Commissioner of Income-Tax, Bangalore
Vs. Shri D. C. Shah  INSC 28 (6 February 1969)
06/02/1969 RAMASWAMI, V.
CITATION: 1969 AIR 927 1969 SCR (3) 586 1969
SCC (1) 550
R 1971 SC1454 (15,16) RF 1986 SC 79 (16) RF
1992 SC 66 (10) RF 1992 SC 197 (10)
Income-tax-Hindu undivided family invested
funds in firm- Remuneration earned by member as officer of the firm-Whether
income of family or individual member.
The assessee a Hindu undivided family-through
its karta was a partner in two firms. The Karta had rich experience in the line
of business carried on by the firms. in one of the firms, the Karta was
appointed as its Managing Partner and paid a remuneration as Managing Partner in
addition to the benefits enjoyed as a partner. in the other firm, another
partner was appointed as the Managing Partner, and it was provided that on his
retirement, the Karta was to be appointed as the Managing Partner and entitled
to the remunerations. The Karta was appointed the Managing Partner of the
second firm also on the retirement of its earlier Managing Partner. The
assessee-family claimed that the remunerations received by the Karta as
Managing Partner should be deleted from the assessment of the assessee, and
they were the personal income of the Karta.
HELD: The remuneration of the Karta was not
earned on account of any detriment to the joint family assets and the accounts
received by the Karta as the Managing Partner of the two partnerships were not
assessable as the income of the Hindu undivided family. [591 F], Upon the facts
of the case, there was no real or sufficient connection between the investment
of the joint family funds and the remuneration paid by the partners to the
Karta. The remuneration was paid not because of the family funds invested ' in
the partnership, but for the personal qualifications of the Karta. [591 D-F] S,
R. M.CT. PL. Palaniappa Chettiar v. Commissioner of Income-tax, 68 I.T.R. 221,
Gurunath V.. Dhakappa v. Commissioner of
Income-tax, Mysore, 53 I.T.R. 575; V. D. Dhanwatey v. Commissioner of Income-
tax, 68 I.T.R. 365; M. D. Dhanwatey V. Commissioner of Income-tax, 68 I.T.R.
285; P. N. 'Krishna Iyer v. Commissioner of Income-tax Kerala,  1 S.C.R.
943 and Commissioner of Income-tax, Mysore v. G V. Dhakappa, Civil Appeal No.
713 of 1965 decided on 23-7-1968, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeals
Nos. 817 and 818 of 1966.
Appeals by special leave from the judgment
and order dated January 19, 1965 of the Mysore High Court in I.T.R.C. No. 1 of
Niren De, Attorney-General, S. C. Manchanda
and R. N. Sach- they, for the appellant.
597 M. C. Chagla, Sharad J. Mhaispurkar, O.
P. Malhotra and O. C. Mathur, for the respondent.
The Judgment of the Court was delivered by
Ramaswami, J. The- respondent is a Hindu Undivided Family (hereinafter called
the assessee) of which Shri D. C. Shah is the karta. The assessment years are
1959-60 and 1960-61 and the relevant accounting periods are Samvat years 2014
and 2015. The assessee through its karta Shri D. C. Shah was a partner in the
firms of (1) M/s C. U. Shah and Co. and (2) M/s Oriental Can Manufacturing Co.
as per terms and conditions set out in the Instruments of Partnership dated
5-6-1961 and 11-9-1957. Shri D. C. Shah was paid a remuneration of Rs. 12,000/-
per 1 year for both the assessment years by M/s C. U. Shah and- Company. He was
paid Rs. 10,000/- for the assessment year 1959-60 by the Oriental Can
Manufacturing Company. The amounts received by Shri D. C. Shah were shown by
the assessee in its, returns of income along with balance of the share income
from the aforesaid firms. The Income Tax Officer in assessing the Hindu
Undivided Family included the remuneration received by Shri D. C. Shah as a
part of the share income from the respective firms. Before the Appellate
Assistant Commissioner the assessee contended that remuneration received by
Shri D. C. Shah was his personal income and the amounts were wrongly shown in
the returns of the' Hindu Undivided Family as its income and should not have
been included in the assessment. In so contending the assessee relied on
clauses 8, 9 and 10 of the Instrument of Partnership dated 5-6-1961 by which
the firm of M/s C. U. Shah and Company was constituted. The assessee also
relied on clauses 14, 15 and 16 of the Instrument of Partnership dated
11-9-1957 by which the firm of M/s Oriental Can Manufacturing Company was
constituted. Clauses 8, 9 and 10 of the Instrument of Partnership dated
5-6-1961 are to the following effect "8. The partner No. 1 Shri D. C. Shah
who has been managing the business of this firm shall hereinafter also continue
to act as Managing partner for conducting the said business free from any
interference of other partners, of whatsoever nature. The said Managing partner
shall manage, direct, appoint: and/or remove any one of the employees, and/or
do all other things, which include right to draw cheques, to make, deliver and
accept documents either legal or commercial in respect of the partnership
business as may be deemed necessary for effectively carrying on the partnership
business. The said Managing partner shall be paid Rs. 1,000/- (Rupees one
thousand only) per month in addition to all other benefits that he is entitled
to enjoy as a partner of the firm.
9. The said Managing partner shall continue
to be the Managing Partner for his life time or his retirement whichever is
10. All other partners shall devote as much
time to the furtherance-of the partnership business as they think proper,.
necessary and a visable".
Clauses 14,,15 and 16 of the Instrument of
Partnership dated 11-9-1957 are to the following effect :
"14. The partner No. 2 shall, be the
Managing Partner for conducting the said business free.
from any interference of whatsoever nature by
others. The said Managing Partner shall manage, carry, direct, appoint and/or
remove any of the employees and/or Agent and do all other things, as may be
deemed necessary, for effectively carrying on the Partnership business. The
said Managing Partner shall be entitled, in addition to all other benefits, to
a monthly remuneration of Rs% 2,000/- (Rupees two thousand only).
15. The Partner No 2 shall continue to be the
Managing Partner for his lifetime or retirement. In the event of Partner No.
2's demise or retirement, whichever is earlier, the Partner No. 1 shall then
act and perform duties and functions of Managing Partner. In the event of the
demise or retirement of Partner No. 1, the Managing Partner shall be appointed
by the remaining partners or their legal representatives, as the case may be,
16. Partner No. 3 shall be responsible for
the duties and functions to be performed under the direction of No. 2, the
In the event of failure on the part of No. 3
to perform duties and functions or otherwise entrusted by No. 2, the Managing
Partner, the matter shall be referred to No. 2 and his decision shall be
binding on No. 3".
The Appellate Assistant Commissioner accepted
the contention of the assessee and held that the remuneration paid and re-
ceived by Shri D. C Shah should be deleted from the assessment of the assessee.
The Income Tax Officer thereafter preferred appeals to the Income Tax Tribunal
which set aside the order of the Appellate Assistant Commissioner and held that
the remuneration paid should be included in the total income of the assessee.
At the instance of the assessee, the Income Tax Appellate Tribunal stated a
case to the High Court on the following question of law :- "Whether on the
facts and in the circumstances of the ease., was the salary received by D. C.
Shah from the- 589 two firms of M/s C. U.
Shah & Co. and M/s Oriental Can Manufacturing Co., includible in the
assessment of the H.U.F. of which Shri D. C. Shah was the Karta?" The High
Court relying upon its earlier decision in Gurunath V. Dhakappa v. Commissioner
of Income-tax, Mysore (1) held that the salary received by Shri D. C. Shah from
the aforesaid firms cannot be included in the assessment of the Hindu Undivided
Family of which he was the karta. These appeals are brought by special leave on
behalf of the Commissioner of, Income Tax, Bangalore from the judgment of the
Mysore High Court, dated 19th January, 1965 in Income Tax Reference No. 1 of
The question whether the remuneration earned
by a member of a Hindu Undivided Family as an officer of a company or. a firm
in which the assets of the Hindu Undivided Family have either been invested or
the office has been acquired with the aid of the funds of the family is the
income of the family or the individual income of the member has been the
subject matter of consideration in several cases before this Court. In V. D.
Dhanwatey v. Commissioner of Income-tax(2), V the karta of a Hindu Undivided
Family contributed to the capital of a firm out of the funds of the family.
Under the agreement of the partnership the general management and supervision
of the partnership business was to be in the hands of V and he was to be paid a
monthly remuneration out of the gross earnings of the partnership business. It
was found that V joined the partnership as representing the family and became a
partner on account of the investments of the joint family assets in the capital
of the partnership and that the remuneration received by V was only an
increased share of the profits paid to him as representing the family. In this
state of facts it was held by this Court that the remuneration paid to V was
directly related to the investments of the assets of the family in the
partnership business and "there was a real and sufficient connection
between the investment from the joint family funds and the remuneration paid to
V". It was therefore held by this Court that the salary paid to V was,
rightly assessed as the income of the Hindu Undivided Family. In M. D.
Dhanwatey v. Commissioner of Income Tax(1) the facts were parallel to the facts
in V. D. Dhanwatey's case (2 ) and the salary received by the karta of the
Hindu Undivided Family was treated as the income of the family.
In S. R. M. CT. PL. Palaniappa Chettiar V.
Commissioner of Income Tax(4), the material facts were different. The karta of
a Hindu Undivided Family acquired 90 out of 300 shares in a transport company
with the funds of the family. In course of time he (1) 53 I.T.R. 575. (2) 68 I.T.R.
(3) 68 I.T.R. 285. (4) 68 I.T.R. 221.
L10Sup./69-3 became the Managing Director of
the Company. As Managing Director the karta was entitled to salary and
commission on the. net profits of the company, and was entrusted with control
over the financial and administrative affairs of the company. The, only
qualification under the Articles of Association for the office of a Director,
was the holding of not less than 25 shares in his own right. It was found that
the shares were acquired by the family not with the object that the karta
should become the Managing, Director, but in the ordinary course of investment
and there was no real connection between the investment of the joint family
funds in the purchase of the shares and the appointment of the karta as
Managing Director of the company. It was held therefore that the remuneration
of the Managing Director was not earned on account of any detriment to the
joint family assets and the amounts received by the karta as Managing
Director's remuneration, commission and 'sitting fee' were not assessable as
the income of the Hindu Undivided Family.
In P. N. Krishna Iyer V. Commissioner 'of
Income Tax Kerala(1), the principle laid down in V. D. Dhanwatey,s case(2) was
applied. It was held that the remuneration received by the assessee from the
company of which he was the Managing Director together with commission and
'sitting fee ' , should be included in the assessment of the Hindu Undivided
Family. It was pointed out that the shares which qualified the assessee to
become a member of the company were purchased with the aid of the joint family
funds. The shares- which were allotted to the assessee in lieu of this services
were also treated as shares belonging to the joint family. The entire capital
assets of the company originally belonged to the joint family and were made
available to the company in consideration of a mere promise to pay the amount
for which the assets were valued. The income was primarily earned by utilising
the joint family assets or funds and the mere fact that in the process of
gaining the advantage an element of personal service or skill or labour was
involved did not alter the character of the income. In cases of this class the
character of the receipt must be determined by reference to its source, its
relation to the assets of the family and the proximity of the connection
between the investment from the joint family funds and the remuneration paid.
Applying the principle laid down in V. D. Dhanwatey's case(3), it was held that
the tribunal wag justified in holding that the income from the salary,
commission or 'sitting fee' obtained by the assessee did not represent his
individual income but was the income of the Hindu Undivided Family of, which he
was the karta.
(1)  1 S.C.R. 943. (2) 68 I.T.R. 365.
591 In Commissioner of Income Tax, Mysore v.
G. V. Dhakappa(1), the principle laid down in V. D. Dhanwatey,s(2) case was
applied again. It was held that there was no finding that the income which was
received by G. V. Dhakappa was directly related to any assets of the family
utilised in the partnership, and, therefore, the income of G., V. Dhakappa
cannot be treated as the income of the Hindu Undivided Family.
In our opinion, the present case falls within
the principle laid down by this Court in S.R.M. CT. PL. Palaniappa Chettiar's
case(3). It has been found that Shri D. C. Shah was a man of rich experience in
the line of business which these two firms were carrying on. Clauses 9 and 10
of the Partnership deed dated 5-6-1961 indicate that the remuneration was paid
not because of the family funds invested in the partnership but for the
personal qualification of Shri D. C. Shah. In the case of Oriental Can
Manufacturing Company clause 14 provided for Shri K. K. Dhote being appointed
as the Managing partner. After the said Shri Dhote retired Shri D. C. Shah was
appointed as the Managing partner during the assessment year 1959-60. Clause 15
of the partnership deed provided for such an appointment.
A reading of clauses 14, 15 and 16 of the Partnership
Deed indicates that the remuneration was paid for the specific acts of
management done by Shri D. C. Shah resting on his personal qualification and
not because he represented the firm. It should also be noticed that no other
partner was paid any salary. Upon the particular facts of this case, it is
manifest that there was no real or sufficient connection between the investment
of the joint family funds and the remuneration paid by the partnership to Shri
D. C. Shah. It follows that the remuneration of Shri D. C. Shah was not earned
on account of any detriment to the joint family assets and the amounts of
remuneration received by Shri D.
C. Shah as the Managing partner of the two
partnerships were not assessable as income of the Hindu Undivided Family.
For these reasons we hold that there is no
merit in these appeals which are accordingly dismissed with costs. There will
be one hearing fee.
Y.P. Appeals dismissed.
(1) Civil Appeal No. 713 of 1965 decided on
(2) 68 I.T.R. 365.
(3) 68 I.T.R. 221.