V. D. Dhanwatey Vs. The Commissioner of
Income Tax, M.P. Nagpur [1967] INSC 244 (26 October 1967)
26/10/1967 RAMASWAMI, V.
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 management
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 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 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 partnership
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 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).
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 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 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 195455 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 tookthe 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 argument 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 science." (Yajnavalkya 2, verses 119-120).
Commenting on this text of Yajnavalkya the
author of Mitakshara 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 coheirs. 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 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 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 subsequent
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
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 observed 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.
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 determination 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 findinon 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 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 determined 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 195556."
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 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 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
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, experience
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.
Notcan 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 Income-tax, West Bengal v. Kalu Babu Lal Chand(6). On the
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 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 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 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 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 Transport 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 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 partnership 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.
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.
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