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Fourth Income-tax Officer Vs. M.P.C.K. Mohandoss - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Madras
Decided On
Judge
Reported in(1985)14ITD323(Mad.)
AppellantFourth Income-tax Officer
RespondentM.P.C.K. Mohandoss
Excerpt:
.....the said amount of rs. 12,000 from the total income of the assessee-huf.3. as already stated the learned members who heard the appeal originally have differed. the learned accountant member has held that in terms of clauses 6 and 8 of the deed of partnership remuneration is payable to those partners who are actively engaging themselves in the partnership activities. according to him this fact brings the assessee's case within the ratio of the supreme court decisions in raj kumar singh hukam chandji's case (supra) and prem nath v. cit [1973] 78 itr 319. observations from the latter decision have been quoted in extenso in the order. he has found the decisions in the cases of cit v.r.m. chidambaram pillai [1977] 106 itr 292 (sc) and gopinath seth v.cit [1982] 135 itr 365 (all.) relied.....
Judgment:
1. On a difference of opinion between the learned Members who heard the appeal originally, the following point of difference is stated : Whether, on the facts and in the circumstances of the case, the salary received by the karta of the assessee Hindu undivided family from the firm M.P.C. Narayana Nadar & Bros. should be excluded from the assessee's share income from the firm 2. Briefly stated the relevant facts are that Shri M.P.C.K. Mohandoss is a partner in the firm of M.P.C. Narayana Nadar & Bros., in his capacity as karta of his HUF. The proceedings relate to its assessment for the assessment year 1979-80. Besides the share in the profits and losses the assessee-HUF enjoys a salary of Rs. 12,000 received by Shri M.P.C.K. Mohandoss, the karta, form the firm for his actively engaging himself in the partnership activities in terms of clauses 6 and 8 of the deed of partnership. The short question that has arisen for consideration in this appeal is, whether the said sum of Rs. 12,000 is taxable as the income of the assessee-HUF. The ITO has decided the question against the assessee while the AAC has, following the Supreme Court decisions in the cases of CIT v. Gurunath v. Dhakappa [1969] 72 ITR 192 and Raj Kumar Singh Hukam Chandji v. CIT [1970] 78 ITR 33 accepted the assessee's claim and directed the ITO to exclude the said amount of Rs. 12,000 from the total income of the assessee-HUF.3. As already stated the learned Members who heard the appeal originally have differed. The learned Accountant Member has held that in terms of clauses 6 and 8 of the deed of partnership remuneration is payable to those partners who are actively engaging themselves in the partnership activities. According to him this fact brings the assessee's case within the ratio of the Supreme Court decisions in Raj Kumar Singh Hukam Chandji's case (supra) and Prem Nath v. CIT [1973] 78 ITR 319. Observations from the latter decision have been quoted in extenso in the order. He has found the decisions in the cases of CIT v.R.M. Chidambaram Pillai [1977] 106 ITR 292 (SC) and Gopinath Seth v.CIT [1982] 135 ITR 365 (All.) relied upon by the department as distinguishable. On the other hand, the learned Judicial Member is of the view that the facts of the assessee's case are identical with those of the Allahabad High Court decision in the case of Laxman Dass v. CIT [1982] 138 ITR 628. According to him mere fact that the payment of remuneration is made under some clauses in the deed of partnership does not mean that the remuneration is to the partner individually and not to him as a partner. He has held that the burden is on the assessee-HUF to prove that its karta had rendered services and that there was a service contract between the firm and the karta. Observing that the assessee-HUF has failed to discharge the burden, the learned Judicial Member has held that there is no justification for exclusion of the remuneration of Rs. 12,000 from the total income of the assessee-HUF.Referring to the fact that in another case being IT Appeal Nos. 185 to 187 (Mad.) of 1982 dated 25-5-1982, the view taken by him has been taken and the learned Accountant Member is a party to that decision, the learned Judicial Member has held that if at all the appeal of the assessee is not to be dismissed, then the matter should be sent back for following the decision of the Tribunal supra.

4. The parties have been heard at length. While the departmental representative has relied on the order of the learned Judicial Member, the counsel for the assessee has strongly relied on the order of the learned Accountant Member. Besides, it has been submitted by the departmental representative that once income is allocated amongst the partners under Section 67 of the Income-tax Act, 1961 ('the Act') no deduction can be allowed out of such allocated income.

5. I have considered the rival submissions carefully. I have also gone through the orders of the learned Members. I am of the view that the Hon'ble Supreme Court has clearly laid down the principle in Raj Kumar Singh Hukam Chanad's case (supra) as under : ... 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) There is not even a suggestion that the above principle has been diluted by the Hon'ble Supreme Court itself or has been explained in a different manner by any High Court. Accordingly, the facts of the case require to be examined in accordance with the principle/guidelines laid down by the Supreme Court. The relevant clause in the deed of partnership lays down that the remuneration is paid to those partners as would be agreed upon from time to time for managing the firm's business. On the face of this clause it can be inferred that it is not necessary for the partners to engage themselves actively in the business of the firm and that if they so engage themselves and if the partners find their such engagement useful they might be paid a remuneration which may be agreed upon from time to time by the partners mutually. There is no suggestion that the payment of remuneration to the karta of the assessee-HUF is detrimental to the interests of the assessee-HUF. In this view of the matter I agree with the learned Accountant Member that the principle/guidelines laid down by the Supreme Court are applicable in this case and that the remuneration of Rs. 12,000 paid to the karta of the HUF is not taxable as the income of the assessee-HUF. On carefully going through the Allahabad High Court decision in the case of Laxman Das (supra) which has been strongly relied upon by the learned Judicial Member I find that the said decision supports the order of the learned Accountant Member rather than that of the learned Judicial Member. It is pertinent to mention that the income-tax authorities as well as the Tribunal had held in that case that the remuneration paid to the karta of the HUF was assessable as the income of the HUF as the payment of remuneration was made under a clause in the deed of partnership. It has been held by the High Court that merely because payment of salary to the karta was on account of a clause in the partnership agreement, that, by itself, would not necessarily render the payment to the individual as a payment to his HUF. The decision of the Hon'ble High Court is that the payment of salary to the karta could not be assessed as the income of his HUF.In view of the Supreme Court decision in CIT v. Ramniklal Kothari [1969] 74 ITR 57. I do not agree with the departmental representative that the above view goes contrary to Section 57 of the Act.

6. Having regard to the above discussion, I am in agreement with the learned Accountant Member that the remuneration is not taxable as the income of the assessee-HUF. My this order will now go to the Division Bench for deciding the appeal according to the majority view.


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