question was whether the remuneration paid to the manager as working partner was income of the family : Held, that the remuneration received by the manager was not the income of the family : the remuneration as for services rendered by him and there was no real and sufficient connection between the investment of the joint family assets and the remuneration paid to him". (p. 319) Thus, it can be seen that there appear to be two types of capital investment, one is financial capital and the other human capital. In the case of capital invested by an HUF in a firm, there is possibility of the HUF supplying financial capital and its manager supplying human capital by agreeing to supply his services for the business of the firm. After ascertaining the share of each of the partner under section 67 and when a stage comes for the manager of the HUF to account for the share income he derives from the firm, he need only account for the share income he derives as a quid pro quo for the share capital supplied by his HUF and he can retain for himself the salary which he receives as a quid pro quo for the services rendered by him.
11. We, therefore, hold that in none of these cases, the AAC went wrong in directing to delete the remunerations received by the managers of the assessee-HUF from being considered in the hands of the HUF.Therefore, the appeals bear no merit and they are dismissed. The cross-objections become infructuous and they are also dismissed.