1. These two appeals, filed by the department, involve a common question for consideration. They are, therefore, disposed of by a common order.
2. Shri N. R. Gopalakrishnan is the karta of the assessee-HUF. During the accounting period relevant to the assessment years 1979-80 and 1980-81, he was partner in the firms of EASSN Somasundaram Chettiar & Co. and Madurai Mercantile Mart representing his HUF and received the following amounts as salary for the services rendered by him to them :
Name of the firm
Salary received in assessment year 1979-80
Salary received in assessmentyear 1980-81
EASSN Somasundaram Chettiar & Co.
Madura Mercantile Mart
3. The ITO was of the view that a firm has no separate legal entity from its partners and that the salary received by the partner was, in reality, only a mode of division of profits of the firm. He, therefore, held that the aforesaid amounts were includible in the income of the assessee-HUF.
4. However, on appeal, the AAC did not agree with the ITO. He observed that Shri N. R. Gopalakrishnan was an experienced jeweller, that he contributed his personal skill to the promotion of the business of the firms in which he was a partner, and as such, the salary received by him to the firms belonged to him in his individual capacity, and not to his HUF. He therefore, excluded the aforesaid amounts of Rs. 3,910 and Rs. 3,770 from the income of the assessee-HUF for the assessment years 1979-80 and 1980-81, respectively. Aggrieved by the consolidated order of the AAC, the department has filed the present appeals.
5. After going through the record and hearing the learned representatives of the parties, I do not find any substance in these appeals.
6. The only question for consideration is whether the salary received by a partner for the services rendered by him to the firm is includible in the income of the HUF, whom he represents. On this point the Supreme Court has held in Raj Kumar Singh Hukam Chandji v. CIT : 78ITR33(SC) as follows :
'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 Hindu undivided family of which he is 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 Hindu undivided family but if it is the latter then it is the income of the individual coparcener. If the income was essentially earned as a result of the funds invested the fact that a coparcener has rendered some service would not change the character of the receipt. But if on the other hand it is essentially a remuneration for the services rendered by a coparcener, the circumstances that his services were availed of because of the reason that he was a member of the family which had invested funds in that business or that he had obtained the qualification shares from out of the family funds would not make the receipt, the income of the Hindu undivided family.' (p. 33)
7. Similar view has been taken by the Madras High Court in the case of CIT v. Surendra Manilal Mehta 1984 Tax LR 371. According to this authority, the remuneration paid to the karta or a coparcener of the family by a firm in which the family is a partner, cannot be assessed as income of the family, unless there is a direct nexus between 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 cnnot be treated as the income of the family. The payment of remuneration for making available to the businessof the firm special skill would really be in the nature of compensation for services rendered by the exercise of such special skill, and so, the receipt of salary by a partner for the services rendered to him to the firm would not partake the character of income HUF for the purposes of tax treatment.
8. Again, the Full Bench of the Patna High Court has held in CIT v. Atma Ram Budhia : 146ITR240(Patna) that if it is established that the remuneration received by the karta of an HUF from a firm in which he is a partner is for services rendered by him and there is no real and sufficient connection between the investment of the joint family funds in the firm and the remuneration paid to him, the remuneration received by the karta could not be treated as income of the family.
9. Now, in the present case, it is not disputed that Shri N. R. Gopalakrishnan was an experienced jeweller and he contributed his personal skill to the promotion of the business of the firms in which he was a partner. Obviously, therefore, he received the salaries in question from the firms for the services rendered by him. There is no material on record to establish a direct nexus between the salary received by Shri N. R. Gopalakrishnan and the investment of the funds of his HUF or to show that the payment of salary was to the detriment of the family funds invested in the firms. In such a situation, I am of the opinion that the AAC has rightly held that the amounts in question are not includible in the income of the assessee-HUF.
10. The learned representative of the department urges that a contract of employment requires two distinct persons, i.e., the employer and the employee, that there could not be a contract of service, under strict law, between a firm and one of its partners and as such, the payment of salary to a partner represents a special share in the profits. In support of his arguments he relies on the decision of the Supreme Court in the case of CIT v. R. M. Chidambaram Pillai : 10ITR292(SC) . It may be mentioned that this authority of the Supreme Court has been distinguished by the Full Bench of the Patna High Court in the case of Atma Ram Budhia (supra) on the ground that the question involved in that case was whether any portion of the salary drawn for services rendered by a partner of the firm was agricultural income liable to tax and not whether the income received by a partner was includible in his personal assessment or in the income of the HUF. The Patna High Court has further held that the decision of the Supreme Court in Raj Kumar Singh Hukum Chandji (supra) would apply to a case when we have to determine whether salary received by a partner from a firm for the services rendered by him is includible in his personal assessment or in the income of the HUF.
11. In view of the above discussion, the impugned order of the AAC is sound and calls for no interference. The same is, accordingly, confirmed.
12. The appeals are dismissed.