Per Shri T. V. K. Nataraja Chandran, Accountant Member -These appeals by the revenue pertaining in to three partners of the firms, Anguvilas M. V. Muthiah Pillai Firm, Dindigual are consolidated and disposed of by a common order of the sake of convenience as they involve common facts and common issue raising common grounds. These appeals pertain to the assessment years 1978-79 to 1980-81 and 1982-83 and are directed against the common but separate orders of the Commissioner (Appeals) dated 8-9-1983 wherein he held that the salary income received by the partners who represented their respective HUFs in the abovesaid firm should not be included in the hands of the HUF but should be separately assessed in the hands of the partners in individuals status. In the common grounds, the revenue urged that the orders of the Commissioner (Appeals) should be set aside and that of the ITO be restored.
2. The assessee are HUFs (specified) and they are represented in the firm, Anguvilas M. V. Muthiah Pillai Firm by their kartas. The firm is carrying on business in the manufacture and sale of scented tobacco. Originally assessment under section 143(3) of the Income-tax Act, 1961 (the Act), was made in the case of each partner for the assessment year 1978-79 excluding the remuneration of Rs. 13,200, Rs. 13,200 and Rs. 15,600, respectively in the cases of partners, Shri M. V. M. Chellamuthu Pillai, Shri M. V. M. Veeramuthu Pillai and Shri M. V. M. Angamuthu Pillai. Later on, the assessment was reopened under section 147(b) of the Act as a result of information as to law contained in the Tribunals decision in the case of S. Janagarajan [IT Appeals Nos. 957 and 958 of 1977-78, dated 31-1-1978] and, consequently, income had escaped assessment as a result of wrong deduction of the remuneration from the allocated share income. For the reasons given in the assessment order for 1979-80 the ITO included the remuneration as part of share income from the firm and brought to tax the amount in the hands of the respective HUFs. In the other years, the ITO included the remuneration as part of share income by way of regular assessments under section 143(3).
3. The case of the ITO was that the partners were paid remuneration right form the first year of joining the firm besides share of profits therein and, therefore, the assessee contention that the remuneration was paid for vast experience and mixing of secret ingredients with tobacco, was not tenable. In the past up to and including the assessment year 1978-79 remuneration paid to the partners was duly admitted and assessed as the income of the respective HUFs. The partnership deeds dated 6-2-1978 and 6-2-1979 and codicil dated 6-3-1971 provided for the annual remuneration and monthly remuneration to the partners and there was provision for increasing the salary to the partners by mutual agreement of the partners. Further, the remuneration was not paid for the individual skill because the business was in existence even prior to the partition on 4-2-1954 and, therefore, the right to claim salary arose as a result of partnership contract and not for individual skill. As partners they were only required to perform normal work of the firm and, therefore they were not entitled to any payment in individual capacity. The partner played dual role - one in th capacity of partner in looking after the firms business and another as manager of the HUF and claim of salary for individual services creates conflicts of interests and there was also no justification for claiming the salary from the share income in terms of section 67 of the Act. Hence, he has included the remuneration received by the partners as their share income and assessed the same in the hands of the respective HUFs.
4. On appeal by the assessee, the Commissioner (Appeals) in his speaking order in the case of partner Shri M. V. M. Angamuthu Pillai upheld the validity of reassessment proceedings taken for the assessment year 1978-79 on the basis of interpretation of law given by the Tribunal which constituted information in terms of section 147(b). On merits he disagreed with the view of the ITO that the remuneration paid to the partner should be included in the HUF assessment by relying on the ratio of the Supreme Court in the case of CIT v. Gurunath V. Dhakappa : 72ITR192(SC) , Premnath v. CIT : 78ITR319(SC) and Rajkumar Singh Hukum Chandji v. CIT : 78ITR33(SC) wherein it has been held that where remuneration was paid by a firm to a partner for services rendered by him such salary should be assessed in the hands of the partners in his individual capacity and not in the capacity of karta of an HUF. Her also noted the different judgment of the Supreme Court in the case of V. D. Dhanwatey v. CIT : 68ITR365(SC) wherein it has been held that if the remuneration received by the partner was directly relatable to the investment of the HUF funds invested by the partner and if there was detriment to the HUF assets because of remuneration by the partner in his individual capacity then the department will be justified in including the salary income in the HUF assessment. In view of this decision, the Commissioner (Appeals) set out to ascertain the facts of the case to find out whether the remuneration received by the partners was for the services rendered by them in their individual capacity or was merely a different name for his share of the net profit of the firm. In this regard, the Commissioner (Appeals) came to the conclusion that he was satisfied that each of the partners has a special skill and experience and the facts that no member of the family was paid remuneration before partition on 4-2-1954 and the kartas included their respective remuneration in the respective HUF assessments up to the assessment year 1971-72 were irrelevant for deciding the issue before him inasmuch as admittedly the principle of res judicata did not apply to income-tax proceedings. Thereafter, the Commissioner (Appeals) proceeded to consider the actual services rendered by each of the partners and observed that in the firms business of manufacturing scented chewing tobacco involving trade secrets. The partner Shri Angamuthu Pillai looked after the purchases of the firm, Shri Veeramuthu Pillai looked after sales of the firm and Shri Chellamuthu Pillai looked after the labour administration and the amount of remuneration paid to each partner as per the codicil dated 6-2-1971 and the partnership deeds dated 6-2-1978 and 6-2-1979 were very reasonable and could not be called excessive by any means considering the magnitude of the business of the firm.
5. The Commissioner (Appeals) thereafter applied the test laid down by the Supreme Court in the case of V. D. Dhanwatey (supra) and found that the share of profit for the assessment year 1978-79 was Rs. 1,28,734 while the salary income paid to the partner was Rs. 15,600 in the case of Angamuthu Pillai and, therefore, the salary income was a small amount only. He has also cited the decision of the Tribunal B Bench, Madras in the case of ITO v. T. Illango [IT Appeal No. 435 (Mad.) of 1982. dated 11-6-1982] wherein has been held that salary paid to a partner who was the karta of an HUF should be assessed in the hands of the individuals and not in the hands of the HUF. He has also referred to the affidavits dated 28-8-1972 filed by Smt. Mariammal to the effect that the partners have rendered actual services to the firm and those affidavits stood unrebutted. For these reasons, the Commissioner (Appeals) came to the conclusion that the remuneration should be assessed in the individual hands of the partners and not as part of share income of the firm in the hands of the respective HUFs.
6. The learned departmental representative has been heard and besides reiterating the common grounds taken in these appeals he emphasised the fact that in law there could be no employer - employee relationship as held by the Supreme Court in the case of CIT v. R. M. Chidambaram Pillai : 10ITR292(SC) and, therefore, the remuneration received by the partners could not be considered as payment for the services rendered in their individual capacity. He, therefore, submitted that the ITO was justified in including the remuneration as part of share income of the HUFs.
7. The learned counsel for the assessee, on the other hand, submitted that the test laid down by the Supreme Court in the case of V. D. Dhanwatey (supra) was crucial to decide the issue and the Commissioner (Appeals) having found as a matter of fact that the payment of remuneration was not detrimental to the interests of the HUF he supported the orders of the Commissioner (Appeals). In this connection, he submitted that the Allahabad High Court in the case of Laxmandas v. CIT : 138ITR628(All) has held 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 a payment to his HUF and the payment of the salary to the karta could not be assessed as income of his HUF.
8. We have duly considered the rival contentions and the facts of the case. In our view the orders passed by the Commissioner (Appeals) are valid in law an justified in the facts and circumstances of the case set out in his orders and therefore, do not require any interference. The Allahabad High Court in the case of Laxmandas (supra), has duly noted the decisions of the Supreme Court in the cases of CIT v. D. C. Shah : 73ITR692(SC) , CIT v. Gurunath V. Dhakappa : 72ITR192(SC) , V. D. Dhanwatey (supra) and also the decision of the Supreme Court in R. M. Chidambaram Pillais case (supra) and held that merely because payment of salary to the karta was on account of a clause in the deed of partnership that by itself would not necessarily render a payment to the individual a payment to the HUF and the payment of salary to the karta could not be assessed as the income of his HUF. The High Court has also held that where an HUF is a partner in a firm through its karta and if the karta has received any remuneration from the firm because of his special aptitude for the business of the firm and for services rendered by him to the firm and if the remuneration is earned not on account of any detriment to the joint family assets, then such remuneration received by the karta is not assessable as the income of the HUF, unless the remuneration has a direct nexus with the investment of funds of the family in the firm. In our view, the decision of the Allahabad High Court applies to the assessees cases squarely. It is on record that the assessee-partners have rendered specialised services in different sections of the business of manufacturing scented tobacco and the turnover has been increased to 1.5 crores. The Allahabad High Court has duly noted the decision of the Supreme Court in the case of R. M. Chidambaram Pillai (supra) but distinguished the case. Even in the case of R. M. Chidambaran Pillai (supra) the Supreme Court has observed as under :
'...... In income-tax law a firm is a unit of assessment, by special provisions, but is not a full person which leads to the next step that since a contract requires two distinct persons, viz., the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. So that any agreement for remuneration of a partner for taking part in the conduct of the business must be regarded as portion of the profits being made over as a reward for the human capital brought in......'
From the above observation it is clear that the remuneration paid to the partner was nothing but a reward for the human capital brought in by them in contradistinction to the capital or investment of the respective HUFs. Therefore, keeping in view the specialised services rendered by the partners which fact remains uncontroverted the remuneration paid to the partners should be regarded only as a reward for the human capital brought in by them and, therefore, the remuneration should be assessed in the individual hands of the respective partners.
9. The Madras High Court in the case of CIT v. Surendra Manilal Mehta 1984 Tax LR 371held in similar circumstances as under :
'...... Indeed Sri Suresh B. Mehta has been found by the Tribunal to posses 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, Hindu undivided family 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......' (p. 374)
In fact, the Madras High Court has referred to the decision of the Supreme Court in the case of R. M. Chidambaram Pillai (supra), and observed that the decision of the Supreme Court did not in any manner assist in advancing the case of the revenue. After referring to various decisions, the Madras High Court has upheld the decision of the Tribunal holding that the remuneration paid in that case was for services rendered by the partners and such receipt would not partake the character of income of the HUF for the purposes of tax treatment. Following respectfully the aforesaid decision of the Madras High Court, we have no hesitation in upholding the order of the Commissioner (Appeals) and rejecting the grounds taken by the revenue.
10. In the result, the appeals are dismissed.