1. The appeal in the present case is filed by the assessee. The cross-objection as presented by the revenue is out of time by 61 days.
An affidavit has been filed by the ITO to the effect that he was on leave when the direction to file cross-objection was received and the same was omitted to be put up to him. He came to know of the same only when the notice of hearing of the appeal was received. In these circumstances we would, after hearing the learned Counsel for the assessee, condone the delay and admit the cross-objection.
2. The assessee had filed a return in the status of HUF for the assessment year 1980-81. In filing this return the assessee had shown share income from a firm Prasad & Co. The assessee in addition was a partner in another firm Akula Venkateswarlu & Co. The ITO called upon the assessee to show cause why his 20 per cent share from the firm Akula Venkateswarlu & Co. should not be included in the assessment. The contention of the assessee was that the assessee had received Rs. 26,744 on partition of the HUF of which he was a member along with his father and out of that Rs. 25,000 was withdrawn on 30-8-1977 and invested in the firm Prasad & Co. in which he became a partner.
Thereafter he stated that there was only a nominal balance and together with interest it came to about Rs. 4,530 which remained with the firm Akula Venkateswarlu & Co. He Has also stated that he was taken as a partner in firm Akula Venkateswarlu & Co. not because of any capital investment but he was only a working partner. Therefore, share income from this firm unlike the share income from the firm Prasad & Co. was not assessable in the hands of the HUF.3. The ITO did not accept the explanation. According to him, since about Rs. 4,000 remained invested in the books of the firm Akula Venkateswarlu & Co. out of family funds and since the share income of the assessee was being credited to the same account, share income from firm Akula Venkateswarlu & Co. should also be included in the hands of the assessee. Thus the ITO computed the total income at Rs. 1,37,798 which included Rs. 1,02,485 being 30 per cent share income from the Prasad & Co. which the assessee had offered for assessment in the hands of the HUF and Rs. 35,313 which represented 20 per cent share income from the firm Akula Venkateswarlu & Co. which, according to the assessee, represented the individual income of Shri Sivanageswar Rao and was not to be included in the hands of the HUF consisting of Shri Sivanageswar Rao as karta and his wife, Smt. Vidyavathi, as the other member.
4. The assessee appealed to the Commissioner (Appeals) and contested the inclusion of income from the firm Akula Venkateswarlu & Co. The Commissioner (Appeals) examined the issue in some detail. He referred to the decisions in the cases of N.V. Narendranath v. CWT  74 ITR 190 (SC), Gowli Buddanna v. CIT  60 ITR 293 (SC), Attorney-General of Ceylon v. AR. Arunachalam Chettiar  34 ITR (ED) 20 (PC) and also the decision in the case of Surjit Lal Chhabda v.CIT[ 1975] 101 ITR 776 (SC). In the course of a very elaborate discussion the Commissioner (Appeals) held as under in paragraph 8 of his order: In the light of the above discussion, I feel that the Income-tax Officer was not correct in awarding the status of HUF and the whole thing needs to be reviewed and recast. I, therefore, set aside the assessment and direct the Income-tax Officer to make fresh assessment according to law after giving opportunity to the appellant and also bearing in mind the Supreme Court decision in Surjit Lal Chhabda's case (supra) which has been explained and applied by the Madhya Pradesh High Court in exactly identical circumstances.
The revenue in the cross-objection contends that the Commissioner (Appeals) erred in relying on the decisions of the Supreme Court in Surjit Lal Chhabda's case (supra) and of the Madhya Pradesh High Court in CIT v. Vishnukumar Bhaiya  142 ITR 357 because on the facts as obtaining in the present case the ratio of the aforesaid decisions were not applicable. The revenue contends that the Commissioner (Appeals) should have followed the decision of the Full Bench of the Madhya Pradesh High Court in CIT v. Krishna Kumar 1982 Tax LR 1275. In other words, if the contentions of the revenue are to be accepted, what the revenue is pleading for is sustaining of the assessment in the manner as made by the ITO, viz., that the status would bs that of the HUF and the share incomes to be included would have to be from both the firms, viz., Prasad & Co. and Akula Venkateswarlu & Co.
5. In the main appeal, the assessee has contended for exclusion of the share income from the firm Akula Venkateswarlu & Co. but otherwise the assessee does not contest the assessment in the status of HUF and inclusion therein of the share of Prasad & Co.
6. The learned Counsel for the assessee took us through the history of the case. There was a HUF of which Venkateswarlu and Sivanageswara Rao, the assessee, were members. There was a partial partition of this HUF on 22-10-1976. The assessee and his father as well as the assessee's brother, Shri Srimannarayanamurthy, each got Rs. 26,744 on partial partition. This amount was got deposited in the firm Akula Venkateswarlu & Co. in which at the material time the assessee was not a partner. Subsequently, the assessee, who was a minor, was admitted into the benefits of partnership of a firm Prasad & Co. The relevant deed was dated 17-8-1977 and in the said deed it was expressly provided in Clause 4 that the capital required was to be contributed by two of the partners as well as the two minors of whom the assessee was one. In pursuance thereof on 30-8-1977, Rs. 25,000 was withdrawn from the account of the assessee, Sivanageswara Rao, in Akula Venkateswarlu & Co. and invested as capital in the firm Prasad & Co. According to the learned Counsel, this investment of capital having been made out of HUF funds, share income from Prasad & Co. was rightly assessable in the hands of the HUF consisting of Sivanageswara Rao and his wife.
7. Shortly thereafter on 26-10-1977 the assessee attained majority. He was taken in as a partner from 10-11-1977 according to the instrument of partnership deed, dated 11-11-1977 in the firm Akula Venkateswarlu & Co. which was reconstituted from that date. The assessee was the fifth partner. By this deed one more partner, Thamana Ramprasad, was also taken in. There was a clause in the partnership which reads as under: Whereas as and from 10-11-1977, fourth and fifth partners named above are admitted into partnership in view of the requirement of additional capital and manpower for the smooth and efficient functioning of the partnership business and ....
Ramprasad was the fourth partner and the assessee was the fifth partner referred to. Further, there was an express provision in Clause 4 regarding capital contribution, etc., which read as under: (a) The first, second, third and fourth partners named above shall be the capital contributing partners in the ratios mutually agreed.
(b) The fifth partner named above is admitted into partnership for his services without any obligation to invest any capital as working partner, unless he voluntarily contributes.
The submission of the learned Counsel was that as far as the assessee was concerned in terms of Clause 4(b), it was categorically stated that he was taken in as a partner only for the services to be rendered and he was not under any obligation to invest any money as working partner.
Subsequently, Ramprasad retired from 29-10-1978 and a fresh deed of partnership was executed on 29-11-1978 for the firm Akula Venkateswarlu & Co. and there was Clause 4 which was couched in similar terms as in the earlier deed. Here again the learned Counsel stressed the assessee, i.e., Sivanageswara Rao, continued as a partner only because of services rendered.
8. The submission of the learned Counsel in the aforesaid background was that the capacity in which the assessee became a partner in Prasad & Co. was different from that in which he became a partner in Akula Venkateswarlu & Co. He stated that in Prasad & Co. the assessee was taken as a partner because of capital contribution which in terms of the deed he was required to make whereas in the latter firm it was expressly provided that the assessee was being taken in only as a working partner. His submission that merely because share income from this firm was credited to an account in the books of account of the firm in which there was a balance of about Rs. 4,000 would not make the share income the income of the HUF.9. The learned departmental representative after adverting to the factual background relied on by the learned Counsel for the assessee submitted that there were funds belonging to the HUF lying in the firm Akula Venkateswarlu & Co. and into the same account the share incomes were being credited which showed the intention of the assessee to treat the incomes as HUF incomes alone. He, therefore, pleaded for the share income from the firm Akula Venkateswarlu & Co. being included in the hands of the assessee-HUF.10. Before us, the learned Counsel for the assessee and the learned departmental representative in support of their respective stands referred to various judicial pronouncements adverted to in the order of the Commissioner (Appeals).
11. We have considered the rival submissions. There was a HUF consisting of the father of the assesses, Sivanageswara Rao, the assessee, and the assessee's brother. There was a partial partition of this HUF on 22-10-1976. On such partition Sivanageswara Rao received Rs. 26,744. This amount was kept in account in his name in the books of Akula Venkateswarlu & Co. in which at the material time the assessee was not a partner. On the date of partition Sivanageswara Rao was a minor. When he was admitted to the benefits of partnership in the firm Prasad & Co. by the instrument of partnership, dated 17-8-1977, he was still a minor. It was provided in terms of Clause 4 of the relevant deed that the assessee-minor was also required to contribute capital.
In pursuance of this requirement, Rs. 25,000 was transferred on 30-8-1977 on which date Sivanageswara Rao was still a minor. Thus, the funds received by Sivanageswara Rao on partition were transferred and invested in the firm Prasad & Co. wherein he was admitted to the benefits of partnership and wherein he was required to contribute funds. Even the funds of the minor was invested in the firm Prasad & Co. Subsequently, Sivanageswara Rao attained majority on 26-10-1977 and on 8-11-1977 a fresh instrument of partnership was drawn up in respect of the firm Prasad & Co. There the assessee became a full-fledged partner. It was again provided in terms of Clause 4(a) that he had agreed to contribute capital. Thus, funds received on partition and invested by Sivanageswara Rao, a minor, in the firm Prasad & Co.
continued to be the capital invested by Sivanageswara Rao when he attained majority and was admitted as full-fledged partner in that firm.
12. Coming to the facts of the case of the second firm Akula Venkateswarlu & Co., there was no transfer of any family funds consequent to which Sivanageswara Rao was made partner. Apart from this, there was the specific provisions of Clause 4(b) that Sivanageswara Rao was admitted to the partnership only for services and there was no obligation to invest any capital as he was a working partner unless be desired to make a voluntary contribution which in fact he did not do. In the preamble to the deed of 11-11-1977 it was no doubt mentioned that the fourth and fifth partners were taken in view of the requirement of additional capital and manpower. But in view of the specific further description in Clause 4 of the deed it is clear that Sivanageswara Rao was taken in only to provide manpower and not to provide any additional capital. He was, thus, only, a working partner in this firm and the same position continued when there was change in constitution evidenced by the later deed of 2-11-1978.
13. The first point for determination is what is the status of the entity consisting of Sivanageswara Rao and his wife. In the accounting year relevant to the assessment year now under consideration, their son Anand had not been born, the son having been born only after March 1981. Since capital had been received on partition by Sivanageswara Rao, it represented family funds and by his marriage on 30-1-1980 it is clear that he and his wife constituted a HUF. There is a discussion by the Madras High Court in the case of P.R. Ramasubramania Raja v. State of Tamil Nadu  121 ITR 879 wherein their Lordships have reviewed all the earlier salient decisions on the point including in particular the decisions of the Supreme Court in the cases of Gowli Buddanna (supra), N.V. Narendranath (supra) and Surjit Lal Chhabda (supra) and the decisions of the Privy Council in Kalyanji Vithaldas v. CIT  5 ITR 90, AR. Arunachalam Chettiar's case (supra) and Attorney-General of Ceylon v. AR. Arunachalam Chettiar  34 ITR (ED) 42 (PC). Their Lordships have pointed out that it has to be examined whether the income stems out of funds which were earlier family funds but received on partition or were funds which were impressed later with the character of HUF property and that the right of the sole surviving coparcener regarding disposal of the property in both the cases would be the same. In one instance, he would be dealing in HUF property and in the other case he would be dealing in property the assessee acquired but which had been thrown into the common hotchpot. If we apply the ratio of the aforesaid judgment, it is clear that in the present case Sivanageswara Rao and his wife constituted a HUF. The funds received by Sivanageswara Rao on partition was HUF funds. Rs. 25,000 out of this money was invested when Sivanageswara Rao was a minor in the firm Prasad & Co. He was admitted to the benefits of partnership in the firm only because of the funds so invested. In the case of Raj Kumar Singh Hukam Chandji v. CIT  78 ITR 33, the Supreme Court had occasion to consider certain tests based on which it could be decided whether the income derived would be income of a HUF or an individual with reference to the investment of funds, etc. The Supreme Court in Raj Kumar Singh Hukam Chandji's case (supra) observed as under: (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 utilization of family assets; (3) whether the family had suffered any detriment in the process of realization 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 if 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 circumstance 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 ... (p. 43) It is clear that it was because of investment of family funds that share income came to be derived from Prasad & Co. Therefore, the share income from Prasad'& Co. was the income of the assessee-HUF and has been rightly taxed by the ITO.14. Coming to the share income from Akula Venkateswarlu & Co., we have referred to the relevant provisions of the partnership deeds. It was made explicit that Sivanageswara Rao was being taken in as a partner only for services to be rendered by him. He was directly taken as a partner and it was not because of his having admitted to the benefit of partnership earlier when he was a minor unlike in the case of Prasad & Co. He also did not invest any portion of the funds received on partition in the firm of Akula Venkateswarlu & Co. Merely because there was a small balance of funds received on partition lying with the firm of Akula Venkateswarlu & Co. before he became a partner and the share income was credited into that account, it would not make the share the income of the HUF. This is so because the averments of Sivanageswara Rao is to the contrary namely that the share income remained his individual income and the stipulations in the partnership deed of Akula Venkateswarlu & Co. corroborate such averments. Therefore, the share income from Akula Venkateswarlu & Co. which was assessed by the ITO has to be excluded from the assessment made in the status of HUF.15. We, therefore, set aside the findings of the Commissioner (Appeals) which are contrary to the conclusions arrived at by us. Our findings are: (a) The assessee-HUF consisting of Sivanageswara Rao and his wife is assessable to tax; (b) in the assessment so made, the share income from Prasad & Co. is includible; and (c) from the assessment made the share income from Akula Venkates-warlu & Co. has to be excluded.
16. In the result, the cross-objection of the revenue is allowed in part and the appeal of the assessee is allowed.