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Prem Nath Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Ref. No. 11-D of 1964
Judge
Reported inAIR1967P& H1; [1967]63ITR795(P& H)
ActsIncome Tax Act, 1922 - Sections 66(1); Income Tax Act, 1961 - Sections 256(1); Hindu Gains of Learning Act, 1930
AppellantPrem Nath
RespondentCommissioner of Income-tax
Appellant Advocate Kirpa Ram Bajaj, Senior Adv. and; Davindra Kumar Bajaj, Adv.
Respondent Advocate Hardayal Hardy, Senior Adv.,; Delip K. Kapur and; Yoge
Cases ReferredGurunath V. Dhakappa v. Commissioner of Income
Excerpt:
- sections 100-a [as inserted by act 22 of 2002], 110 & 104 & letters patent, 1865, clause 10: [dr. b.s. chauhan, cj, l. mohapatra & a.s. naidu, jj] letters patent appeal order of single judge of high court passed while deciding matters filed under order 43, rule1 of c.p.c., - held, after introduction of section 110a in the c.p.c., by 2002 amendment act, no letters patent appeal is maintainable against judgment/order/decree passed by a single judge of a high court. a right of appeal, even though a vested one, can be taken away by law. it is pertinent to note that section 100-a introduced by 2002 amendment of the code starts with a non obstante clause. the purpose of such clause is to give the enacting part of an overriding effect in the case of a conflict with laws mentioned with the.....s.k. kapur, j.1. though the income-tax reference no. 11-d of 1964 raises a common question with some other income-tax references being nos. 9-d, 10-d of 1964 and nos. 31-d and 35-d of 1963, yet we are dealing only with the, income-tax reference no. 11-d of 1964 leaving it to the division bench to deal with other references in the light of the decision given by the full bench in this reference.2. the question referred to the full bench is whether on the facts already stated by us the allowance paid to shri prem nath by messrs. k. c. raj and company is to be treated as his individual income or the income of the hindu undivided family of which he is the karta ?' but for avoiding unnecessary delay in the matter, the learned counsel for the parties-agree that we should answer the question as.....
Judgment:

S.K. Kapur, J.

1. Though the Income-tax Reference No. 11-D of 1964 raises a common question with some other Income-tax References being Nos. 9-D, 10-D of 1964 and Nos. 31-D and 35-D of 1963, yet we are dealing only with the, Income-tax Reference No. 11-D of 1964 leaving it to the Division Bench to deal with other references in the light of the decision given by the Full Bench in this reference.

2. The question referred to the Full Bench is whether on the facts already stated by us the allowance paid to Shri Prem Nath by Messrs. K. C. Raj and Company is to be treated as his individual income or the income of the Hindu undivided family of which he is the Karta ?' but for avoiding unnecessary delay in the matter, the learned counsel for the parties-agree that we should answer the question as referred to this Court by the Income-tax Appellate Tribunal, namely, 'whether the remuneration received by Prem Nath, Karta of the assessee Hindu undivided family for services rendered to the firm of Messrs. K. C. Raj and Company and the sub-partnership of Messrs. Kishan Lal in which he is a partner representing the interests of the assessee Hindu undivided family was rightly included in the total income of the assessee Hindu undivided family ?'

3. Shri Prem Nath (H. U. F.) hereinafter for convenience referred to as the assessee, is a Hindu undivided family represented by its Karta Prem Nath. The said Prem Nath representing the interest of the assessee became a partner in the firm styled as Messrs, K. C. Raj and Company. He was also a partner in the sub-partnership styled as Messrs. Kishan Lal. Clause 7 of the partnership agreement constituting the firm Messrs. K. C. Raj and Company entered into between Messrs. Kishan Lal, Prem Nath, Balkishan and Smt. Ram Piari, provides, --'The working parties shall be entitled to charge an allowance of Rs. 750 per month each which shall be considered as business expenditure'. In pursuance of this clause in the instrument of partnership, the three partners, except Smt. Ram Piari, have been drawing Rs. 750 per month each as remuneration, claimed by the assessee, as remuneration, for services rendered.

The Income-lax Appellate Tribunal had recourse to various authorities bearing on the subject and particularly the decision of this Court in Bhagwant Singh v. Commissioner of Income-tax and decided that the remuneration received by the Karta from the firm of Messrs. K. C. Raj and Company was rightly included in the assessment of the Hindu undivided family. The contention by the assessee before the Income-tax Appellate, Tribunal was--'The remuneration received by Prem Nath, the Karta, from the firm of Messrs. K. C. Raj and Company is the individual income of the Karta and is not the income of the assessee (H. U. F.)'. Though an alternate contention had also been raised, but it is unnecessary to mention the same, as the arguments have been confined before us to the above quoted contention alone. The decision mainly turns on the reading of one decision of the Judicial committee in Amar Nath v. Hukam Chand Nathu Mal AIR 1921 PC 35, and the Supreme Court decisions in Commissioner of Income-tax, West Bengal v. Kalu Babu Lal Chand : [1959]37ITR123(SC) ; Piyare Lal Adishwar Lal v. Commissioner of Income-tax, Delhi : (1966)IILLJ759SC and Mathra Prashad v. Commissioner of Income-tax, U. P., Civil Appeal No. 10 of 1965, dated 9-12-1965 (SC).

There are other decisions also, to which I will refer in the course of discussion. In Amar Nath's case, AIR 1921 PC 35, the Privy Council held that in a joint Hindu family the rule is that the acquisitions of the members are joint property and partible, that is to say liable to be shared with the other members of the family, and impartibility is the exception and that persons qualified for earning money by specialised education, enjoyed to the detriment of family funds, become a continuing investment for the family benefit. The Judicial Committee also repelled the contention that only such gains are partible as result directly from the use of joint family funds while, where the use of the funds is remote or indirect, the earnings in the hand of the member remain impartible. In other words, the finding of the Judicial Committee was that partibility does not depend on causa proxima and is not negatived by the intervention of the personal element of the individual coparcener's character. There are two passages in the judicial committee's decision, which I would like to read.

It was observed by Lord Sumner that, 'It is true that a distinction may be drawn between a presumption in favour of partibility which is a legal attribute of the gains in question, and a presumption in favour of detriment to the patrimony involved in acquiring the specialised learning, the use of which has produced the gain, which is a question of fact, but, in their Lordships' opinion, if it is in general incumbent upon the joint family member to prove that his case is an exception to the prevailing rule of partibility, it is also incumbent upon him to prove the particular facts which are needed to establish the exception. . . .'. In the later part of the judgment, it is said,--'Then, can it be said that the gains, which are partible, are such as result only directly from the use of joint family funds, and that emoluments, which are the consideration for the personal services of an official selected for his special personal qualifications, result remotely only and too remotely from any family outlay Not only is no authority forthcoming for the first part of this contention, but the contrary has been continuously assumed in all the cases which turn on 'gains of science'. The point of all of them is, that persons qualified for earning money by specialised education, enjoyed to the detriment of family funds, become, as it were, a continuing investment for the family benefit. No decision attempts to distinguish between the personal and the family elements in the ultimate gains; it would probably be impracticable to do so. There is equally little ground for contending that partibility depends on causa proxima, or is negatived by the intervention of the personal element of the individual coparcener's character. It is true that in the very learned Judgment of Mr. Collett in Chalakonda's case (1864) 2 M.H.C.R. 56, (he expresses the view, that logically the rule should have regard to the use of family property in acquiring the partible gains themselves 'during and for the purposes of the acquisition' and not to its use in acquiring the science by means of which they arc gained, and he cites Sir T. Strange's opinion that in order to make the gains in question partible the common fund must have been directly instrumental in procuring them. There is also an allusion in ILR (1882) 6 Bom 225 to 'the branch of science which is the immediate source of the gains', a passage, however, intended to distinguish between elementary and specialised education, and not between the direct and indirect fruits of the latter. This view was, however, overruled on appeal in Chalakonda's case (1864) 2 MHCR 56, and has never been re-established. . . .'.

It is, however, significant that the judicial committee did, recognise the exception to the effect that the slightness of the assistance by the family funds may, in certain circumstances, make the earnings impartible and so would the peculiar character of the education by which the science is acquired. The judicial committee also did not disapprove of the decision in Lakshman v. Jamnabai ILR (1882) 6 Bom 225, where the earnings of a family member, a subordinate Judge, were held to be impartible, though he had received a slight elementary education of a non-professional character at the family expense. The reading of Amar Nath's case AIR 1921 PC 35, shows that a member of the family, who earns by his own exertions would not be called upon to part with his earnings in favour or other members of the 'family, merely because he was fed at the family funds or he received slight elementary education at the family expense.

The doctrine laid down by the judicial committee in Amar Nath's case AIR 1921 PC 35, that the gains made by a member by means of his learning acquired to the detriment of the family funds belong to the family, suffered a demise at the hands of the legislature in the year 1930, when the Hindu Gains of Learning Act, 1930 (Act No. XXX of 1930), was passed, which provided that no gains of learning shall be held not to be the exclusive or separate property of the acquirer, merely by reason of his learning having been imparted to him by any member of his family or with the aid of the joint funds of his family or with the aid of the funds of any member thereof, or by reason of the fact that while such member was acquiring his learning, he had been maintained or supported, wholly or in part, by the joint funds of his family or by the funds of any member thereof.

This dent, was, however, not deep enough to destroy the principle that income of a member of a joint family would be impartible only if obtained by his own exertions and without any detriment to the father's estate, that is without the aid of joint family property, and that such earning would be joint if earned at the expense of the joint family property. It was in this state of law that a similar question arose before the Patna High Court in Indra Singh v. Commissioner of Income-tax, B. and O. : [1943]11ITR16(Patna) . In that case, the amount was the remuneration earned by a governing director of a company and it was held that the personal remuneration paid to such director for services rendered to the company was his individual income and the fact that the shares held by such director to qualify him to the appointment belonged to the joint family did not make the remuneration taxable in the hands of the family. Amar Nath's case AIR 1921 PC 35, was not considered.

The same view was taken again by the Patna High Court in Commissioner of Income-tax, B. and O. v. Darsanram : [1945]13ITR419(Patna) . In that case, two Hindu undivided families represented by their Kartas owned a limited company. Certain sums were paid to the Kartas as directors' fees. The High Court repelled the argument of the Revenue that as the directors became qualified by reason of the shares of the joint family having been placed at their disposal, the income should be treated as that of the Joint Hindu family. It was held that the directors' fees paid to the directors were their personal income and not the income of the joint family. Amar Nath's case AIR 1921 PC 35, again does not appear to have been brought to the notice o the learned Judges. I may straightway say, with utmost respect to the learned Judges, that whatever be the position with respect to the remuneration other than the director's fee earned by a Karta, the decision in this case as to the director's fee is wrong in view of the principles laid down by the Supreme Court in Kalu Babu Lal Chand's case : [1959]37ITR123(SC) and Piyare Lal Adishwar Lal's case : (1966)IILLJ759SC , and by the judicial committee in Amar Nath's case AIR 1921 PC 35, director earns his fees only by reason of his such position and if there is no difference in direct and indirect use of funds belonging to the joint family, it must be held that it is impossible for a director to earn director's fees without detriment to the family funds.

4. Then came a decision of the Madras High Court in Commissioner of Income-tax, Madras v. Sankaralinga Iyer : [1950]18ITR194(Mad) . In that case, the assesses, the Karta of a Hindu undivided family earned remuneration as a managing director and fees as a director from a bank. The income-tax authorities treated that income as income of the family on the ground that necessary shares to acquire the qualification of a managing director were purchased out of joint family funds. It was held that the remuneration earned in consideration of the services which he rendered to the bank was his personal income and not the income of his family of which he was the Karta, because no part of the family funds was spent or utilised for earning the remuneration and the fact that family funds were utilised for acquiring the qualification shares did not constitute such detriment to the family property as to make the said remuneration partible. The matter was considered by the Supreme Court for the first time in Kalu Babu Lal Chand's case : [1959]37ITR123(SC) . In that case, a company was floated with the funds provided by a joint family and the managing director acquired qualification shares also with the funds belonging to the family.

The Supreme Court held that the remuneration received by the Managing director was assessable as the income of the joint family. It was observed that--

'Here was the Hindu undivided family of which B. K. Rohtgi was the Karta. It became interested in the concern then carried on by Milkhi Ram and others under the name of India Electric Works. The Karta was one of the promoters of the company which he floated with a view to take over the India Electric Works as a going concern. In anticipation of the incorporation of that company the Karta of the family took over the concern, carried it on and supplied the finance at all stages out of the joint family funds and the finding is that he never contributed anything out of his separate property, if he had any. The articles of association of the company provided for the appointment as managing director of the very person who, as the Karta of the family, had promoted the company. The acquisition of the business, the floation of the company and the appointment of the managing director appear to us to be inseparably linked together. The joint family assets were used for acquiring the concern and for financing it and in lieu of all that detriment to the joint family properties the joint family got not only the shares standing in the names of two members of the family but also, as part and parcel of the same scheme, the Managing directorship of the company when incorporated. It is also significant that right up to the accounting year relevant to the assessment year 1943-44 the income was treated as the income of the Hindu undivided family. It is true that there is no question of res judicata but the fact that the remuneration was credited to the family is certainly a fact to be taken into consideration. It appears to us that the case is governed by the principles laid down in Haridas Purshottam's case : [1947]15ITR124(Bom) . The recitals in the agreement also clearly point to the fact of B. K. Rohtgi having been appointed managing director because of his being a promoter or the company and having actually taken over the concern of India Electric Works from Milkhi Ram and others. The finding in this case is that the promotion of the company and the financing of the concern and the taking over of it were all done with help of the joint family funds and the said B. K. Rohatgi did not contribute anything out of his personal funds if any. In the circumstances, we are clearly of opinion that the managing director's remuneration received by B. K. Rohatgi, was as between him and the Hindu undivided family, the income of the latter and should be assessed in its hands. ...... ...'

The point again arose before the Supreme Court in Piyare Lal Adishwar Lal's case : (1966)IILLJ759SC . There, an individual was appointed as a treasurer of a bank and property of the Hindu undivided family of which he was a member was furnished by him as security. It was held that he was an employee of the bank and there was nothing to show that he received any 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 and, therefore, the salary paid to the treasurer belonged to and was assessable as his individual income and not as the income of the family. Giving of Joint family property in security for the good conduct of the treasurer was held not to constitute any detriment to the family property or risk of loss within the meaning of the term as used in the various decided cases so as to make his income partible. Dealing with Kalu Babu Lal Chand's case : [1959]37ITR123(SC) the Supreme Court said,

'That case is distinguishable. There the Karta of a Hindu undivided family took over a business as going concern and carried on the business till the company was incorporated. The shares in the name of the 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 form' 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 floatation of the company and the appointment of the managing director were inseparably linked together .....'

5. Then came the latest decision of the Supreme Court in Mathra Prasad's case, Civil Appeal No. 10 of 1965, D/- 9-12-1965 (SG). In that case, Hindu undivided family partitioned their property in business and as a result of that partition one-sixth share was allotted in the assets to a smaller Hindu undivided family of which Mathura Prasad was the manager. After partition, the managers of sis branches joined as partners to carry on business formerly conducted on behalf of the larger Hindu undivided family. Clause 8 of the partnership agreement provided --

'That the business of a place shall be managed by one of members who reside at a place of the business to the best of his or their ability. The allowances of the Managing partners of a particular place shall be debited to the profit and loss account of that place at the end of the year. But such allowance shall not be more than profits disclosed by the business of that place in that particular year. If the business is managed by more than one partners, such allowances shall be divided equally between them. The member or members shall be entitled to withdraw for such allowance a sum of money monthly which will approximately he proportionate to the expected profits of the year. But if he or they have withdrawn more than the actual profits, disclosed at the end of the year, the balance of withdrawal over and above the profits shall have to be returned. At the Agra office i. e. Aggarwal Iron Works Shri Mathura Parsad who will manage, the whole affairs will be entitled to a monthly allowance of Rs. 1,500/- but for him too the terms mentioned above will apply i. e. if the profits disclosed at the place do not justify the withdrawals in the manners mentioned above, he will have to refund the excess of the withdrawals over the profits.'

6. Mathura Prasad claimed that income received by him as remuneration from the firm was his individual income. The Supreme Court held that in view of the finding of the tribunal that Mathura Prasad, the manager, became a partner in the firm with the help of joint family funds and as a partner he was entrusted with the management of a particular business, the allowance received by him was directly related to the investment of the family funds in the partnership business and, therefore, taxable as income of the family. Dealing with Piyare Lal Adishwar Lal's case : (1966)IILLJ759SC , it was observed that

'We see no analogy between a case in which the property of the Hindu undivided family is sought to be encumbered for obtaining a benefit which is essentially personal to the manager, and a case in which with the aid of the family funds the manager of the family is able to enter into a partnership and to earn allowance, which he would not otherwise have been entitled to receive.'

Another contention raised before the Supreme Court was that Mathura Prasad earned the allowance because of the special aptitude he possessed for managing the particular branch of business and was not earned by use of joint family funds. The Supreme Court declined to go into that question on the ground that no such contention was raised before the High Court. It is necessary to recur for a moment to Kalu Babu Lal Chand's case : [1959]37ITR123(SC) , and to see the treatment accorded to the two decisions of the Patna High Court and the decision of the Madras High Court in Sankaralinga Iyer's case : [1950]18ITR194(Mad) . Indra Singh's case : [1943]11ITR16(Patna) was distinguished on the ground that it was expressly provided in the articles of association of the company that the remuneration of the managing director would be his personal income while Darsanram's case : [1945]13ITR419(Patna) on the ground that there was a finding of fact that the joint family property had not been utilised in earning the managing director's remuneration.

There has been a considerable controversy not only before us but before other High Courts as well as to whether or not the Supreme Court overruled Sankaralinga Iyer's case : [1950]18ITR194(Mad) . In one part of the judgment, their Lordships of the Supreme Court observed that the decision did not help the assessee because of the facts found in that case. After discussing the facts, their Lordships did express themselves by saying that the learned Judges of the Madras High Court overlooked the principle laid down by the Judicial Committee in Amar Nath's case AIR 1921 PC 35, where it had been pointed out that there was no valid distinction between the direct use of the joint family funds and the use which qualified the member to make the gains on his own efforts.

Shorn of all details, it does appear that both the Patna High Court and the Madras High Court were inclined to the extreme view that wherever remuneration was earned by a member of the family for personal services rendered, the said remuneration would belong to and be assessable in the hands of the individual irrespective of the fact whether or not the aid of family funds was taken in earning the said remuneration. To that extent, as pointed out by their Lordships of the Supreme Court in Kalu Babu Lal Chand's case : [1959]37ITR123(SC) , the Madras High Court, and, if I may say so also the Patna High Court did ignore the principle laid down by the judicial committee, in Amar Nath's case AIR 1921 PC 35. It follows that if the learned Judges deciding those cases had been invited to bear that principle in mind, they would not have laid down a rigid rule of law that in all cases such remuneration must belong to and be assessed in the hands of the members as their individual income but would have directed their attention to the facts found with a view to enquiring: did the joint family funds qualify the member to earn the remuneration in question As I understand the observations of their Lordships of the Supreme Court about Sankaralinga Iyer's case : [1950]18ITR194(Mad) , I think what their Lordships pointed out was that the High Court decided the question in disregard of the principle that if the family funds qualified the member to earn that remuneration, the same would be taxable in the hands of the family even though earned by the member for services rendered by him.

Consequently, I am unable to hold that the Supreme Court intended to lay down that the said amount should have been taxed in the lands of the family at all events and no amount of circumstances could have admitted of any exception. As I read the decision in Kalu Babu Lal Chand's case : [1959]37ITR123(SC) , therefore, I am of the opinion that there is no rigid rule of law one way or the other and the enquiry to be directed in all cases is to find out whether the income was earned by a member to the detriment of the family funds and it is immaterial whether the use of family funds was direct or indirect. In other words, if the use of family funds is direct in the sense that the income directly arises from the investment of the family funds, it would be the income of the family, and, similarly, where the family funds qualify a member to earn that income and, therefore, the use of funds is remote or indirect, even then the income will belong to the family and partibility will not be negatived by the intervention of the personal element of the individual member's character. If, on the other hand, it can be shown that there was no aid taken from the family funds directly or indirectly in earning the income which was earned entirely or predominently due to the personal exertions of the member without detriment to the funds of the family, the income would remain the individual income of the member and taxable in his hands.

7. I am not at all unmindful of what the judicial committee said that there is a presumption in favour of the partibility and a presumption in favour of detriment to the patrimony, in case the funds of the family have been used directly or indirectly, and it is for the joint family member to prove that his case is an exception to the rule of partibility. I am also fully conscious that the judicial committee said that it is impracticable to distinguish between the personal and the family elements in the ultimate gain. But still some exception was, undoubtedly, recognised by the judicial committee. It also appears from Kalu Babu Lal Chand's case : [1959]37ITR123(SC) and from Piyare Lal Adishwar Lal's case : (1966)IILLJ759SC , that if there was no exception to the general rule the Supreme Court would not have gone into the various facts to find out the existence an inseparable link between the earning and the family funds. I must refer to what their Lordships of the Supreme Court said in Piyare Lal Adishwar Lal's case : (1966)IILLJ759SC while holding that the income belonged to the member. It was said that,--

'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.'

It was further said that it had not been shown that there was any detriment to the family property within the meaning of the terms as used in the decided cases. It is, clear that the Supreme Court proceeded on the assumption, and there can be no denying that fact, that furnishing of security was necessary to enable the member to secure the appointment and in that sense there was a detriment to the family property, but the decision in that case turned on the question that the furnishing of the security was not the sole or even the main reason for being appointed to the post. Similarly, in Mathura Prasad's case, Civil Appeal No. 10 of 1965, D/- 9-12-1965 (SC) the decision was based on a finding that the member was able to enter into a partnership because of the family funds and he would not have earned the allowances if he had not entered into the partnership. In other words, it was decided that the member earned the remuneration because he was a partner and he would not have earned it otherwise. It is significant that the Supreme Court declined to go into the suggestion that Mathura Prasad was appointed because of the special aptitude he possessed for managing the particular branch of business as the point had not been raised. If there had existed no exception, the Supreme Court would have answered the suggestion by saying that that question could not arise at all. 'Mayne on 'Hindu Law and Usage' eleventh edition, at page 354, refers to Jimutavahana as laying down that--

'Where it is attempted to reduce a separate acquisition into common property on the ground that it was obtained with the aid of common property, it must be shown that the joint stock was used for the express purpose of gain. It becomes not common, merely because property may have been used for food or other necessaries; since that is similar to the sucking of the mother's breast' ......'.

The following principles, in my opinion, emerge from the decisions of the Supreme Court and the judicial committee--

(1) that the income of a member of a joint family would be a separate property if it has been obtained by his own exertions and without any detriment to the father's estate, that is, without the aid of joint family property;

(2) that it would be a joint family income if earned at the expense of the joint family funds:

(3) that where the family funds have been used either for earning the income or for qualifying the member to earn the income, the presumption is in favour of partibility and in favour of detriment to the patrimony;

(4) that partibility dose not depend on causa proxima and is not negatived by the intervention of the personal element of the individual member's character or, in other words, when the income arises both by reason of use of family funds and personal exertion, the presumption would be that the income belongs to the family; and

(5) that if the facts show that a member would not have been put in such a position as to be able to earn the income in question without the aid of the family funds, it would be the income of the family and, consequently, where a member becomes a partner with the aid of family funds and earns remuneration, though for services rendered, the income would belong to the family if it appears that he would not have earned that remuneration had he not been a partner. On the other hand, if the facts show that the income was the result, entirely or predominantly, of the personal exertion of the member which it would be for the member to prove, the income will not be partible, as happened in Piyare Lal Adishwar Lal's case : (1966)IILLJ759SC . In other words, if there exists an inseparable link between the investment of the patrimony and the earning, the earning would be partible.

(6) Where a member can establish that he earned the remuneration not because of his being a partner, but solely or predominantly because of special qualifications personal to him, the income would be impartible.

I would like to add one example to illustrate my point. Take a case of a partnership firm, engaged in the construction work, consisting of four partners, three of whom are not at all experienced or qualified for any construction work and the fourth is a qualified civil engineer. Such a firm takes a contract for execution of certain works and all the partners do some work or the other in this connection every day and are paid for the same. The qualified engineer partner says to the other partners,--'You have employed an engineer to do overtime work at night, for which you pay him Rs. 2,000 a month. I am as qualified as he is, and if you pay me half of that remuneration I will do that overtime work.' And the other partners agree. In such circumstances, it may be possible for that engineer partner to show that 'this income is entirely the result of my personal exertion and it cannot be said that I would not have earned this amount if I were not a partner.' In such a case, I think, the presumption in favour of partibility may possibly be rebutted.

Of course, it would be a question of fact to be decided in each case and all that I say is that exceptions cannot be completely ruled out. Again, a member may be appointed to do a particular job not because he is a partner but because of the special aptitude possessed by him to do the job. I cannot understand why, in such circumstances, such a partner cannot say that 'my income is not the result of any use, direct or indirect, of the family funds.'

8. After Kalu Babu Lal Chand's case : [1959]37ITR123(SC) , and before Piyare Lal Adishwar Lal's case : (1966)IILLJ759SC , came the decision of this Court in . In that case a Division Bench of this Court took, what may be understood, as the other extreme view, namely, that where the monies of the family have been invested in the partnership, the remuneration earned by the partner a member of a joint Hindu family would always belong to the family. The reading of the judgment shows that the learned Judges thought that no exception was possible.

It was observed that--

'It has been established on the record of this case that S. Bhagwant Singh was a member of a joint Hindu family, that he invested a part of the joint family funds in this partnership, that it was in consequence of this investment that he became a partner in this enterprise, and that it was in consequence of his being a partner that he became entitled to draw his salary. 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.'

This observation was made while answering a contention raised that no joint family property was utilised in earning the salary by Bhagwant Singh. I am not suggesting that the judgment was incorrect on facts, particularly as I have said that there would be a presumption in favour of partibility where joint family funds have been used by a member for becoming partner.

All that I wish to say is that the learned Judges appear to have declined to accept any exception and, consequently, with all respects, I would say that they went a little too far. It is not necessary to elaborate on another judgment of this Court in Mohan Tayal v. Commissioner of Income-tax, Punjab , as it is based primarily on Bhagwant Singh's case . As a matter of fact, while distinguishing Piyare Lal Adishwar Lal's case : (1966)IILLJ759SC , the learned Judges did observe that that case was different inasmuch as the furnishing of security was not the sole or the main reason for being appointed a treasurer. The Madras High Court was again faced with a similar problem in Commissioner of Income-tax, Madras v. Palaniappa Chettiar : [1964]53ITR581(Mad) , and it was held that the character of income has to be determined taking into account the basic foundation from which it emanates and if the income is traceable to the family property, it must partake of the joint family character. The learned Judges, however, thought that they were not concerned to consider as to what would result where the detriment to the family funds were trifling or unsubstantial; the question whether an acquisition was made to the detriment of the family estate, being largely a question of fact. Considering the facts, the learned Judges thought that the root cause of the member's income was certainly his share position and, therefore, a dichotomy between the earning by the managing director as remuneration for services and as dividends on shares was not possible. There again the decision turned on the finding that the investment in shares was the root cause of the ultimate income.

9. There then remains to consider a decision of the Mysore High Court in Gurunath V. Dhakappa v. Commissioner of Income-tax, Mysore : [1964]53ITR757(KAR) . There, a business was carried on by a Hindu undivided family which was subsequently converted into a partnership. The manager of the family managing the family business was receiving Rs. 500 per month as remuneration and it was agreed by the partners that he should continue to receive the said remuneration for the services rendered to the firm. The learned Judges decided, again depending on the facts found, that the circumstances did not lead to the conclusion that the manager got that remuneration only because he was one of the partners and, as a matter of fact, his being a partner was not the sole or the exclusive reason. So far as the principle is concerned, it is apparent that the learned Judges of the Mysore High Court also thought that there was not such invariable rule that in all such cases the income must belong to the family, even though the member 'being a partner be not at all the reason for the appointment of the member to the position wherefrom he earned the remuneration.

10. Mr. Kirpa Ram Bajaj, learned counsel for the assessee, has very strongly relied on Mathura Prasad's case, Civil Appeal No. 10 of 1965, dated 9-12-1965 (SC), in support of the proposition that whereas in Kalu Babu Lal Chand's case : [1959]37ITR123(SC) , the Supreme Court had declined to recognise any exception to the rule of partibility in such circumstances, their Lordships did, for the first time, recognise the possibility of an exception in Mathura Prasad's case, Civil Appeal No. 10 of 1965, dated 9-12-1965 (SC). It is really unnecessary to go into the contention as raised by Mr. Bajaj, because I have already said that possibility of exception cannot be ruled out.

11. It is in the light of the aforesaid principles that I must proceed to answer the question referred to us by the Tribunal. The contention raised before the Tribunal was that since the remuneration was received by Prem Nath in consideration of the services rendered, it must be held that it was a remuneration OH account of his personal exertions and not earned at the detriment of the family funds. I have already said that merely because remuneration is earned for the services rendered cannot lead to the conclusion that the income can, in no case, belong to the family. I think, the assessee never made out a case that he would have earned this remuneration from the firm even if he were not a partner and that there was no link between the patrimony and the earning. In other words, no facts appear to have even been alleged to rebut the presumption so prominently brought out by the judicial committee in Amar Nath's case AIR 1921 PC 35.

12. Mr. Bajaj then says, 'Look at the question referred' which shows that it was assumed that the remuneration was for services rendered. That, however, does not improve the position so far as the assessee is concerned, in view of what I have said above, namely, that there is a presumption in such a case of the income being partible, even, if earned in consideration of services rendered. The exception, as contemplated by me in the discussion above, has not been either alleged or proved. As a matter of fact, the perusal of Clause 7 of the partnership agreement, referred to by me already, shows that it was intended to operate merely as a removal of the bar to a partner receiving remuneration, as provided in Section 13(a) of the Indian Partnership Act, I think, the case squarely falls within the rule laid down by the Supreme Court in Mathura Prasad's case, Civil Appeal No. 10 of 1965, dated 9-12-1965 (SC), and the answer must be in the affirmative, that is, in favour of the Revenue. The Commissioner will have the costs in this Court, which I fix at Rs. 250.

A.N. Grover, J.

13. I agree.

S.S. Sulat, J

14. I agree.


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