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PETITIONER: COMMISSIONER OF  INCOME-TAX, BANGALORE

       Vs.

RESPONDENT: SHRI D. C. SHAH

DATE OF JUDGMENT: 06/02/1969

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. SHAH, J.C. GROVER, A.N.

CITATION:  1969 AIR  927            1969 SCR  (3) 586  1969 SCC  (1) 550  CITATOR INFO :  R          1971 SC1454  (15,16)  RF         1986 SC  79  (16)  RF         1992 SC  66  (10)  RF         1992 SC 197  (10)

ACT: Income-tax-Hindu  undivided family invested funds  in  firm- Remuneration earned by member as officer of the firm-Whether income of family or individual member.

HEADNOTE: The assessee a Hindu undivided family-through its karta  was a  partner in two firms.  The Karta had rich  experience  in the line of business carried on by the firms. in one of  the firms,  the Karta was appointed as its Managing Partner  and paid  a remuneration as Managing Partner in addition to  the benefits  enjoyed as a partner. in the other  firm,  another partner  was appointed as the Managing Partner, and  it  was provided  that  on  his  retirement, the  Karta  was  to  be appointed  as  the  Managing Partner  and  entitled  to  the remunerations.  The Karta was appointed the Managing Partner of  the  second firm also on the retirement of  its  earlier Managing  Partner.   The assessee-family  claimed  that  the remunerations  received  by the Karta  as  Managing  Partner should  be deleted from the assessment of the assessee,  and they were the personal income of the Karta. HELD:     The  remuneration of the Karta was not  earned  on account of any detriment to the joint family assets and  the accounts  received by the Karta as the Managing  Partner  of the  two partnerships were not assessable as the  income  of the Hindu undivided family. [591 F], Upon the facts of the case, there was no real or  sufficient connection between the investment of the joint family  funds and the remuneration paid by the partners to the Karta.  The remuneration  was  paid  not because  of  the  family  funds invested  ’  in  the  partnership,  but  for  the   personal qualifications of the Karta. [591 D-F] S,  R.  M.CT. PL.  Palaniappa Chettiar  v.  Commissioner  of Income-tax, 68 I.T.R. 221, followed. Gurunath V.. Dhakappa v. Commissioner of Income-tax, Mysore,

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53  I.T.R. 575; V. D. Dhanwatey v. Commissioner  of  Income- tax,  68  I.T.R.  365; M. D. Dhanwatey  V.  Commissioner  of Income-tax,   68  I.T.R.  285;  P.  N.  ’Krishna   Iyer   v. Commissioner  of Income-tax Kerala, [1969] 1 S.C.R. 943  and Commissioner  of Income-tax, Mysore v. G V. Dhakappa,  Civil Appeal No. 713 of 1965 decided on 23-7-1968, referred to.

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeals Nos. 817 and 818 of 1966. Appeals  by special leave from the judgment and order  dated January 19, 1965 of the Mysore High Court in I.T.R.C. No.  1 of 1964. Niren De, Attorney-General, S. C. Manchanda and R. N.  Sach- they, for the appellant. 597 M.   C.  Chagla, Sharad J. Mhaispurkar, O. P.  Malhotra  and O.   C. Mathur, for the respondent. The Judgment of the Court was delivered by Ramaswami,  J. The- respondent is a Hindu  Undivided  Family (hereinafter  called the assessee) of which Shri D. C.  Shah is the karta.  The assessment years are 1959-60 and  1960-61 and  the relevant accounting periods are Samvat  years  2014 and  2015.  The assessee through its karta Shri D.  C.  Shah was a partner in the firms of (1) M/s C. U. Shah and Co. and (2)  M/s  Oriental Can Manufacturing Co. as  per  terms  and conditions  set out in the Instruments of Partnership  dated 5-6-1961  and  11-9-1957.   Shri  D.  C.  Shah  was  paid  a remuneration  of  Rs.  12,000/-  per 1  year  for  both  the assessment  years  by M/s C. U. Shah and- Company.   He  was paid  Rs.  10,000/- for the assessment year 1959-60  by  the Oriental Can Manufacturing Company.  The amounts received by Shri  D. C. Shah were shown by the assessee in its,  returns of  income along with balance of the share income  from  the aforesaid  firms.  The Income Tax Officer in  assessing  the Hindu Undivided Family included the remuneration received by Shri  D.  C.  Shah as a part of the share  income  from  the respective   firms.    Before   the   Appellate    Assistant Commissioner   the  assessee  contended  that   remuneration received by Shri D. C. Shah was his personal income and  the amounts  were  wrongly shown in the returns  of  the’  Hindu Undivided  Family  as its income and should  not  have  been included  in the assessment.  In so contending the  assessee relied  on  clauses  8,  9  and  10  of  the  Instrument  of Partnership  dated 5-6-1961 by which the firm of M/s  C.  U. Shah and Company was constituted.  The assessee also  relied on  clauses 14, 15 and 16 of the Instrument  of  Partnership dated  11-9-1957  by  which the firm  of  M/s  Oriental  Can Manufacturing Company was constituted.  Clauses 8, 9 and  10 of  the Instrument of Partnership dated 5-6-1961 are to  the following effect               "8. The partner No. 1 Shri D. C. Shah who  has               been managing the business of this firm  shall               hereinafter  also continue to act as  Managing               partner for conducting the said business  free               from any interference of other partners,  of               whatsoever nature.  The said Managing  partner               shall  manage, direct, appoint: and/or  remove               any one of the employees, and/or do all  other               things,  which include right to draw  cheques,               to  make, deliver and accept documents  either               legal   or  commercial  in  respect   of   the               partnership   business   as  may   be   deemed

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             necessary  for  effectively  carrying  on  the               partnership   business.   The  said   Managing               partner shall be paid Rs. 1,000/- (Rupees  one               thousand  only) per month in addition  to  all               other benefits that he is entitled to enjoy as               a partner of the firm.               588               9. The said Managing partner shall continue to               be  the Managing Partner for his life time  or               his retirement whichever is earlier.               10.   All other partners shall devote as  much               time  to  the furtherance-of  the  partnership               business as they think proper,. necessary  and               a visable".               Clauses  14,,15  and 16 of the  Instrument  of               Partnership   dated  11-9-1957  are   to   the               following effect :               "14. The partner No. 2 shall, be the  Managing               Partner for conducting the said business free.               from any interference of whatsoever nature  by               others.   The  said  Managing  Partner   shall               manage,  carry, direct, appoint and/or  remove               any  of the employees and/or Agent and do  all               other things, as may be deemed necessary,  for               effectively   carrying  on   the   Partnership               business.  The said Managing Partner shall  be               entitled,  in addition to all other  benefits,               to  a  monthly  remuneration  of  Rs%  2,000/-               (Rupees two thousand only).               15.   The  Partner No 2 shall continue  to  be               the  Managing  Partner  for  his  lifetime  or               retirement.  In the event of   Partner No. 2’s               demise  or retirement, whichever  is  earlier,               the  Partner No. 1 shall then act and  perform               duties and functions of Managing Partner.   In               the  event  of  the demise  or  retirement  of               Partner  No. 1, the Managing Partner shall  be               appointed  by the remaining partners or  their               legal representatives, as the case may be,               16.   Partner  No. 3 shall be responsible  for               the duties and functions to be performed under               the direction of No. 2, the Managing  Partner.               In  the event of failure on the part of No.  3               to perform duties and functions or  otherwise               entrusted by No. 2, the Managing Partner,  the               matter  shall  be referred to No.  2  and  his               decision shall be binding on No. 3". The Appellate Assistant Commissioner accepted the contention of the assessee and held that the remuneration paid and  re- ceived  by  Shri  D.  C Shah  should  be  deleted  from  the assessment   of  the  assessee.   The  Income  Tax   Officer thereafter  preferred  appeals to the  Income  Tax  Tribunal which  set  aside  the  order  of  the  Appellate  Assistant Commissioner  and held that the remuneration paid should  be included  in  the  total income of  the  assessee.   At  the instance of the assessee, the Income Tax Appellate  Tribunal stated a case to the High Court on the following question of law :-               "Whether on the facts and in the circumstances               of the ease., was the salary received by D. C.               Shah from the-               589               two  firms  of M/s C. U. Shah &  Co.  and  M/s               Oriental Can Manufacturing Co., includible  in               the assessment of the H.U.F. of which Shri  D.

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             C. Shah was the Karta?" The High Court relying upon its earlier decision in Gurunath V.  Dhakappa v. Commissioner of Income-tax, Mysore (1)  held that  the  salary  received  by Shri D.  C.  Shah  from  the aforesaid firms cannot be included in the assessment of  the Hindu  Undivided  Family of which he was the  karta.   These appeals  are  brought  by special leave  on  behalf  of  the Commissioner of, Income Tax, Bangalore from the judgment  of the  Mysore High Court, dated 19th January, 1965  in  Income Tax Reference No. 1 of 1964. The question whether the remuneration earned by a member  of a  Hindu Undivided Family as an officer of a company  or.  a firm in which the assets of the Hindu Undivided Family  have either  been invested or the office has been  acquired  with the  aid  of the funds of the family is the  income  of  the family  or the individual income of the member has been  the subject matter of consideration in several cases before this Court.  In V. D. Dhanwatey v. Commissioner of Income-tax(2), V  the karta of a Hindu Undivided Family contributed to  the capital of a firm out of the funds of the family.  Under the agreement  of  the partnership the  general  management  and supervision  of  the partnership business was to be  in  the hands of V and he was to be paid a monthly remuneration  out of  the gross earnings of the partnership business.  It  was found  that  V joined the partnership  as  representing  the family and became a partner on account of the investments of the  joint family assets in the capital of  the  partnership and  that  the  remuneration  received  by  V  was  only  an increased  share of the profits paid to him as  representing the  family.   In this state of facts it was  held  by  this Court  that the remuneration paid to V was directly  related to  the  investments  of the assets of  the  family  in  the partnership  business and "there was a real  and  sufficient connection  between  the investment from  the  joint  family funds  and  the remuneration paid to V".  It  was  therefore held  by this Court that the salary paid to V  was,  rightly assessed as the income of the Hindu Undivided Family.  In M. D. Dhanwatey v. Commissioner of Income Tax(1) the facts were parallel to the facts in V. D. Dhanwatey’s case (2 ) and the salary  received by the karta of the Hindu Undivided  Family was treated as the income of the family. In S. R. M. CT.  PL.  Palaniappa Chettiar V. Commissioner of Income Tax(4), the material facts were different.  The karta of a Hindu Undivided Family acquired 90 out of 300 shares in a transport company with the funds of the family.  In course of time he (1) 53 I.T.R. 575.         (2) 68 I.T.R. 365. (3) 68 I.T.R. 285.             (4) 68 I.T.R. 221. L10Sup./69-3 became  the Managing Director of the Company.   As  Managing Director the karta was entitled to salary and commission  on the.  net  profits of the company, and  was  entrusted  with control over the financial and administrative affairs of the company.   The,  only qualification under  the  Articles  of Association for the office of a Director, was the holding of not less than 25 shares in his own right.  It was found that the  shares were acquired by the family not with the  object that the karta should become the Managing, Director, but  in the  ordinary  course of investment and there  was  no  real connection between the investment of the joint family  funds in  the  purchase of the shares and the appointment  of  the karta  as  Managing Director of the company.   It  was  held therefore that the remuneration of the Managing Director was not  earned on account of any detriment to the joint  family assets  and  the amounts received by the karta  as  Managing

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Director’s remuneration, commission and ’sitting fee’  were not assessable as the income of the Hindu Undivided Family. In  P.  N.  Krishna  Iyer V.  Commissioner  ’of  Income  Tax Kerala(1),  the  principle laid down in  V.  D.  Dhanwatey,s case(2)  was  applied.  It was held  that  the  remuneration received  by the assessee from the company of which  he  was the Managing Director together with commission and  ’sitting fee  ’ , should be included in the assessment of  the  Hindu Undivided Family.  It was pointed out that the shares  which qualified  the  assessee to become a member of  the  company were purchased with the aid of the joint family funds.   The shares- which were allotted to the assessee in lieu of  this services were also treated as shares belonging to the  joint family.  The entire capital assets of the company originally belonged to the joint family and were made available to  the company in consideration of a mere promise to pay the amount for which the assets were valued.  The income was  primarily earned by utilising the joint family assets or funds and the mere  fact that in the process of gaining the  advantage  an element of personal service or skill or labour was  involved did not alter the character of the income.  In cases of this class  the  character of the receipt must be  determined  by reference  to its source, its relation to the assets of  the family  and  the  proximity of the  connection  between  the investment from the joint family funds and the  remuneration paid.  Applying the principle laid down in V. D. Dhanwatey’s case(3),  it  was held that the tribunal  wag  justified  in holding  that  the  income from the  salary,  commission  or ’sitting fee’ obtained by the assessee did not represent his individual income but was the income of the Hindu  Undivided Family of, which he was the karta. (1) [1969] 1 S.C.R. 943.      (2) 68 I.T.R. 365. 591 In Commissioner of Income Tax, Mysore v. G. V.  Dhakappa(1), the  principle  laid down in V. D. Dhanwatey,s(2)  case  was applied  again.  It was held that there was no finding  that the income which was received by G. V. Dhakappa was directly related  to  any  assets  of  the  family  utilised  in  the partnership,  and, therefore, the income of G., V.  Dhakappa cannot  be  treated  as the income of  the  Hindu  Undivided Family. In our opinion, the present case falls within the  principle laid  down  by  this Court in S.R.M.  CT.   PL.   Palaniappa Chettiar’s case(3).  It has been found that Shri D. C.  Shah was  a man of rich experience in the line of business  which these  two firms were carrying on.  Clauses 9 and 10 of  the Partnership   deed   dated  5-6-1961   indicate   that   the remuneration  was  paid  not because  of  the  family  funds invested   in   the  partnership  but   for   the   personal qualification  of Shri D. C. Shah.  In the case of  Oriental Can Manufacturing Company clause 14 provided for Shri K.  K. Dhote  being appointed as the Managing partner.   After  the said Shri Dhote retired Shri D. C. Shah was appointed as the Managing partner during the assessment year 1959-60.  Clause 15 of the partnership deed provided for such an appointment. A  reading of clauses 14, 15 and 16 of the Partnership  Deed indicates  that the remuneration was paid for  the  specific acts  of management done by Shri D. C. Shah resting  on  his personal  qualification and not because he  represented  the firm.   It should also be noticed that no other partner  was paid any salary.  Upon the particular facts of this case, it is manifest that there was no real or sufficient  connection between  the  investment of the joint family funds  and  the remuneration paid by the partnership to Shri D. C. Shah.  It follows  that  the remuneration of Shri D. C. Shah  was  not

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earned  on  account  of any detriment to  the  joint  family assets  and the amounts of remuneration received by Shri  D. C. Shah as the Managing partner of the two partnerships were not assessable as income of the Hindu Undivided Family. For  these reasons we hold that there is no merit  in  these appeals  which are accordingly dismissed with costs.   There will be one hearing fee. Y.P.                                 Appeals dismissed. (1)  Civil Appeal No. 713 of 1965 decided on 23-7 1968. (2)  68 I.T.R. 365. (3)  68 I.T.R. 221. 592