http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 22  

PETITIONER: V. D. DHANWATEY

       Vs.

RESPONDENT: THE COMMISSIONER OF INCOME TAX, M.P. NAGPUR(With Connected A

DATE OF JUDGMENT: 26/10/1967

BENCH: RAMASWAMI, V. BENCH: RAMASWAMI, V. WANCHOO, K.N. (CJ) BACHAWAT, R.S. MITTER, G.K. HEGDE, K.S.

CITATION:  1968 AIR  682  CITATOR INFO :  R          1969 SC 893  (9,10)  RF         1969 SC 927  (8)  R          1971 SC1454  (10,11,16)  RF         1986 SC  79  (16)

ACT:    Income-tax-Hindu  undivided Family-karta  as  partner  of firm-also  getting salary as manager under partnership  deed capital  contribution  made by family--if salary  income  of family or of individual partner.

HEADNOTE:   The  appellant in Civil Appeals Nos. 1372 and 1373, was  a Hindu undivided family of which V was the karta and was,  is such,  t  partner  in  a business  of  lithography  and  art printing  with other members of the family including M,  who was the karta of the appellant HUF in Civil Appeal No. 1371. The  capital  in  the  case of both V  and  M  was  entirely contributed  by their respective families.  The  partnership was governed by two successive partnership deeds which  were in similar terms during the relevant period, whereby it  was provided, inter alia, that interest would be payable to each partner  on  the amount of capital, that the  general  mana- gement and supervision of the business would be in the hands of V; M would be the manager of the works and both he kind V would have power to make contracts, etc.  Provision was also made  for  the  payment  of’ specified  amounts  by  way  of remuneration  to  various other partners out  of  the  gross earnings  of the partnership business.  For  the  accounting period relating to the assessment year 1954-55 and  1955-56. V  was paid a sum of Rs. 18,000 in each year and M was  paid Rs.  7,500 in respect of the assessment year  1955-56.   The appellants,  being  the assessee Hindu undivided  family  in each  of the appeals, showed these amounts in Section  D  of their returns kind it was contended that these amounts  were not taxable in their hands as they represented income earned by V and M for the services rendered by each of them to  the partnership  and constituted their individual  income.   The Income  Tax Officer rejected this contention and appeals  to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 22  

the    Appellant       Assistant       Commissioner     were dismissed,  Further  appeals  were  also  dismissed  by  the Appellate  Tribunal  and  it held that  although  V  was  an employee  of the firm even before the family was taken as  a partner, after he was taken as such partner, he Could not at the  same time be an employee of the partnership  firm;  the remuneration  received by him must therefore be held  to  be only an adjustment of the share in profits of the family  in the  partnership.   The High Court, upon a  reference,  also held against the assessees. On appeal to this Court, Held  :  (By Majority) in Appeals Nos. 1372 and 1373  :  The High Court had rightly answered the question of law  against the assessee and the appeals must therefore be dismissed. (i)It was the investment of the joint fimily funds in  the partnership  which enabled V to become a partner  and  there was a real and sufficient connection between that investment and   the  remuneration  paid  to  V  under  the   deed   of partnership.  It follows therefore that the remuneration  of V was not earned without detriment to the Hindu joint family funds  and the case fell directly within the principle  laid down  in  The C.I.T., West Bengal v. Kalu  Babu  Lal  Chand, [1960]  1 S.C.R. 320; and in Mathura Prasad v. C.I.T.,  U.P. 60 I.T.R. 428. [74 C-E] 63 M/s.   Piyare Lal Adishwar Lal v. The C.I.T., Delhi,  [1960] 3. S.C.R. 669; referred to. The general doctrine of Hindu Law is that property  acquired by  a  karta or a coparcener with the aid or  assistance  of joint family assets is impresed with the character of  joint family property., The test of self acquisition by the  karta or coparcener is that it should be without detriment to  the ancestral  --state and before an acquisition can be  claimed to be a separate properly, it must be shown that it was made without  any aid or assistance from the ancestral  or  joint family property. [68B, C] The finding of the Tribunal that even before the partnership was  formed  V was receiving the salary  from  the  business which  was  carried  on the larger  joint  family,  was  not relevant for the determination of the question of law in the present  case.   The salary given to V before  he  became  a partner  had no connection with the remuneration  earned  by him after the contract of partnership which had it different character,  and  which  arose  out  of  a  different   legal relationship   and  was  paid  to  him  by  virtue  of   the partnership deed. [73H] (ii)The  conclusion  reached  by the Tribunal  that  V  had earned the remuneration in Question without any detriment to the family funds was not a conclusion on a Question of  pure fact  but  was a conclusion on a mixed question of  law  and fact.   Though  this  conclusion  was  based  upon   primary evidentiary facts, its ultimate form had to he determined by the  application of the relevant legal principles  of  Hindu law.  In dealing with findings on Questions of mixed law and fact the High Court must no doubt accept the findings of the Tribunal on the primary questions of fact; but it is open to the  High Court to examine whether the Tribunal had  applied the  relevant legal principles correctly or not in  reaching it,,  final  conclusion;  and in that sense,  the  scope  of enquiry and the extent of the jurisdiction of the High Court in  dealing with such point8 is the same as in dealing  with pure points of law. [74,G-75B] G.  Venkataswami  Naidu  & Co., v.  C.I.T.  35  T.T.R.  594, referred to. (Per  Hegde, J., dissenting) The sum of Rs. 18,000  received

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 22  

by  V  is his remuneration was not rightly included  in  the total income of the assessee. From the fact, found by the Tribunal it was established  (i) that V was attending to the business in question even before the partnership came into existence and that he was  getting remuneration  for  the  workdone  by  him;  (ii)  after  the partnership came Into existence, he, one out of the  several partners, was designated as the general manager and for that work  he was given a monthly remuneration of Rs. 1,500;  and (iii) the said remuneration was received by him without  any detriment to hi,,, family. [76H] There  was  no  basis  for the  conclusion  reached  by  the Tribunal  that the remuneration received by V was  only  "an increased  share in the profits of the firm paid to  him  as representing his HUF." The remuneration received by V had no relationship  with the share capital subscribed by him.   He was  not appointed general manager merely because he  was  t partner.   A  cannot be said that his joint family  was  the general  manager nor that for any act or omission of his  as the  general manager his family could be  held  responsible. It  was the family which was contending that the  income  in question  was  V’s individual income and  it  was  therefore reasonable  to  infer  that his family  had  agreed  to  his receiving that income 64 as   his  individual  income;  the  assessee’s  case   would therefore  fall within the rule laid down, in Jugal  Kishore Baldeo  Sahi  v. Commissioner of Income-tax, U.P.  [1967]  1 S.C.R. 416. [77G, H; 85B.E] Piyare Lal v. Commissioner of Income tax [1960] 3 S.C.R 669. Palanippa  Chettiar v. Commissioner of Income Tax Bihar  and Orissa  CA.  1055  of 1966; Sardar Bahadur  Indra  singh  v. Commissioner of 1ncome Tax, Bihar and Orissa, 11 I.T.R.  16; Commissioner of Income tax Bihar and Orissa v. Darsanram and Ors.  13 I.T.R. 419; and Commissioner of Income Tax,  Madras v. S.N.N. Sankaralinga Iyer 18 I.T.R. 194: relied upon. Commissioner  of  Income Tax, West Bengal v. Kalu  Babu  Lal Chand,  [1960] 1 S.C.R. 320; Mathura Prasad v.  Commissioner of Income tax U.P, 60 I.T.R. 428; distinguished. Palaniappa  Chettiar  v. Commissioner of income  Tax  Madras [1968] 2 S.C.R. 55; referred to. The Tribunal and the High Court were wrong in thinking  that the  partner of the firm can under no circumstance,be  given remuneration   for  taking  part  in  the  conduct  of   the partnership  business.   It is clear from s. 13(a)  ’of  the Partnership Act that by agreement between the partners,  one of the partners can he remunerated for attending to partner- ship work. [77D] S.   Magnus  v. Commissioner  of Income tax Bombay City,  33 I.T.R. 538: distinguished. The High Court was wrong in thinking that the finding of the tribunal  that  the remuneration received by V  was  without detriment to his family is not a finding of fact but a legal inference drawn by the tribunal from the facts proved.   The tribunal  reached  that finding on the basis  of  the  facts placed before it and it had given cogent reasons in  support of that finding.  The conclusion reached by the tribunal was therefore  a finding of fact.  A finding of  this  character cannot be considered as a mixed question of law and fact  as nolegal principle was required to be applied in arriving at that conclusion.[77B-C] Held : In CivilAppeal  No.  1371 of 1966  (Per  Wanchoo C.J.,  Bachawat,Ramaswami  and  Mitterr, JJ):  The  material facts in the case of M being almost identical with those  in

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 22  

Civil Appeals 1372 and 1373 of 1966, tied High Court rightly answered  the  question referred to it and the  appeal  must therefore he dismissed. (Hegde  J. concurred with the decision of the majority  that the  appeal  should  be dismissed  but  disagreed  that  the material  facts in the case of M were almost identical  with those in the case of V).

JUDGMENT: CIVIL  APPELLATE JURISDICTION : Civil Appeal No. 1371-73  of 1966. Appeals  front the judgments and orders dated July 23,  1963 and July 23, 1964 of the Bombay High Court, Nagpur Bench  in Income-tax Reference No. 5 of 1962 and 85 of 1963. G.L. Satighi, A. S. Bobde, P, C. Bhartari and O. C.  Mathur, for the appellant (in all the Appeals). C.K.  Daphtaiy, Attorney-General, A. N. Kirpal and R.  N. Sachthey, for the respondent. 65 The  judgment  of  WANCHOO, C.J.,  BACHAWAR,  RAMASWAMI  AND MITTER, JJ. was delivered by RAMASWAMI J. HEGDE J. delivered a dissenting Opinion. Ramaswami, J. These appeals are brought, by certificate,  on behalf of the assessee from the judgment of the Bombay  High Court dated July 23, 1964 in Income Tax Reference No. 85  of 1963. The appellant (hereinafter called the ’assessee’) is a Hindu Undivided  family  represented  by its  Karta,  Shri  V.  D. Dhanwatey.   The assessment years involved in these  appeals are  1954-55 and 1955-56.  For the year 1954-55 there was  a deed  of  partnership  dated April  1,  1951  governing  the relationship  of the partners.  For the year  1955-56  there was  another partnership deed dated October 1, 1953.   There was,  however,  no material change in the terms of  the  two deeds  of  partnership.   The business  carried  on  by  the partnership  was  of lithography and art  printing  and  was carried  on  through  a Press under the name  and  style  of Shivraj   Fine  Art  Litho  Works.   The  capital   of   the partnership  under the partnership deed was  Rs.  10,50,000. Clause  (4)  of the partner-ship deed enumerated  the  share capital contributed by the partners as follows  1. Baburao alias Vasantrao     Dattaji Dhanwatry.                     .. Two annas. 2. Marotirao Dattaji    Dhanwatey.                           ..  Three annas. 3.Shamrao Dattaji  Dhanwatey.                             ..   Two annas.                               three pies. 4.   Shankarao Dattaji      Dhanwatey.                           .. Two annas.                               three pies. 5.   Krishnarao Dattaji     Dhanwatey.                                              Two annas.                                           three     pies. 6.   Balu alias Yeshwantrao      Dattaji Dhanwatey.       Two annas.                                              three pies. 7.   Shivaji Vasantrao   Dhanwatey.                               Two annas. Clause (5) states that interest at the rate of 5% per  annum shall  be  payable  to each partner on  the  amount  of  the capital,  Clause  (7) provides that general  management  and

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 22  

supervision  of  the partnership business shall  be  in  the hands of Shri V. D. Dhanwatey 66 Clause  (8)  states that Marotirao Dhanwatey  shall  be  the manager  incharge  of the works and both  he  and  Vasantrao Dhanwatey  shall  have power to make contracts  and  arrange terms with constituents or customers.  Clause (10) empowered three  partners, viz., V. D. Dhanwatey, M. D. Dhanwatey  and Shamrao Dhanwatey to appoint such person or persons on  such salary  as  they deem fit for carrying on the  work  of  the partnership  and delegate to them such powers as they  think proper.  Clause (15) provided that the various adult members of the, partnership shall devote theirwhole    time    and attention  to  the  partnership  in  the  sphere  of   their respective duties.  Clause ( 16) is to the following effect:               "The  said  Baburao  alias  Vasantrao  Dattaji               Dhanwatey  shall be paid remuneration  at  the               rate  of  Rs.  1,250  (Rupees  Twelve  Hundred               Fifty)  per month, the said Marotirao  Dattaji               Dhanwatey  shall be paid remuneration  at  the               rate  of Rs. 1,000 (Rupees One  thousand)  per               month,  the  said  Shamrao  Dattaji  Dhanwatey               shall be paid remuneration at the rate of  Rs.               700 (Rupees seven hundred) per month. the said               Shankarrao  Dattaji Dhanwatey  and  Krishnarao               Dattaji   Dhanwatey   shall   each   be   paid               remuneration  at the rate of Rs.  500  (Rupees               five  hundred) each out of the gross  earnings               of  the partnership business.  This amount  of               remuneration  of Any or all can,  however,  be               revised at any time if all the partners  agree               to revise." According  to  this  clause the  remuneration  paid  to  the various  partners  shall be paid to them out  of  the  gross earnings  of  the partnership  business.   The  remuneration provided  for Shri V. D. Dhanwatey was later raised  to  Rs. 1,500 per month.  For the accounting period relating to  the assessment  years 1954-55 and 1955-56 Shri V.  D.  Dhanwatey had been paid Rs. 18,000 in each year.  The assessee  showed the said amount in his return in Section D. It was contended on  behalf of the appellant that the amount was not  taxable because it was the income earned by Shri V. D. Dhanwatey for the  service-, Tendered by him -to the partnership  and  the amount constituted his individual income and not the  income of  the Hindu Undivided Family.  It was urged that the  said amount should be taxed in the hands of Shri V. D.  Dhanwatey in  his status as individual and not in his status as  Karta of  the  Hindu  Undivided family.  The  Income  Tax  Officer rejected the contention of the, assesse.  The appeals of the assessee   were  disallowed  by  the   Appellate   Assistant Commissioner of Income-tax.  Nagpur.  The assessee took  the matter  in  further appeal before the  Income-tax  Appellate Tribunal  in Bombay.  It was contended by the assessee  that Shri V. D. Dhanwatey was an 67 employee  of the firm even before the family was taken as  a partner.  It was said that on partition of the larger  Hindu undivided  family in 1939 of which Shri V. D. Dhanwatey  was member,  Shri V. D. Dhanwatey representing the  small  Hindu undivided  family  of which he became the  karta,  became  a partner  in the said firm and received salary from it.   ’Me Tribunal, by its order dated September 4, 1962 dismissed the appeal   of  the  assessee.   The  Tribunal   accepted   the contention  of  the assessee that Shri V. D.  Dhanwatey  was rendering  services to the firm and was getting salary  ever

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 22  

before  his  family became a partner in the firm.   But  the Tribunal held that Shri V. D. Dhanwatey who was a partner of the  firm could not at the same time be an employee  of  the partnership  firm and the remuneration received by him  must be held to be only an adjustment of the share in profits  of the  Hindu  Undivided  family in the  partnership.   At  the instance  of  the assessee the Appellate Tribunal  stated  a case  to the High Court under s. 66 (1) of the Income  Tax.’ Act, 1922 on the following question of law :               "Whether on the facts and in the circumstances               of’  the  case,  the sum  of  Rs.  18,000  was               rightly  included in the total income  of  the               assessee-family for the assessment years 1954-               55 and 1955-56?" By its judgment dated July 23, 1964 the High Court  answered the reference against the assessee, holding that the  entire capital  contribution  was made by the Hindu  Joint  family, that the remuneration paid to Shri V. D. Dhanwatey was  paid under  a  clause  of  the  deed  of  partnership,  that  the remuneration paid was only an increased share in the profits of the firm paid to Shri V. D. Dhanwatey as representing the Hindu   undivided   family  and  so  the  said   amount   of remuneration was taxable in the hands of the assessee.   The High Court took- the view that the case was governed by  the decision  of this Court in The C.I.T., West Bengal  v.  Kalu Babu Lal Chand(1). On behalf of the assessee learned Counsel stressed the argu- ment  that the remuneration to Shri V. D. Dhanwatey  was  by reason  of his own exertions and it was not earned with  the help  of  the joint family assets.  It  was  contended  that there  was no nexus between the joint family funds  and  the remuneration  paid to Shri V. D. Dhanwatey for the  services rendered by him and there was no evidence that any  training had been given to Shri V. D. Dhanwatey at the expense of the family funds for equipping him for the services rendered  by him to the partnership.  It was argued that the remuneration earned  by  Shri V. D. Dhanwatey could not be said  to  have been earned by detriment to the joint (1)  [1960] 1 S.C. R. 3 20. 68 family funds. It was therefore said that the High Court  was wrong  in applying the principle laid down by this Court  in The  C.I.T.,  West  Bengal  v. Kalu  Babu  Lal  Chand(1)  in deciding the present case. The general doctrine of Hindu law is that property  acquired by  a  karta or a coparcener with the aid or  assistance  of joint family assets is impressed with the character of joint family property.  To put it differently, it.-is an essential feature of self-acquired property that it should. have  been acquired  without  assistance  or aid of  the  joint  family property.   The  test of self-acquisition by  the  karta  or coparcener  is. that it should be without detriment  to  the ancestral  estate.   It is therefore clear  that  before  an acquisition  can be claimed to be, a separate property,-  it must be shown that it was made without any aid or assistance from the ancestral or joint family property.  The  principle is  based  on  the original text of  Yajnavalkya  who  while dealing with property not liable to partition, states               "Whatever  else is acquired by the  coparcener               himself,  without  detriment to  the  father’s               estate, as, a present from a friend or a  gift               at  nuptials, does not appertain to  co-heirs.               Nor shall he, who receives hereditary property               which  had  been  taken away, give  it  up  to               coparceners;  nor  what  has  been  gained  by

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 22  

             science." (Yajnavalkya 2, verses 119-120). Commenting on this text of Yajnavalkya the author of  Mitak- shara states :               "The  author explains what may not be  divided               whatever  else is acquired by  the  coparcener               himself,  with.out detriment to  the  father’s               estate, as a present from a friend. or a  gift               at  nuptials,  does not appertain to  the  co-                             heirs.   Nor shall be, who recovers  h ereditary               property,  which had been taken away, give  it               up  to  the coparceners; nor what  ha,,  been.               gained by science."               The,  author sets out in verse 2 the  text  of               Yajnavalkya  in  his own words and  states  in               verse 6 :               (1) [1960] 1 S.C.R. 320.               69               "Here the phrase anything acquired by himself,               without detriment to the father’s estate  must               be  everywhere  understood;  and  it  is  thus               connected  with each member of  the  sentence;               what  is  obtained  from  a  friend,   without               detriment  to  the paternal  estate;  what  is               received  in  marriage, without waste  of  the               patrimony; what is redeemed, of the hereditary               estate   without  expenditure   of   ancestral               property;  what is gained by science,  without               use of the father’s goods.  Consequently, what               is obtained from a friend, as the return of an               obligation  conferred  at the  charge  of  the               patrimony;  what  is received  at  a  marriage               concluded  in  the form termed  Asura  or  the               like;  what  is recovered, of  the  hereditary               estate,  by  the expenditure of  the  father’s               goods;  what is earned by science acquired  at               the expense of ancestral wealth; all that must               be  shared with the whole of the brethern  and               with the father." The  expression ’without determined to the father’s  estate’ in  the  text of Yajnavalkya is :  "Dealing  with  the  same matter, Devanna Bhttta states in Smriti Chandrika : "27.   The principle contained in Yajnavalkya’s  text  i.e.. ’Whatever else is acquired by the coparcener himself without detriment  to the father’s estate’ is explained by  Manu  in his  passage,  ’What  has been acquired  by  labour  without prejudice to the father’s estate.’ 28.In  both the above passages, the word father  signifies an  undivided  co-heir generally-’By labour’ means  by  acts requiring   labour,  such  as  agriculture,  etc..   Without prejudice,’ means without detriment. 29.Vyasa,  too; ’Whatever it man gains by his  own  labour without  the assistance of the father’s estate share not  be given by him to the co-heirs.’ 30.’Without   the  assistance,  means   without   deriving assistance  for the purpose of gaining.  The word father  is used  to denote ,In undivided co-heir generally".  (Setlur’s translation, Ch.  VII, Paragraphs 27 to 30)" This principle is implicit in the decision of this Court  in the  C.1.T., West Bengal v. Kabu Babu Lal Chand(1) in  which one  Rohatgi, manager of a Hindu undivided family, who  took over a business as a going concern, promoted a company which was (1)[1960] 1 S.C.R. 320. 70

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 22  

to  Lake over the business.  The Articles of Association  of the company provided that Rohati would be the first managing director  at a remuneration specified in the Articles.   The shares  which stood in the name of Rohatgi and  his  brother were  acquired with funds belonging to the joint family  and the  family was in enjoyment of the dividends paid on  those shares,  and the company was floated with funds provided  by the  family, and was at all material times financed  by  the joint  family.  in proceedings for assessment of  the  Hindu undivided   family,  it  was  claimed  that   the   managing director’s  remuneration were personal earnings  of  Rohatgi and could not be added to the income of the Hindu  undivided family.   The contention was rejected by this Court  and  it was  held that the managing director’ remuneration  received by  Rohatgi  was,  as between him and  the  Hindu  undivided family the income of the family and should be assessed in it hands. In  reaching  that  conclusion,  the  court  first observed that a Hinduundivided family cannot enter  into a  contract of partnership with another person  or  persons. The  karta of the Hindu undivided family, however, may,  and in  fact,  does, enter into partnership  with  outsiders  on behalf and for the benefit of his joint family, but which he so,  the other members of the family do not,  vis-a-vis  the outsiders  become  partners  in the firm.   So  far  as  the outsiders  ,  become partners in the firm.  so  far  as  the partners are concerned, it is the manager who is  recognised as  a partner.  Whether in entering into a partnership  with outsiders, the manager acted .. his individual capacity  and for his own benefit, or he did so as representing his  joint family and for its benefit, is a question of fact.  If,  for the  purpose of contribution of his share of the capital  in the  firm, the karta brought in monies, out of the  till  of the  Hindu  undivided family, then he must  be  regarded  as having  entered into for the benefit of the Hindu  undivided family, and the other members of his family he would be  all profits  received  by him as his share out of  profits,  and such  profits  would  be assessable as hands  of  the  Hindu undivided  family.   The  court  to  consider  whether  that principle was applicable to the income derived by a  manager as a partner of a managing agent to remuneration received by the  manager  as the managing director of the  company,  and held that if the manager was appointed a managing  ,director as  representing  the Hindu undivided  family,  the  income, received  would  be  taxable  as the  income  of  the  Hindu undivided family.  In the course of his judgment, S. R. Das, C.  J. speaking for the Court observed as follows  at  pages 331-332 of the Report               "The  karta  was one of the promoters  of  the               Company  which he floated with a view to  take               over  the  India  Electric Works  as  a  going               concern.  In anticipation of the incorporation               of that Company the karta of the               71               family  took over the concern, carried  it  on               and supplied the finance at all stages out  of               the joint family funds and the finding is that               he  never  contributed  anything  out  of  his               separate   property,  if  he  had  any.    The               Articles   of  Association  of   the   Company               provided  for  the  appointment  as   managing               director of the very person who, as the  karta               of the family, had promoted the Company.   The               ,acquisition  of the business, the  floatation               of the Company and appointment of the managing               director appear to us to be inseparably linked

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 22  

             together.   The joint family assets were  used               for acquiring the concern and for financing it               and in lieu of all that detriment to the joint               family  properties  the joint family  got  not               only  the shares standing in the names of  two               members  of the family but also, as  part  and               parcel  of  the  same  scheme,  the   managing               directorship     of    the    company     when               incorporated..................... The recitals               in  the  agreement also clearly point  to  the               fact  of B. K. Rohatgi having  been  appointed               mananaging  director  because of his  being  a               promoter  of the company and  having  actually               taken over the concern of India Electric Works               from  Milkhi Rain and others.  The finding  in               this case is that the promotion of the Company               and  the  taking over of the concern  and  the               financing of it were all done with the help of               the  joint  family funds and the  said  B.  K.               Rohatgi did not contribute anything out of his               personal funds if any.  In the  circumstances,               we  are clearly of opinion that  the  managing               director’s  remuneration  received  by  B.  K.               Rohatgi  was,  as between him  and  the  Hindu               undivided family, the income of the latter and               should be assessed in its hands." The same principle was reiterated by this Court in a  subse- quent case--Mathura  Prasad v. C.I.T., U.P.(1) In that case. a  Hindu  undivided family owned considerable  property  and carried  on many businesses.  There was a partition  anion,, the  six  branches in the family and a sixth  share  of  the property was allotted to the smaller Hindu undivided  family of which M was the manner.  After partition the managers  of the,  six branches entered into an agreement of  partnership to carry on the businesses.  Under the agreement, M, who was to manage the affairs of one of the offices, was entitled to a  monthly  allowance  of  Rs.  1,500,  such  allowance  not exceeding  the profit,,, disclosed at that office.   It  was conceded  before  the  Tribunal  that  M  had  entered  into partnership  as  representing, his smaller  Hindu  undivided family  for  the benefit of the fan-Lily.   It  was  further found that M became a partner with the help of joint  family funds and 1)   60 I.T.R. 428. 72 that  the allowance received by him was directly related  to the  investment  of  the family  funds  in  the  partnership business.    Accordingly,  his  allowance  was   taxed.   as the--income  of  the smaller Hindu undivided family  in  its hands.   The appellant thereupon applied for a reference  of the  question  whether the allowance was the income  of  the Hindu  undivided  family or of M in his  personal  capacity. Both  the Tribunal and the High Court were of the view  that the  question  sought,  to be raised was  concluded  by  the judgment of this Court in C.I.T. v. Kalu( Babu Lal  Chand(1) and therefore it need not be referred for the opinion of the High Court.  The assessee preferred an appeal to this  Court from  the order of the High Court rejecting his  application for  reference.   It  Was held by this  Court  that  on  the findings   recorded  by  the  Tribunal,  the  question   was concluded  by the judgment of this Court in C.I.T.  v.  Kalu Babu  Lal Chand(1) and any further elaboration was  academic and  that the High Court was therefore right in refusing  to direct  a  case  to be stated under s. 66(2)  of  the  India Income-tax  Act, 1922.  Reference was made on behalf of  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 22  

appellant to the decision of this Court in M/s.  Piyare  Lal Adishwer  Lal  v.  The C.I.T.Delhi(1).  But  that  case  was distinguished  and  it  was pointed out that  there  was  no analogy  between a case in which the property of  the  Hindu undivided family was sought to be encumbered for obtaining a benefit which was essentially personal to the manager, and a case  in which with the aid of the family funds the  manager of  the family was able to enter into a partnership  and  to earn  allowance,  which he would not other  wise  have  been entitled to receive.  In the course  of his judgment at page 433  of the Report, Shah, J. speaking for the Court  observ- ed as follows:               "In  the present cases the Tribunal has  found               that  Mathura Prasad had become, a partner  in               the  firm of.  Badri Prasad Jagan Prasad  with               the  aid of the funds of the  Hindu  undivided               family,  and as a partner of the firm  he  was               entrusted  with the management of the  Agarwal               from Work,, and he, earned the allowance which               was claimed to be salary.  The, right to  draw               the   allowance  was,  in  the  view  of   the               Tribunal,  made possible by the use of  family               funds.  The family funds enabled him to become               a  partner and to claim the allowance for  the               services  rendered.  There was in the view  of               the Tribunal an inseparable connection between               the  joint  family  funds  and  the  allowance               received.   The  right to draw  the  allowance               therefore arose directly from the joint family               funds.               It   may  be  recalled  that  in  the   second               paragraph  of  clause  8  of  the  partnership               agreement, though a monthly               (1)  [1960] 1 S.C.R. 320.               (2) [1960] 3 S.C.               73               Allowance of Rs. 1,500 was named as the amount               which Mathura Prasad was entitled to withdraw,               the  amount was liable to be reduced,  if  the               profits    earned   did   not   justify    the               withdrawals,  and Mathura Prasad was bound  to               refund the excess of the withdrawals over  his               appropriate share in the profits.   Therefore,               by the agreement it was intended that  subject               to  a maximum of Rs. 1,500 per month,  Mathura               Prasad  will be entitled to  make  withdrawals               commensurate with the profits of the firm.  In               the  light of the principle laid down by  this               Court  in  Kalu Babu  Lal  Chand’s  case(1960)               [S.C.R,  320],  it must be held  that  on  the               finding   recorded   by  the   Tribunal.   the               question,  which  it was  -claimed  should  be               referred  to the High Court, was concluded  by               the judgment of this Court." Now what ire the facts found in the present case" It is  not in  dispute  that  ’he capital contribution of  Shri  V.  D. Dhanwatey in the partnership belonged to the Hindu undivided family  which  he represented.  In other words,  the  entire capital  contribution  to the partnership was made,  by  the Hindu  undivided family of which.  Shri V. D. Dhanwatey  was the karta.  It has been found that Shri V. D. Dhanwatey  was in  the  partnership  as represent in  the  Hindu  undivided family and has became a partner on account of the investment of   the  joint  family  assets  in  the  capital   of   the partnership.   It  is  also not disputed  that  shri  V.  D.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 11 of 22  

Dhanwatey  got  remuneration at the rate of  Rs.  1,500  per month  by virtue of clause (16) of the deed of  partnership. In  other  words,  the  payment was made  to  Shri  ’V.   D. Dhanwatey  because of tile investment of the capital by  the joint  family  in the partnership business and had;  it  not been for such investment Shri V. D. Dhanwatey would not have got the remuneration.  It was stated by Counsel on behalf of the assessee that the Appellate Tribunal had found that even before  the partnership was formed Shri V. D. Dhanwatey  was receiving salary from December 1930 to August 1939 front the business  Which. was carried on by the larger joint  family. In our opinion, this finding is not relevant for the  deter- mination  of the question of law in the present case.   Even assuming that Shri V. D. Dhanwatey was rendering services to the  business before the partnership was formed it does  not necessarily follow that the remuneration paid to Shri V.  D. Dhanwatey  after the formation of the partnership should  be deemed  to  be individual income in his ’hands and  did  not belong  to the Hindu joint family of which he is the  karta. The  salary  given. to Shri V. D. Dhanwatey  from  December, 1930 to August, 1939 has no connection with the remuneration earned  by him after the contract of partnership and  has  a different  character  and arises out of  a  different  legal relationship.  ’On the other hand, the remuneration L10Sup.CI/68-6 74 in  the  present case was given to Shri V. D.  Dhanwatey  by virtue  of the contract of partnership.  It should  also  be noticed  that  under cl. (16).of the  partnership  deed  the amount  of  remuneration of Shri V. D. Dhanwatey or  of  any other  partner  could  be revised at any  time  if  all  the partners  agreed  to  do  so. It  has  been  found.  by  the Appellate Tribunal that the remuneration received by Shri V. D.. Dhanwatey was only an increased share of the profits  of the  firm  paid to him as representing the  Hindu  undivided family  and therefore the whole of the payment made to  Shri V. D. Dhanwatey, viz   the share in the profits of the  firm and  his individual remuneration, was taxable as  income  of the Hindu undivided family.  It is manifest that Shri V.  D. Dhanwatey  was made a partner due to the contributions  made by  the ’joint family funds to the entire share  capital  of the  firm.   In other words, it was the utilisation  of  the joint  family  funds which enabled Shri V.D.  DHANBWATY   to become  a  partner  in  the  partnership  business.  In  our opinioun, the remuneration paid to Shri V. D. Dhanwatey  was directely  related   to investments from the assets  of  the Hindu  joint family in the partnership business.   In  other words,  there was a real. and sufficient connection  between the  investment  the  Hindu  joint  family  funds  into  the partnership business and the remuneration paid to Shri V. D. Dhanwatey  under  cl. (16) of the deed of  partnership.   It follows  therefore  that  the remuneration  of  Shri  V.  D. Dhanwatey  was  not carried without detriment to  the  Hindu joint  family funds and the case falls directly  within  the principle  laid.  down  by this Court in  The  C.1.T.,  West Bengal  v.  Karta  Babu Chand(1) and in  Mathura  Prasad  v. C.I.T., U. p. (2) it was finally contended on behalf of the appellant that the Appellate  Tribunal had found that Shri V. D. Dhanwatey  had carried the remuneration without any detriment to the family funds  and  the finding of the Appellate  Tribunal  on  this point was a findin- on a question of pure fact and the Hindu Court  could  not,  in a reference under s. 66  (1)  of  the Income-tax  Act,  1922,  question: the  correctness  or  the validity  of  that  finding.  We are unable  to  accept  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 12 of 22  

argument put forward on behalf of the appellant, It is  true that  the jurisdiction conferred on the High Court by s.  66 (1)  of  the  Income-tax  Act  is  limited  to  entertaining references  on  questions  of law.   In  the  present  case, however,  the  conclusion reached by the Tribunal is  not  a conclusion on a question of pure fact but it is a conclusion on  a  mixed  question of law and  fact.   In  other  words, thouogh  the  conclusion of the Tribunal is no  doubt  based upon primary evidentiary facts, its ultimate from is  deter- mined by the application of the relevant legal principle  of Hindu  Law  which has been discussed in the course  of  this judgment.   In dealing with findings s on question of  mixed law and fact the High (1) [1960] 1 S.C.R. 320.                 (2) 60 I.T.R. 428. 75 Court  must no doubt accept the findings of the Tribunal  on the  primary questions of fact; but it is open to  the  High Court  to  examine  whether the  Tribunal  had  applied  the relevant  legal principles correctly or not in reaching  its final  conclusion; and in that sense, the scope  of  enquiry and.  the  extent of the jurisdiction of the High  Court  in dealing with such points is the same as in dealing with pure points of law.  For example, in G. Venkataswanmi Naidu & Co. v.  C.I.T.(1) it was pointed out by this Court - that  where the  question is whether a transaction is in the  nature  of trade,  even  if the conclusion of the  Tribunal  about  the characterof the transaction is treated as a conclusion on  a question  of  fact, in arriving it its final  conclusion  on fact,,  proved,  the  Tribunal has  necessarily  to  address itself  to the requirements associated with the  concept  of trade  or  business.  The final conclusion of  the  Tribunal can, therefore, be challenged on the ground that the relevantlegal  principles  have  been  misapplied  by  the Tribunal inreachingits  decision  on the point and  such  a challenge is open. under s.66(1)  because  it is a challenge on a  ground  of law" For  the  reason,,  expressed we hold that  the  High  Court rightly answerd the question of law against the assessee and these  appeals  must  be dismissed with  costs-one  set,  of hearing fees. Hegde,  J. I regret that it has not been possible for me  to agree with the majority decision. The  question for decision in these appeals is  "whether  on the  facts  and circumstances of the case, the  sum  of  Rs. 18,000  was  rightly  included in the total  income  of  the assessee  family for the assessment years 1954-55 and  1955- 56." The facts as found by the tribunal are these : The  assessee is  a Hindu undivided family of which Shri V.  D.  Dhanwatey (who  will be hereinafter referred to as Dhanwatey)  is  the karta.   He  is  one of the partners-in a  firm  engaged  in lithography  and  printing business.  The  partnership  came into  existence in August 1939, But that very  business  was being carried on by Dhanwatey’s family before its  partition in  1939.   After partition in the  bigger  family,  several members of the quondam family formed a partnership and  that partnership  took over the business in question.   Dhanwatey was  attending to that business ever since 1930 and, he  was being remunerated for the same.  Dhanwatey joined. the  firm as  one  of its partners but his share of  the  capital  was subscribed   by  his  joint  family.   Under  the  deed   of partnership he was designated as the general manager and his remuneration  was  fixed at Rs.1,500 per  month.   The  High Court  found that he was getting the same remuneration  even

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 13 of 22  

before the partnership came into exitence. (1)35 I.T.R. 594. 76 The relevant findings of the tribunal are found in paragraph 5 of its order.  It reads as follows :-               "Even after the partition and the formation of               the  firm Shri V. D. Dhanwatey was  getting  a               salary for managing the said business.   These               facts are not disputed by the department.   We               think, therefore, that the assessee has proved               that  Shri V. D. Dhanwatey has been  rendering               services  to  the  firm and that  as  the  was               getting  the  salary even before he  became  a               partner (subsequently representing his H.U.F.)               it cannot be said that the salary now paid  to               Shri  V.  D.  Dhanwatey  is  because  of   any               detriment to the joint family." Even after coming to that conclusion, the tribunal  repelled the  contention of the assessee that the salary received  by Dhanwatey  was his individual income on the sole ground,  to quote it,, own words :               "Dhanwatey  is  a  partner in  the  said  firm               represent  in his H.U.F. In law he alone is  a               partner of the firm and not the H.U.F. Shri V.               D.   Dhanwatey  cannot,_  therefore,   be   an               employee  of the partnership and  the  alleged               salary  received by Shri V. D. Dhanwatey  must               be held to be only an adjustment of the  share               of the H.U.F. in the partnership.  As in  this               case  no salary can be said to have been  paid               to Shri V. D. Dhanwatey, but what is paid can.               be  said to be only an increased share in  the               profits   of   the  firm  paid   to   him   as               representing his H.U.F., and the share in  the               partnership  being undoubtedly the  income  of               the H.U.F., it is clear that the whole of  the               payment  made to Shri V. D.  Dhanwatey,  viz.,               the  share in the profits of the firm and  the               alleged  salary,  all this is  income  of  the               H.U.F. and in our opinion was rightly taxed as               such  in the hands of Shri V. D. Dhanwatey  as               the karta of the H.U.F." In  support of the conclusion that no partner of a firm  can get  remuneration for taking part in  partnership  business, the tribunal purported to rely on the decision of the Bombay High Court in S.    Magnus  v. Commissioner of  Income  tax, Bombay City(1). From  the  above findings of fact reached  by  the  tribunal which were binding on the High Court and are binding on this Court, it is established (1) that Dhanwatey was attending to the  business in question even before the  partnership  came into existence and that he was getting remuneration for  the work  done  by  him. (2) after the,  partnership  came  into existence, he, one out of the (1) 33 I.T.R. 538. 77 several partners, was designated as the general manager  and for  that  work he was given a monthly remuneration  of  Rs. 1,500,  and  (3) the said remuneration was received  by  him without  any  detriment to his family.  We have now  to  see whether  on  the basis of these  findings  the  remuneration received by Dhanwatey can be considered as an accretion.  to his family income.  In my opinion the High Court went  wrong in  thinking  that  the finding of  the  tribunal  that  the remuneration received by Dhanwatey was without detriment  to

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 14 of 22  

his  family is not a finding of fact but a  legal  inference drawn  by the tribunal from the facts proved.  The  tribunal reached that finding on the basis of the facts placed before it  and  it  has given cogent reasons  in  support  of  that finding.   The  conclusion  reached by  the  tribunal  is  a finding of fact.  I respectfully disagree with the  majority that  a  finding of this character can be  considered  as  a mixed  question  of law and fact as no legal  principle  was required to be applied in arriving at that conclusion. The appellate tribunal as well as the Bombay High Court were wrong  in  thinking that a partner of a firm  can  under  no circumstance  be given remuneration for taking part  in  the conduct  of  the  partnership business.   In  reaching  that conclusion  the tribunal as well as the; High Court  ignored s. 13(a) of the Partnership Act, which says that subject  to the contract between the partners, a partner is not entitled to  receive remuneration for taking part in the  conduct  of the  business.   From  that provision  it  follows  that  by agreement  one of the partners in a partnership firm can  be remunerated for attending to partnership work. The  tribunal  as well as the High Court erred  in  thinking that the Bombay High Court in the case of S. Magnus had laid down  that a partner of a partnership firm cannot  be  given any  -remuneration for taking part in partnership  business. All that decision has laid down is that a partner cannot  be an employee of the partnership.  That is not the same  thing as  saying that a partner cannot be remunerated  for  taking part  in.  the conduct of the partnership business.  0n  the facts  found  by it there was no basis  for  the  conclusion reached  by the tribunal that the remuneration  received  by Dhanwatey was only "an increased share in the profits of the firm  paid to him as representing his HUF".  It may  further be noted that the remuneration received by Dhanwatey had  no relationship  with the share capital subscribed by him.   It is in no manner linked with the share capital subscribed  by him. On the material on record it is not possible to hold nor did the  tribunal  hold  that Dhanwatey  was  appointed  as  the general  manager  merely  because he  was  a  partner.,  The partnership deed does not say so either expressly or  even-- by implication.  In law he alone is the partner.   Therefore it would not be correct to say 78 that  every right Dhanwatey acquired under  the  partnership deed  was acquired on behalf of the family.  Under cl.  (16) of the partnership Dhanwatey. as the general manager of  the firm  was given a remuneration of Rs. 1,500 per  month.   It cannot  be  said  that  Dhanwatey’s  joint  family  was  the general,  manager of the family, nor could it be  said  that for any act or omission of his as the general manager of the firm his family could be held responsible. Dhanwatey  evidently  had great deal of  experience  in  the business   in   question.   To  repeat,  even   before   the partnership  came into existence, he was attending  to  that very  business and he was drawing a salary of Rs. 1,500  per month.  For the capital supplied by his joint family, it was getting  dividends.   It  may be, the fact  thaT  he  was  a partner of the firm was a circumstance that had induced  the other  partners to appoint him as the general manager.   But the  Could  no  have been  the  determinative  circumstance. There  were other partners who had subscribed  more  capital than  the done, It must be remembered that investment  in  a business  is  but  one  of its  facets.   The  know-how  and intelligent  direction  is  no  less  important.    Business concerns  do  not  earn profits merely  because  capital  is

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 15 of 22  

invested in them.  Much depends upon ,the person who are  in charge of the business.  Captains of industries and business managers   should   possess   business   knowledge,    tact, capability,  drive and numerous other qualities.   The,  ex- perience of Dhanwatey in that particular business must  have greatly  weighed with the partners in appointing him as  the general manner and entrusting to him the supervision of  the business.   Therefore  it can be reasonably  concluded  that remuneration paid to him was a quid pro quo for the -special services rendered by him. So far as the partnership is concerned, it was Dhanwatey and not his joint family that was the partner.  The  partnership had  nothing to do with his joint family.  But  the  capital invested  by  Dhanwatey  being that  of  his  joint  family, Dhanwatey  had  to  hold that  capital  and  the  accretions thereto as joint family property.  But he need not make over to his family his personal earnings.  Before an  acquisition made by a coparcener of a Hindu family can be considered a,; family  acquisition, as observed in the  majority  judgment, there  must  be real and sufficient connection  between  the family investment and the acquisition.  On the facts of this case  it  cannot be said that the  management  of  Dhanwatey involved  any  risk to his family as such.  Not- can  it  be said-except  in a very remote sense-that he took the aid  of the family funds in making the acquisition. As laid down by the Hindu law Texts, whatever is acquired by a  coparcener  himself  without detriment  to  the  father’s estate, does  79 not appertain to the co-heirs.  The tribunal, the final fact finding   authority,   has  found  that   the   payment   of remuneration  to Dhanwatey did not entail any  detriment  to the  family assets.  Nor could it be said that he made  that acquisition  with  the aid of the, family assets.   The  aid contemplated  by law must be a real and substantial one  and not any remote connection between the income earned and  the family  funds.  That position is made clear by the  decision of  this Court in Piyare Lal v. Commissioner of  Income  tax (1)  and  the  decision of this  very  Bench  in  Palangappa Chettiar v.    Commissioner of Income Tax, Madras(2). In Sardar Bahadur Indra Singh v. Commissioner of  Income-tax Bihar  and  Orissa(3), the income realized by the  karta  of Hindu  undivided  family  as the  governing  director  of  a private   company   of   which   he   was   a   partner   as representing_his family, was held to be his personal income. A  similar  view was taken in Commissioner  of  Income  tax, Bihar   and  Orissa   v.   Darsanram   and  others(1).    In Commissioner of Income-tax, Madras v. S. V. N.  Sankaralinga Iyer(5)   a  division  bench  of  the,  Madras  High   Court consisting  of Satyanarayana Rao and Viswanatha Sastri,  JJ. held that the remuneration deceived by Sankaralinga Iyer  as the  managing director of a bank was his  individual  income though  be  had  acquired  the  shares  in  the  bank  which qualified him to be a director from out of the funds of his, family  of  which  he  was, the karta.   It  held  that  the remuneration  received  by him as  the  managing  director’s remuneration and director’s sitting fee was earned by him in consideration  of  the services which he  rendered.  to  the bank, and as, there was no detriment to the family  property in  earning  that remuneration, his income as  the  managing director  of  the bank was his personal income and  not  the income  of the Hindu undivided family of which lie was  the, karta. Then came the decision of this Court in Commissioner of  In- come-tax,  West  Bengal v. Kalu Babu Lal Chand(6).   On  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 16 of 22  

fact.,,, of that case, this Court held that the remuneration earned by Rohatgi as the managing director of a firm was the income of his HUF.  The  facts  of that case  were  somewhat peculiar.  They are setcut  at p. 331 of the  report.   It would be best to quote the,passage in question which reads:-               "Here was the Hindu undivided family of  which               B.    K.  Rohatgi  was the karta.   It  became               interested in               the concern then carried on by Milkhi Ram  and               others under the name of India Electric Works.               The  karta  was one of the  promoters  of  the               Company  which he floated with a view to  take               over the India Electric Works               (1)   [1960] 3 S.C.R. 669.               (3)   11 I.T.R. 16.               (5)   18 I.T.R. 194.               (2)   [1968] 2 S.C. R. 5 5.               (4)   13 I.T. R. 419.               (6)   [1960] 1 S.C.R. 320.               80               as  a going concern.  In anticipation  of  the               incorporation of that Company the karta of the               family  took over the concern, carried  it  on               and supplied. the finance at all stages out of               the joint family funds and the finding is that               he  never  contributed  anything  out  of  his               separate   property,  if  he  had  any.    The               Articles   of  Association  of   the   Company               provided  for  the  appointment  as   managing               director of the very person who, as the  karta               of  the  family,  had  promoted  the   Company               (Emphasis supplied).  The acquisition. of  the               business,  the floatation of the  Company  and               appointment  of the, managing director  appear               to us to be inseparably linked together.   The               joint  family assets were used  for  acquiring               the  concern and for financing it and in  lieu               of  all.  that detriment to the  joint  family               properties  the joint family got not only  the               shares standing in the names of two members of               the  family but also, as, part and  parcel  of               the same scheme, the managing directorship  of               the  company  when incorporated.  It  is  also               significant  that right up to  the  accounting               year  relevant to the assessment year  1943-44               the  income was treated as the income  of  the               Hindu undivided family.  It is true that there               is  no question of res judicata but  the  fact               that  the,  remuneration was credited  to  the               family  is certainly a fact to be  taken  into               consideration." It may be noted that it is on the basis of those facts  that this  Court  came to the conclusion  that  the  remuneration received by Rohatgi was the income of his HUF. While  dealing  with the decisions in Sardar  Bahadur  India Singh(1)  and Darsanram’s ( 2 ) cases referred  to  earlier, this Court observed in Kalu Babu’s(3) case : "The  case of Sardar Bahadur Indra Singh v. Commissioner  of Income  tax, Bihar and Orissa is clearly distinguishable  in that   it  was  expressly  provided  in  the   Articles   of Association   of   the  Company  in  that  case   that   the remuneration of the managing director would be his  personal income.  In Commissioner of Income-tax, Bihar and Orissa  v. Darsanranr,  the finding of fact was that the  joint  family property  had  not  been  spent  in  earning  the   managing

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 17 of 22  

director’s   remuneration which was, therefore,  held  to be the personal earnings of the karta who had been appointed as the managing director." (1) 11 I. T. R. 16 (2) 13 1. T. R. 419. (3) [1960] 1.S.C.R. 320., 81 From these observations it follows, that this Court did  not dissent,  from the view taken in Darsanram’s(1)  case.   The facts  found  by  the  tribunal  in  the  present  case  are identical to those found in Darsanram’s(1) case. Dealing with Sankarlinga Iyer (2) case, this Court  observed in the aforementioned Kalu Babu’s(3) case :               "The  case  of  Commissioner  of  Income  tax,               Madras v. S. N. N. Sankaralinga Iyer does  not               help the respondent because of the facts found               in that case.  In that case it was found  that               the remuneration of the managing director  was               earned by him in consideration of the service,               which  he rendered to the bank and no part  of               the  family funds had been spent  or  utilised               for  acquiring that remuneration  except  that               the   necessary   shares   to   acquire    the               qualification  of  a  managing  director  were               purchased  out of the joint family funds.   It               was  said that there was no detriment to,  the               family  property  in  any  manner  or  to  any               extent,   as  admittedly  the  shares   earned               dividends which were included in the income of               the family." If   this   Court  had  observed   nothing   further   about Sankaralinga Iyer’s(2) case, the rule laid down in that case could  have been relied on ’by the assessee in this case  as the facts found in the two, cases are in pari materia.   But unfortunately in Kalu Babu’s(3) case this Court went further and observed :               "With great respect to the learned judges,  it               appears   to  us  that  they  overlooked   the               principles   laid   down  by   the   Judicial’               Committee in Gokul Chand’ v. Hukum Chand  Nath               Mal  (48  I.A. 162) where it was  pointed  out               that  there  would  be  no  valid  distinction               between  the  direct use of the  joint  family               fund  and’ the use which qualified the  member               to  make  the gains on his own  efforts.   The               member  of the joint family entered  into  the               Indian Civil Service no doubt by reason of his               intelligence   and  other   attainments.    He               certainly  entered into a  personal  agreement               with the Secretary of State in Council and  he               received his salary for rendering his personal               service.   But all that was made  possible  by               the  use  of  the  joint  family  funds  which               enabled   him   to   acquire   the   necessary               qualifications and that fact made his earnings               part  of  the joint family  properties.   That               apart,  those decisions do not clearly  govern               the case now before us."               (1) 13. 1. T. R. 419.                (2) 181  T. R. 1940               (3)[1960] 1 S.C.R. 320..               82 The  above observations, which are purely obiter dicta  have led to a great deal of misunderstanding about the true legal position.   It  is  well known that the  decision  in  Gokul

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 18 of 22  

Chand’s(1)   case  gave  rise  to  great  deal   of   public dissatisfaction and the legislature was constrained to  step in  and enact the Hindu Gains of Learning Act 1930. (Act  30 of  1930) which nullified the effect of that decision.   The observation in Gokul Chand’s(1) case that there is no  valid distinction between the direct use of the joint family  fund and the use which qualified the member to make the gains  on his own efforts, if I may say so with respect, is an  unduly wide  statement  of  the law.  It does  not  flow  from  the relevant  text  referred  to  earlier.   Further  the   said observation  is  wholly  out of tune with  our  present  day socioeconomic conditions.  Hence that decision should not be allowed to influence our judgment.  In Piyare Lal’s(1)  case this  Court  ignored  the rule laid  down  by  the  Judicial Committee  in Gokul Chand’s(1) case and this very Bench  did not allow itself to be influenced by that rule in  Palanippa Chettiar’s(3) case. Dealing with Sankaralinga Iyer’s(4) case this Bench observed thus  in Palaniyappa Chettiar’s(3) case               "We  consider it also necessary to state  that               the  decision of Madras High Court in  C.I.T.,               Madras  v. S. N. N. Sankaralinga  Iyer(4)  was               not.  impliedly  overruled by  this  Court  in               C.I.T., West Bengal v. Kalu Babu Lal Chand(5).               It  was merely pointed out that  the  material               facts  of that case were different from  those               of Kalu Babu Lal Chand’s(5) case.  It was, for               instance, found in C.I.T., Madras v. S. N.  N.               Sankarlinga  Iyer(1) that the remuneration  of               the managing director was earned by  rendering               services to the bank and no part of the family               funds were utilised except that the  necessary               shares  to  acquire  the  qualification  of  a               managing director were purchased out of  joint               family  funds.  It was held that there was  no               detriment to the family property in any manner               or to any extent.  In view of this finding  it               follows that the remuneration of the  managing               director could not be treated as an  accretion               to the income of the joint family and taxed in               its  hands.  The process of reasoning  of  the               Madras  High Court in C.I.T., Madras v. S.  N.               N.  Sankaralinga  Iyer(3) may  not  be  wholly               sound but, in our opinion, the actual decision               in  that case is correct and is  supported  by               the  principle that there is no  detriment  to               the family property and no part of the  family               funds had been spent or utilised for acquiring               the remuneration of the managing director."               (1)   48 1, A. 162.(2)   [1960]  3  S.C.   R               669.(3) [1968] 2 S. C. R. 5 5.               (4)18 1. T. R. 194.                (5)  [1960] 1 S. C. R. 320.               83 From  these  observations, it follows that  this  Court  has accepted   the  correctness  of  the  rule  laid   down   in Sankaralinga Iyer’s case.  I am unable to discover any  real basis  to  distinguish the facts of the  present  case  from those  found  in  Sankaralinga Iyer’s case.   Hence,  in  my judgment  the  ratio of that decision fully applies  to  the facts of this case. This  takes  me  to the decision of this  Court  in  Mathura Prasad v.Commissioner  of   Income tax, U.P.(1). The  facts found  in that case are more or less similar to those  found in the Kalu Babu’s case.  Those facts as conceded before the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 19 of 22  

tribunal  are  Mathura Prasad, the manager of  his  HUF  had entered  into  a partnership as representing his  family  of which he was the Kirta and for   the benefit of the  family. There  was also no dispute that In the firm of Badri  Prasad Jagan  Prasad  the  assets  of  the  assessee  family   were invested.        The tribunal found that Mathura Prasad  the manger  became a partner in the firm with the help of  joint family  funds  and  as partner he  was  entrusted  with  the management of the Agarwal Iron Works.  On the basis of those facts  it  was held that the allowance received  by  Mathura Prasad was   therefore directly related to the investment of the family funds ill the partnership business. In the course of the judgment, it was observed:               "it  was suggested that Mathura Prasad  earned               the  allowance  sought to be  brought  to  tax               because  of the special aptitude he  possessed               for  managing the Agarwal Iron Works  and  the               allowance  claimed by him was not  earned  be,               the  use  of the joint family funds.   But  no               such  contention  was raised before  the  High               Court.    We  have  been  taken  through   the               petition tiled in the High Court under section               66(2) of the Act, and there is no averment  to               the effect that Mathura Prasad had any special               aptitude  for management of the  Agarwal  from               Works,  and what was agreed to be paid to  him               was  as remuneration for  performing  services               because of such aptitude." From  these observations it is clear that in that case  this Court  was  not considering a case wherein the  facts  found were  similar  to those before us in this case.   I  do  not think  that the rule laid down by this Court either in  Kalu Babu’s (2) case or in Mathura Prasad’s(2) case is applicable to the facts of the present case. It  is unnecessary to go into the decisions rendered by  the High Courts after the decision of this Court in Kalu  Babu’s 2)  case.  Most of them, we were told, are pending  in  this Court  in appeal.  Further, they were decided on  their  own facts.  Some of them (1) 60 I.T.R. 428. (2) 1960 1 S.C.R. 320. (3)  60 I.T.R. 428. 84 appear  to have been greatly influenced by the  observations in  Kokulchand’s(1)  case  quoted  with  approval  in   Kalu Babu’s(2) case. The contention that if a  coparcener of a Hindu joint family takes   any  aid  from  his  family  funds  in   making   an acquisition,  however,  slender  that  aid  might  be,   the acquisition  in  question should be considered as  a  family acquisition,  stands repelled by the decision of this  Court in Piyare Lal Adishwary Lal’s (3) case.  Therein, one  Sheel Chandra  who was the karta of his HUF consisting of  himself and  his younger brother, furnished as security  his  family properties for being appointed the treasurer of a bank.   He would not have been appointed treasurer of the bank but  for the security given.  In that case also, it was contended  on behalf of C.I.T. that the salary earned by Sheel Chandra was a  family  income and is liable to be taxed as  such.   That contention was negatived by this Court.  From that  decision it follows that it is not any and every kind of aid received from,family  funds which taints an income as family  income. Before  an income earned by the exertions of  a  co-parcener can  be  considered  as  a  family  income,  a  direct   and substantial  nexus  between the income in  dispute  and  the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 20 of 22  

family  funds  should  be established.   The  ratio  of  the decision  of this Bench in Palaniappa Chettiar’s  case  also leads to the same conclusion.  Palaniappa Chettiar would not have become the director of the firm Trichy-Sri Ranga Trans- port  Company Ltd. but for the shares acquired by  him  from out  of the funds of his joint family.  But yet  this  Bench held  that the remuneration received by him as the  managing director of the company was his individual income.  I see no real  distinction  between  the  relevant  facts  found   in Palaniappa  Chettiar’s case and those found in  the  present case.   In  my opinion, both these cases stand on  the  same footing. Law is a social mechanism to be used for the advancement  of the  society.  It should not be allowed to be a dead  weight on  the  society.   While interpreting  ancient  texts,  the courts must give them a liberal construction to further  the interests of the society, Our great commentators in the past bridged the gulf between law ,is enunciated in the Hindu law texts  and the advancing society by wisely interpreting  the original  texts  in such a way as to bring them  in  harmony with the prevailing conditions.  To an extent, that function has now to be discharged by our superior courts.  That  task is undoubtedly a delicate one.  In discharging that function our courts have shown a great deal of circumspection. tinder modern conditions legislative modification of laws is  bound to  be  confined  to major  changes.   Gradual  and  orderly development  of  law can only be  accomplished  by  judicial interpretation. (1) 48 1. A. 162. (2) [1960] 1 S. C..R. 320. (3)  [1960] 3 S.C.R. 669. 85 The  Supreme  Court’s role in that regard is  recognised  by Art. 141 of our Constitution. On the facts found in this case, it is clear that  Dhanwatey was  treating  the  remuneration  received  by  him  as  his individual  income  with  the consent  of  his  family.   As pointed  out earlier, he was getting the  same  remuneration when his quondam joint family was running the business.   He could  not have received the same on behalf of  the  family. There was no point in the family giving remuneration to  him in one hand and taking it back in the other.  Therefore, the remuneration  drawn by him prior to 1939 must be held to  be his individual income.  That remuneration quite clearly must have been paid to him with the consent of the members of the family.  Factually there was no change in the position after the partnership came in to existence.  Dhanwatey has  always been  treating  that income as his  individual  income.   In these  cases it is the family which is contending  that  the income  in question is Dhanwatey’s individual income.   From these  facts it is reasonable to infer that his  family  had agreed  to  his  receiving that  income  as  his  individual income.  If that is so, the assessee’s case falls within the rule laid down by this Court in Judge Kishore Baldeo Sahi v. Commissioner  of Income tax, U.P.(1) It is true that  at  no stage  the  assessee,had  put forward  the  contention  that Dhanwatey  was getting the remuneration in question  as  his individual  income  with the consent of the  members,of  his family,  but  that conclusion clearly flows from  the  facts found  by the tribunal and such a conclusion is not  outside the scope of the question referred to the High Court. For  the reasons mentioned above, I allow these appeals  and answer  the question referred under s. 66(1) of  the  Income Tax Act 1922 in favour of the assessee, i.e.,, on the  facts and circumstances of the case the sum of Rs. 18,000 received

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 21 of 22  

by Dhanwatey as his remuneration was not rightly included in the  total income of the assessee for the  assessment  years 1954-55 and 1955-56.                            ORDER In  accordance with the opinion of the majority the  appeals are dismissed with costs.  One hearing fee. C.A. 1371 of 1966. Ramaswami,  J.  This appeal is brought,  by  certificate  on behalf of the assessee from the judgment of the Bombay  High Court  dated July 23, 1963 in Income Tax Reference No. 5  of 1962. The  appellant (hereinafter called the "assessee is a  Hindu undivided family of which Shri M. D. Dhanwatey is the Karta. The (1)  [1967] 1 S C. R 416. 86 assessment  year  involved in this appeal  is  1954-55,  the corresponding accounting year being the year ended September 30,  1953.   Shri  M.  D. Dhanwatey was  a  partner  in  the partnership  firm  carrying on business under the  name  and style  of  M/s.  Shivraj Fine Art Litho  Works.   The  share capital of Shri M. D. Dhanwatey was entirely contributed  by the  assessee  Hindu undivided family.  The  rights  of  the partners were governed at the relevant time by a partnership agreement dated April 1, 1951.  According to the  agreement, the partnership was of lithography and art printing and  was carried  on by means of a press under the name and style  of "Shivraj  Fine Art Litho Works’.  Clause 4) of the  partner- ship  deed enumerated various capital contributions  of  the partners.   The share contribution of Shri M.  D.  Dhanwatey was  shown  as  Rs. 1,96,875/-.  It is  admitted  that  this amount  belonged to the Hindu undivided family.  Clause  (5) provided  for payment of interest at a Certain rate  to  the partners  on  the share contribution.  Clause  (7)  provided that  general management and supervision of the  partnership business  shall  be in the hands of Shri  V.  D.  Dhanwatey. Clause  (8)  stated that Shri M. D. Dhanwatey shall  be  the manager in charge of the. work-, and both be and Shri V.  D. Dhanwatey  shall have power to make, contracts. and  arrange terms with constituents or customers Clause ( 10)  empowered three  partners, viz., V. D. Dhanwatey, M. D. Dhanwatey  and Shamrao Dhanwatey to appoint such person or persons on  such salary  as  they deem fit for carrying on the  work  of  the partnership  and delegate to them Such powers as they  think proper.  Clause (15) provided that the various adult members of  the  Partnership  shall  devote  their  whole  time  and attention to the partnership in the sphere of the respective duties.  Clause ( 16) is the material clause and it provides for various amounts to be paid by way of remuneration  to the partners.  The remuneration provided  to be paid to Shri M. D. Dhanwatey under cl. (16) is Rs. 1,250 per month.   For the  relevant accounting year Shri M. D. Dhanwatey was  paid Rs. 7,500 as remuneration.  For the assessment year  1954-55 the  assessee  showed the said amount In Section D  of’  the return.   It was contended that the salary received by  Shri M.  D.  Dhanwatey,  the karta of  the  assessee  family  was received  by him In his individual capacity and that it  was not  taxable in the hands of the assessee.   The  Income-tax Officer,  Special Investigation Circle ’B’, Nagpur,  by  his assessment order dated May 28, 1955 negatived the contention of  the  assessee.   The assessee took the  matter  to,  the Appellate   Assistant   Commissoner  but  the   appeal   was dismissed.   The assesee preferred a further appeal  to  the appellate  Tribunal  which rejected the  contention  of  the assessee that the amount of Rs. 7,500 was earned by Shri  M.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 22 of 22  

D. Dlianwatey in his individual capacity and that it  should not  have  been  included.  in the  taxable  income  of  the assessee.   As  directed by the High  Court,  the  Appellate Tribunal stated a case on the following    87 question of law under s. 66(2) of the Indian Income-tax Act, 1922 :               "Whether on the facts and circumstances of the               case,  the payment of Rs. 7,500 (Rupees  seven               thousand  five  hundred) paid to  Shri  M.  D.               Dhanwatey for rendering services to the  firm,               could  be included in the total income of  the               assessee family?" The  High  Court  answered the reference in  favour  of  the Income  tax Department and against the assessee.   The  High Court  observed  that Shri M. D. Dhanwatey was  one  of  the partners in the partnership a,; representing Hindu undivided family consisting of himself and his two minor sons.   There was no evidence, whatever to show that Shri M. D.  Dhanwatey was  in  the  service,  of  the  partnership  firm  in   his individual  capacity and the High Court held that  what  was paid  to him in the form of remuneration was only  form  the purpose  of  adjustment of the rights inter se  between  the partners.  The remuneration paid to karta was there-fore the income of the Hindu undivided family and it cannot be  said, on  the facts found in the case, that the remuneration  paid to  Shri M. D. Dhanwatey was without any detriment  to  the, joint  family  property. It was also found  that  the  share capital  contributed  by Shri M. D. Dhanwate came  from  the joint family assets. The material facts of the present case are almost  identical with those in Shri V. D. Dhanwatey v. Commissioner of Income Tax  A.P.  Nagpur(1) judgment in which has  been  pronounced today.  For the reasons, elaborately set out in that case we hold that the decision of the question of law in the present case  is  governed  by the decisions of this  Court  in  The C.I.T.  West  Bengal  v. Kalu Babu Lal Chand ( 2  )  and  in Mathura Prasad v. C.I.T.U.P.(3). We are accordingly of the opinion that the question referred to the High Court was rightly answered against the  assessee and this appeal must be dismissed with costs. Hegde, J. I agree with the conclusion reached by my  learned brothers.   For the reasons stated in my judgment  in  Civil Appeals  1372  and  1373 of 1966 (Shri V.  D.  Dhanwatey  v. Commissioner  of  Income Tax, M.P., Nagpur) I am  unable  to subscribe to the observation ’in the majority judgment  that the material facts of the present case are almost  identical with those in Shri V. D. Dhanwatey v. Commissioner of Income Tax, M.P., Nagpur R.K.P.S. Appeal dismissed (1)  Civil Appeals Nos. 1372 & 1373 (,r 1966. (2)  [1962] 1 S. C. R. ’320. (3)  60 1. T. R. 4,28. 88