1. The assessed, namely, the Hindu undivided family known as Charan Dass Khanna & Sons, was, in the previous year relevant to the assessment year 1963-64, constituted of Smt. Krishan Piari Khanna, her four sons, viz., Raj Krishan Khanna, Bal Krishan Khanna, Ram Krishan Khanna & Jai Krishan Khanna and their families. This family had been operating business in spectacles and frames.
2. On November 2, 1961, each of the four sons of Smt. Krishan Piari Khanna withdrew Rs. 6,250 from the business accounts of the family by cheques. These amounts were invested by them as their share capital in the partnership business which they started under the name and style of M/s. Modern Optical and Surgical Industries, near Ghaziabad. The firm also obtained a site belonging to the HUF on a yearly rent of Rs. 1,500 and set up the factory where manufacture of optical goods and steel furnitures was started.
3. In the balance-sheet dated March 31, 1963, of the HUF, which was signed by R. K. Khanna, the withdrawals of those Rs. 6,250 by each of the brothers were described as under:
' Advances made to the members of the HUF are in the nature of loans. No interest is charged. '
4. When the assessment of the HUF for the assessment year 1963-64, came up before the ITO, R. K. Khanna, coparcener, again initially took the stand that those withdrawals were in the nature of loans and no interest was charged. However, subsequently, during the course, of assessment, it was pleaded from the side of the family that those withdrawals were not loans simpliciter, but were in fact the result of a partial partition in the family. Thereby each of the four brothers got Rs. 6,250 as separate property. The resultant partnership business, which followed on the investment of those withdrawals, it was claimed, was their individual business, and the income thereof could not be clubbed with the income of the HUF.
5. The ITO, however, declined to accept this belated plea of partial partition and held that the funds of the HUF had been utilised in the operation of the new business and, thereforee, there was detriment to the funds of the family. The income enjoyed from that business was, thereforee, held attributable to the family funds and assessable in its hands. He was unable to accept that merely because an element of personal service or skill or labour was involved on the part of the coparceners for earning that income, the same ceased to belong to the family. The character of income, it was observed, had to be determined, taking into account the basic foundation from which it emanated and in all cases where the income was traceable to the family property, it must partake of the joint family character.
6. In appeal, the AAC confirmed this assessment observing that there was detriment to the family funds and, thereforee, the income enjoyed on utilisation of money withdrawn there from had to be attributed to the family. He declined to accept the contention of the assessed that the withdrawals of Rs. 6,250 by each of the four brothers on November 21, 1961, from the HUF, amounted to partial partition, inter se, to the extent of Rs. 25,000. In this regard, it was observed that the capital account of the HUF was not debited. Instead the accounts of the four brothers were debited by a sum of Rs. 6,250 each. He further noted that no claim for recognition of partial partition was lodged before the ITO under the provisions of Section 171(2) of the I.T. Act, 1961, which was mandatory. The AAC further took into account that the recompense of Rs. 1,500 yearly, in respect of the land where the factory had been set up, was not adequate as it gave a yearly yield of less than 3% to the HUF.
7. When the matter went before the Appellate Tribunal, it allowed the appeal after observing that no detriment to the interest of individual coheirs had resulted, although in its earlier part of the order, the Tribunal did take into account that the matter relating to the detriment of the interest of the HUF could not be ignored.
8. It is in these circumstances that the revenue has got this referencemade under Section 256(1) of the I.T. Act, 1961, with the following question forthe opinion of this court:
' Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was justified in excluding the income of the business, styled M/s. Modern Optical & Surgical Industries, from the total income of the assessed? '
9. We have heard the parties and given our due consideration to all the circumstances. So far as the case of the assessed that the withdrawals of Rs. 6,250 each by the four brothers amounted to the partial partition in the HUF, we find that the same cannot be sustained. As brought out by the AAC there was no debit entry made in the capital account of the family. Instead the accounts of the four brothers were debited by a sum of Rs. 6,250 each. In the balance-sheet dated March 31, 1963, which was prepared of the affairs of the HUF, there was a clear narration that those amounts were advances made to the members of the family in the nature of loans and no interest was being charged. At the stage of assessment also the initial stand taken was that those withdrawals constituted loans simplicities to the four brothers by the HUF. These contemporaneous expressions of the nature of withdrawals were significant and left little doubt that at that time the family and the four brothers were treating those withdrawals as mere loans. Any subsequent stand taken by them, after the lapse of some years, could not convert those loans into a partial partition. Rather we find that this case of partial partition has no legs to stand on. Smt. Krishan Piari, who would have been entitled to equal share in that partition with her sons, was not given any share. There was also no statement from her side that she had given up her share. Moreover, at no stage the assessed formally invoked Section 171 of the Act before the ITO and sought recognition of the partial partition. No separate appeal against implied refusal, if any, to recognise this partial partition was, besides, moved. We have, thereforee, little hesitation in agreeing with the findings of the I.T. authorities that there was no partial partition in the year 1961.
10. We next advert to the question whether the loan of Rs. 6,250 by each of the four brothers from the family and the start of the new manufacturing business by them could result in the treatment of that business as belonging to the family, and its income was attributable to it. The ITO had relied upon the observations of the Supreme Court in the case of CIT v. Kalu Babu Lal Chand : 37ITR123(SC) , to the effect that where a karta brought in monies out of the till of the HUF for entering into partnership with outsiders, he must be regarded as having entered into partnership for the benefit of the HUF.
11. In the case of V. D. Dhanwatey v. CIT : 68ITR365(SC) , the Supreme Court considered the nature of remuneration obtained by the karta of an HUF who had become a partner of the firm by contributing capital belonging to the firm. It was observed that the remuneration paid by the firm to the karta was directly related to the investment in the partnership business from the assets of the family and there was real and sufficient connection between the investment of the family funds and the remuneration enjoyed. The salary paid to the karta was, thereforee, held assessable as income of the HUF. Before an acquisition by the karta of the HUF, can be claimed to be his separate property, it was observed, it must be shown that it was made without any aid or assistance from the ancestral or joint family property.
12. In a later decision, in the case of Raj Kumar Singh Hukam Chandji v. CIT : 78ITR33(SC) , the Supreme Court observed that in determining whether the remuneration received by an individual is the income of the individual to whom it is purported to have been given or that of the HUF of which he is a coparcener, the test 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 HUF but if it is the latter then it is the income of the individual coparcener. It was further observed that 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 HUF. In that case, the remuneration enjoyed by the karta from the company in which the family had substantially invested, in his capacity as director, was held as assessable to tax as his individual income on the ground that it was received for his personal services.
13. Recently a similar matter again came up before the Supreme Court in the case of Y. L. Agarwalla v. CIT : 114ITR471(SC) . There, the karta of a HUF was a partner in a firm in his capacity as karta. On his death, his three minor sons were admitted to the benefits of the partnership in that firm. The capital of HUF standing in the account of the deceased in the firm was continued to be utilised by the firm free of interest. The question arose whether the share of the profits allocated to the three minor sons belonged to the family and was to be assessed to income-tax in its hands. It was held that the induction of the three minors to the benefit of the partnership was with the tacit assent and agreement on the part of their widowed mother representing the family and that the quid pro quo for admitting the three minor sons to the benefits of the partnership was the continued use, free of interest, of the capital amount lying in Y's account by the firm. In the circumstances, it was held that there was direct and substantial nexus between the share income allocated to the three minor sons and the family funds that remained with and were utilised by the firm. The family had also suffered detriment inasmuch as the capital amount lying to the credit of Y was utilised by the firm free of interest and further there was no question of any service being rendered by the three minor sons. The share incomes of the minors were, thereforee, held to belong to the family and assessable in its hands.
14. It is, thereforee, clear that investment of money by coparceners after obtaining loans from the family in a new business is a significant factor though not the only determining criterion for deciding whether the business belongs to the family and its income liable to be clubbed in its hands. It has also to be ascertained if that new business and the earning of income, thereforee, can be overwhelmingly attributed to the specialised skill and enterprise of the coparceners. In case the investment part of that family funds is the main factor resulting in the set up of the new business and its profitability, then the income may have to be ascribed to the family.' If, however, the investment part played a minor role, and it was primarily the personal efforts, specialised skill and enterprise of the individual coparceners, which resulted in the new business being set up and the profits accruing, it may not essentially be said that the income belongs to the HUF.
15. At the same time, the existence of the joint family nucleus, and whether there has been any detriment to the interest of the HUF funds Cannot be altogether ignored. This concept of the Hindu law is not without purpose and significance. It provides a safeguard and protection to other family members from possible mischief or injury to their interest. A karta or any influential adult coparcener may start a new business with family funds, and after asserting that the operation of the business involved his personal efforts and skill, deprive the minors and females who may have a right of share in the funds and income of the family, the benefits thereof.
16. The judicial pronouncements have, as well, drawn a sort of distinction between the share income from a business entered into with the HUF funds, and the salary enjoyed by the karta from that business. While the former has generally been treated as belonging to the family, the latter has been left over to be dependent on the nature and extent of services rendered vis-a-vis the investment. Thus in CIT v. Kalu Babu Lal Chand's case : 37ITR123(SC) , the Supreme Court attributed share profit to the HUF. The other decisions mostly pertain to salaries enjoyed by the kartas which could or could not be primarily attributed to personal services rendered.
17. With this background of the position of law, we find that in the present case, the entire investment flowed from the HUF funds. No interest on those investments was allowed. All the major male coparceners, moreover, joined in the business. No outsider was co-opted in. The site where the factory was set up also belonged to the HUF, though a nominal rent was allowed. The nature of the business also involved manufacture and sale, inter alia, of optical goods which was not entirely divorced from the old optical goods business of the HUF. It was further not brought out that any of those coparceners had acquired any specialised technical skill which could be termed the result of his gains and learning's analogous to those envisaged by the Hindu Gains of learning's Act of 1930.
18. So far as devotion of personal efforts, time and expertise by the coparceners, there was nothing unusual. An HUF does not work in vacuum.
19. It is its members who operate it and its business, and put in their time, labour and skill for their success. That is the normal incident and expectation of an HUF. In the present case, the four coparceners have done nothing more.
20. In the totality of these circumstances, there is no escape from the conclusion that the business income from the partnership business belonged to the assessed-HUF. We answer the question referred in the negative. No order as to costs.