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Commissioner of Income-tax, Tamil Nadu-i, Madras Vs. Surendra Manilal Mehta and - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtChennai High Court
Decided On
Case NumberTax Cases Nos. 637 and 638 of 1978 and 3 to 7 of 1980
Judge
Reported in(1984)42CTR(Mad)310; [1985]154ITR264(Mad)
ActsIncome Tax Act, 1961 - Sections 67(1)
AppellantCommissioner of Income-tax, Tamil Nadu-i, Madras
RespondentSurendra Manilal Mehta and ;suresh B. Mehta
Appellant AdvocateJ. Jayaraman, ;Nalini Chidambaram, ;S. Jaishree, Advs.
Respondent AdvocateS.V. Subramaniam and ;P.P.S. Janarthan Raja, Advs.
Excerpt:
direct taxation - construction - sections 67 (1) of income tax act, 1961 - salary paid to 'karta' of hindu undivided family (huf) by utilizing his special skill and ability - whether same can be assessed in hands of huf - salary of 'karta' can only be assessed in hands of huf when salary derived was related with investments of huf in capital of firm - facts revealed that salary paid was not made to detriment of funds of huf - held, aforesaid income of 'karta' cannot be included in income of huf. - - strong reliance was placed by the learned counsel for the assessees upon the decision of the supreme court in rajkumar singh hukam chandji v. 6. we now proceed to consider some of the decisions laying down the considerations applicable to cases like these. out of the four shareholders in..........to attend to the business of the firm, yet only four out of six partners of the firm had been paid salary and that would indicate that such payment of salary was only towards the compensation for special services rendered by them, as otherwise, there was no justification for excluding two out of six partners and providing for payment of salary only to four partners. strong reliance was placed by the learned counsel for the assessees upon the decision of the supreme court in rajkumar singh hukam chandji v. cit : [1970]78itr33(sc) , as concluding the question in favour of the assessees. the further submission of the learned counsel was that the decision in cit v. chidambaram pillai : [1977]10itr292(sc) , related to the consideration of the question whether salary paid to a partner of.....
Judgment:

Ratnam J.

1. These tax cases are dealt with together, as at the instance of the Revenue, a common question has been referred for the opinion of this court in all those cases, though the assessees, which are HUFs, and the assessment years, are different. While T.Cs. Nos. 3 to 7 of 1980 relate to a HUF, which is a partner in the firm of M/s. Bapalal and Company, represented by its karta, Sri Suresh B. Mehta, for the assessment years 1968-69 to 1972-73, T.Cs. Nos. 637 of 1978 and 638 of 1978 are concerned with another HUF, which is also a partner in the firm of M/s. Bapalal & Co., represented by its karta, Sri Surendra Manilal Mehta, in respect of the assessment years 1971-72 and 1972-73. For the assessment year 1968-69, though the assessee in T.Cs. Nos. 3 to 7 of 1980 originally declared a certain income, a revised return was subsequently filed showing a reduced income and claiming that the difference of Rs. 12,000 being the salary received by Shri Suresh B. Mehta in his individual capacity should be excluded in computing the income of the HUF. Similar claims were made for the assessment years 1969-70 to 1972-73. The ITO was of the opinion that the income of Rs. 12,000 was earned by the utilisation of the joint family funds and that the rendering of personal service by Shri Suresh B. Mehta to the firm would not in any way alter the character of the income. In this view, the amount of Rs. 12,000 was added back in each of the relevant assessment years. On appeal, the AAC took note of the recognition by the Government of India of Sri Suresh B. Mehta as one of the approved valuers and concluded that he had attained skill in valuing diamonds and precious stones for making which available to the firm by his services he was paid a salary and, therefore, the amounts received by him would be compensation for services rendered and cannot be treated as a return made to the HUF, because of the investment of its funds in the firm, M/s. Bapalal & Co. In computing the total income of the assessee-HUF, the salary paid to Sri Suresh B. Mehta was deleted. The Revenue appealed to the Tribunal contending that as the assessee initially had not treated the salary as belonging to the coparcener but as belonging to the HUF (the contention that), the payment of the salary was for special services rendered by the coparcener cannot be accepted and that in a business depending upon the skill of partner, the salary paid should not be only for services rendered but should be viewed as also relatable to the membership in the partnership in which the HUF had invested its capital. On behalf of the assessee, relying upon the terms of the deed of partnership, it was contended that payment of salary had been provided only in respect of four out of six partners indicating that such payment was only towards compensation for special services rendered by them which was something more than the ordinary services rendered as partners in the firm. Dealing with the appeals for the assessment years 1968-69 and 1969-70, the Tribunal took note of the provision for the payment of salary to four only out of six partners in the deed of partnership and the non-denial that the coparcener to whom the salary was paid had certain special skill and held that such payment of salary was only in respect of special skill exercised by the partner not because he was a partner, but as he was working in the business. Relying upon the principle enunciated by the Supreme Court in Rajkumar Singh Hukam Chandji v. CIT : [1970]78ITR33(SC) , the Tribunal concluded that the remuneration paid was in respect of services rendered by the coparcener and such receipt would not partake the character of income of the HUF for purposes of tax treatment. On this conclusion, the Tribunal dismissed the appeals. Following its earlier orders relating to the assessment years 1968-69 and 1969-70, the Tribunal dismissed the appeals preferred by the Revenue even in respect of the assessment years 1970-71 to 1972-73.

2. In T.Cs. Nos. 637 of 1978 and 638 of 1978 relating to the assessment years 1971-72 and 1972-73, the salary received by one Shri Surendra Manilal Mehta from the firm of M/s. Bapalal & Co., in a sum of Rs. 12,000 every year was included by the ITO in the income of the assessee family in computing its income. On appeal to the AAC, he took the view that the question had been considered in the appeal preferred by another partner of the same firm, wherein it had been held that the remuneration received from the firm was not includible in the hands of the HUF and following the very same reasoning, directed the deletion of the salary received by Sri Surendra Manilal Mehta from the assessment of an HUF. On further appeal to the Tribunal, if followed its earlier order with reference to the assessee in T.Cs. Nos. 3 to 7 of 1980 regarding the assessment years 1968-69 and 1969-70 and dismissed the appeals.

3. Inasmuch as a common question was thus decided by the Tribunal in all the appeals, the following question which is common to both the assessees in respect of all the assessment years has been referred under s. 256(1) of the I.T. Act, 1961 (hereinafter referred to as 'the Act') :

'Whether, even on the finding that the salary was paid to the karta of the assessee by reason of his special skill and ability, the same could be assessed in the hands of the assessee-Hindu undivided family ?'

4. The learned counsel for the Revenue contended that as under the terms of the deed of partnership there was no provision for the payment of remuneration towards the special services rendered by the partners, all the partners were entitled to attend to the business of the firm under clause 8 thereof and hence payment of salary should be regarded as attributable only to the membership of the HUFs in the partnership. Relying upon the decision in CIT v. Chidambaram Pillai : [1977]10ITR292(SC) , it was further contended that there cannot be a contract of service between a firm and one of its partners and that payment of salary to a partner retains the character of the income of the firm and should be dealt with under s. 67(1)(b) of the Act. On the other hand, the learned counsel for the assessee in T.Cs. Nos. 637 and 638 of 1978 submitted that though every partner of the firm under the terms of the deed of partnership was entitled to attend to the business of the firm, yet only four out of six partners of the firm had been paid salary and that would indicate that such payment of salary was only towards the compensation for special services rendered by them, as otherwise, there was no justification for excluding two out of six partners and providing for payment of salary only to four partners. Strong reliance was placed by the learned counsel for the assessees upon the decision of the Supreme Court in Rajkumar Singh Hukam Chandji v. CIT : [1970]78ITR33(SC) , as concluding the question in favour of the assessees. The further submission of the learned counsel was that the decision in CIT v. Chidambaram Pillai : [1977]10ITR292(SC) , related to the consideration of the question whether salary paid to a partner of a firm growing and selling tea is exempt from tax to the extent of 60% thereof representing agricultural income and liable to tax only in respect of 40% and, therefore, that decision would be inapplicable to this case where no question with reference to the claim for exemption or even the applicability of s. 67(1)(b) the Act for purposes of tax treatment of such a payment has either arisen or referred.

5. According to the general doctrine of Hindu law, property acquired by a karta or a coparcener with the aid or assistance of the joint family assets would partake the character of joint family properties. To state it differently, acquisitions without the assistance or aid of the joint family property would clothe such properties with the character of self-acquisitions. The essential test of self-acquisition either by a karta or a coparcener is that the acquisition had been made without detriment to the ancestral estate. Therefore, before an acquisition can be claimed to be a separate property, it must be established to have been made without any assistance from the ancestral or joint family property. From the terms of the deed of partnership included as annexure D in the stated case in T.Cs. Nos. 3 to 7 of 1980, it is seen that the six partners have contributed a sum of Rs. 36,000 towards the capital in equal shares. Clauses (4) and (5) provide for the payment of a monthly remuneration of Rs. 1,000 to four only out of the six partners. Under clause (8), it is provided that all partners shall be entitled to attend to the business of the firm. The provision in the deed of partnership for payment of salary to only four persons out of six shows that apart from devoting their attention to the business of the firm, in respect of which they will be entitled to a share of profits of the firm, a special provision has been made for payment of salary. Such a special provision regarding the payment of salary has been thought of only on account of certain special skill and experience of those partners, particularly in the work of valuing diamonds and precious stones. Indeed, Shri Suresh B. Mehata has been found by the Tribunal to possess certain special skill. Payment of remuneration for making available to the business of the firm such special skill would really be in the nature of compensation for services rendered by the exercise of such special skill. This is not just the same as attending to the business of the firm in the ordinary course as a partner entitled to do so. Therefore, the remuneration paid by the firm and received by the partner is not in any manner related to the investment of the HUF in the firm. On the other hand, it is in the nature of compensation for making available to the firm the benefit of the personal skill and experience of four out of six partners in the line of business pursued by the firm. In exercising such skills for the purpose of the conduct of the business of the firm, the detriment, if any, is personal to the partners and not to the undivided family or its properties or investment in the firm. We may also mention that the question referred to this court for its opinion and set out earlier also proceeds on the acceptance of the finding of the Tribunal that the salary was paid to the karta of the assessees by reason of special skill and ability. In view of these considerations and the absence of materials to establish that the salary paid to Suresh B. Mehta and Surendra Manilal Mehta would be in the nature of returns to the HUFs of the assessees because of the investment of those families in the firm, the contention of the learned counsel for the Revenue cannot be accepted.

6. We now proceed to consider some of the decisions laying down the considerations applicable to cases like these. In CIT v. Kalu Babu Lal Chand : [1959]37ITR123(SC) , the manager of a HUF took over a business as a going concern and promoted a company to take over the business. The shares, which stood in the name of the manager and his brother, were acquired with the funds belonging to the joint family when the company was floated. The company was also financed by the joint family. In proceedings for the assessment of the HUF, it was claimed that the remuneration paid to the manager of the HUF, who under the articles of association of the company, had become the managing director, was his personal earnings and could not be added to the income of the HUF. The Supreme Court accepted the finding that the taking over of the concern, the promotion of the company and the financing of it were all done with help of the joint family funds and that the manager of the HUF did not contribute anything and held that, under those circumstances, the remuneration received by the managing director, as between him and the HUF, was the income of the family and assessable in its hands. In Dhanwatey v. CIT : [1968]68ITR365(SC) , the karta of a HUF was a partner of a firm and the contribution to the capital of the firm belonged to the family. Interest was payable on the capital contributed by each partner. Under clause (7) of the partnership deed, the general management and supervision of the partnership business was to be in the hands of V. D. Dhanwatey. Provision was also made for payment of monthly remuneration to him. The question arose whether the salary received by V. D. Dhanwatey was assessable in the hands of the HUF. The High Court took the view that the salary paid to V. D. Dhanwatey was only an increased share of the profits of the firm paid to V. D. Dhanwatey and the amount was taxable in the hands of his undivided family. By a majority decision, the Supreme Court held that the remuneration paid to V. D. Dhanwatey practically related to the investments of the assets of the undivided family in the partnership business and that there was sufficient connection between the investment of the joint family funds and the remuneration paid and, therefore, the salary paid to V. D. Dhanwatey was assessable as the income of the HUF. In Dhanwatey v. CIT : [1968]68ITR385(SC) , M. D. Dhanwatey, as the karta of his HUF, was a partner of a firm, the share capital in the firm having been contributed entirely by the family. Clause (5) of the deed of partnership provided for payment of interest to the partners on their share of the capital contribution. Under clause (8), he was to be the manager in charge of the works and a monthly remuneration was payable under clause (16). Under thouse circumtances, the Supreme Court held that the salary received by him could be included in the total income of the HUF. In Palaniappa Chettiar v. CIT : [1968]68ITR221(SC) , the karta of a HUF acquired certain shars in a transport company with the help of the family funds. Out of the four shareholders in the company including the karta, two were directors and on the death of one of them, the karta became a derector of the company and on the death of another, who was managing the business of the company, he became the managing director and as such, he was entitled to remuneration, sitting fees, as well as commission in the net profits. The question arose whether the remuneration, commission and the sitting fee received by the managing director, who was also the karta of the HUF, were assessable as the income of the family. The Supreme Court held that the acquisition of the shares were not with the object that the karta should become the managing director, but as an investment in the ordinary course and there was no connection between the investment of the joint family funds for the purchase of the shares and the appointment of the karta as the managing director and as the remuneretion as remunaration as manaing director was not earned by any detriment to the family assets, the amount received by the karta towards the managing director's remunaration, commission and sitting fee were not assessable as the income of the HUF. In CIT v. Gurunath Dhakappa : [1969]72ITR192(SC) , the karta of a HUF representing his family was a partner in a registered firm of which he was appointed manager on a remuneration of Rs. 500 every month. He received a sum of Rs. 14,737 from the firm for the assessment year 1960-61, including a sum of Rs. 6,000 as salary for managing the firm's business. There was no finding that the salary received by the karta directly related to the assets of the family utilised in the firm and, therefore, the Supreme Court held that the sum of Rs. 6,000 could not be treated as the income of the HUF. In the course of the judgment, the Supreme Court observed as under at page 193 :

'In the absence of a finding that the income which was recived by G. V. Dhakappa was directly related to any assets of the family utilised in the partnership, the income cannot be treated as the income of the Hindu undivided family.'

7. It may be recapitulated that in this case also there is no finding that the salary paid to the karta was in any manner related to the utilisation of the assets of the HUF in the partnership or was in the nature of a return made to the family because of its investment. In CIT v. Shah : [1969]73ITR692(SC) , a HUF through its karta was a partner in two firms and he was paid remuneration as a managing partner as he had rice experience in the line of business carried on by the two firms. No other partner was paid any salary, though other provisions were there in the deed of partnership with reference to the management of the business. On those facts, the Supreme Court held that there was no real or sufficient connection between the investment of the joint family fund and the remuneration paid and the remuneration was not earned on account of any detriment to the joint family assets and, therefore, the remuneration received form the two firms was not assessable as the income of his undivided Hindu family. This decision emphasises again the need for a nexus between the investment of the family funds in the business and the payment of remuneration by way of return to the family in order to constitute such income as that of the HUF. In Rajkumar Singh Hukam Chandji v. CIT : [1970]78ITR33(SC) , the managment of a company was carried on by a HUF consisting of three branches and that family was disrputed. The assessee was a branch of that family. There were further aquisitions of shares in the company and the shares which were more in the name of the assessee's family members and the shares which were more in the name of the assessee's family members and the subsequent acquisitions were all treated as the property of the assessee's family. The remuneration recived as the managing director of the company was claimed as assessable in his individual hands and not in the hands of the HUF. The Supreme Court laid down the principles applicable in such cases at page 43 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 renderded 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.'

8. Applying the principles aforesaid in the light of the finding of the Tribunal that the appointment as managing director was not as a result of any outlay or expenditure or detriment to the family, the income in question was held to be the individual income of the karta of the HUF and could not, therefore, be assessed as the income of his HUF. In this case also, it had earlier been seen that there is no finding by the Tribunal that the salary paid to the karta was but a mode of return in respect of the investment made by the family in the firm. The salary had been reveived by the karta towards compensation for services rendered by exercising special personal skill, as persons experienced and skilled in valuation of diamonds and precious stones. In Laxmandas v. CIT : [1982]138ITR628(All) , the question arose whether the remuneration paid to the karta of a HUF, who was a partner in a firm, because of his special aptitude in the line of business of the firm and for services rendered by him would be assessable as the income of the HUF. In that case also, there was a clause in the partnership agreement for the payment of salary. The Allahabad High Court held that the principle is now well settled that remuneration paid to the karta or a coparcener of the family by a firm in which the family is a partner, cannot be assesed as the income of the family, unless there is a direct nexus betwen the investment of the funds of the family in the firm and the payment of the salary. In other words, unless such payment is to the detriment of the family funds invested in the firm, it cannot be treated as the income of the family. It was also further pointed out that payment of salary on account of a clause in a deed of partnership would not by itself necessarily render such payment to the individual, a payment to a HUF and liable to be treated as the income of the HUF. Bearing in mind the aforesaid principles, it is seen that in this case, the assessee in T.Cs. Nos. 3 to 7 of 1980, had special skill and experience in the line of business which the firm was carrying on. Similarly, the assessee in T.Cs. Nos. 637 and 638 of 1978, had also been paid a salary not becuse of his position as a partner, but on account of his having rendered services utilising his experience and special skill. Even the very question referred to this court accepts that the payments were made to the karta by reason of his special skill and ability. The payment has not been found to have had any connection whatever with the investments of the HUF in the capital of the firm. In other words, this payment of salary was not made to the detriment of the funds of the HUF. The detriment, if any, is only personal to the partner, in having drawn upon the reservoir of his skill and experience in the line of the business of the firm and placed it at the disposal of the firm.

9. It only remains to consider the decision of the Supreme Court in CIT v. Chidambaram Pillai : [1977]10ITR292(SC) , relied on by the Revenue. In that case, the controversy centered round the question whether the sums drawn as salaries by partners were wholly liable to income-tax or only to the extent of 40% thereof, which fell within non-agricultural income. In considering this question, the Supreme Court held that though paid as salary, such payment was treated as profits and enjoyed the same invulnerability to exigibility that rule 24 of the Indian I.T. Rules confers on the agrarian portion. In our view, this decision of the Supreme Court dose not in any manner assist in advancacing the case of the Revenue. Besides, as the question relating to the applicability of s. 67(1)(b) of the Act has not been specifically made the subject-mater of these references, we are of the view that it is unnecessary on the facts and in the circumstances of this case having regard to the scope of the reference, to pursue this matter further. We hold the Tribunal was quite right in the conclusions arrived at by it and answer the question referred to us in the negative and aginst the Revenue. The assessees in T.Cs. Nos. 637 and 638 of 1978 will be entitled to get the costs of this reference from the Revenue. Counsel's fee Rs. 500. There will be no order as to costs in T.Cs. Nos. 3 to 7 of 1980.


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