M/S. Y. L. Agarwalla & Ors Vs.
Commissioner of Income-Tax, Central, Calcutta [1978] INSC 116 (27 July 1978)
TULZAPURKAR, V.D.
TULZAPURKAR, V.D.
BHAGWATI, P.N.
CITATION: 1978 AIR 1412 1978 SCR (3)1059 1978
SCC (3) 426
ACT:
Hindu Undivided Family Firm-Karta having 36%
shares as one of the partners of partnership firm and after his death his widow
and three daughters declined to continue in the partnership, but his three
minor sons were admitted into partnership with 14% shares each under a new
deed--Clause 6 of the new deed ensure to the firm the continued use of the
capital of Hindu Undivided Family standing in the account of the minors' late
father, free of interest--whether the share income of three minor sons front
the partnership firm liable to be assessed as the income of Hindu Undivided
Family ?
HEADNOTE:
One Yudhisthir Lal Agarwala, since deceased,
was the Karta of a Hindu Undivided Family known as M/s. Y. L. Agarwala &
Co. and was assessed to tax as such, including his 36% share income from the Partnership
firm known as 'M/s. Grand Smithy Works'. After his death on 18-12-1967, his
surviving wife and three major daughters by two letters dated January 11, 1968
declined to exercise the option reserved, under clause 13 of the Partnership
deed dated 20-9-1961 and refused to join the Partnership business, however his
three minor sons were admitted to the benefits of the partnership.
Under the new partnership deed, the minor
sons were given 14% share each with a right to become a full fledged partner on
attaining majority. Clause 6 of the deed ensured to the firm the continued use
of the capital of Hindu Undivided Family standing in the account of late
Yudhisthir Lal, free of interest.
In the return filed by the widow representing
the H.U.F. for the relevant accounting period 1-9-67 to 31-8-68 i.e. the
assessment year 1969-70, the share of the income from M/s.
Grand Smithy Works was shown only from
1-9-6-/ to 18-12-67 i.e. up to the date when Yudhisthir was alive and was a
partner in that firm, claiming that w.e.f. 19-12-67, the Hindu Undivided Family
had no interest in the said firm and that her minor sons were admitted to the
benefits of pertnership in their individual and personal capacity and therefore
their share of Rs. 3,08,187/- could not be included. The Income Tax Officer
negatived that contention and held that the shares of the minor sons were
assessable in the hands of the Hindu Undivided Family. The Appellate Assistant
Commissioner on appeal and the Tribunal in further appeal confirmed it. On a
reference the High Court also answered against the assessee.
Dismissing the appeal by special leave the
Court
HELD : (1) In Rajkumar Singh Hukumchandji v.
Commissioner of Income Tax, M.P. (78 I.T.R. 33) though the question that arose
for determination was whether the Managing Director's remuneration received
from the company by the Karta of a Hindu Undivided Family was assessable to tax
as his individual income or as the income of Hindu Undivided Family, certain
subsidiary tests, as also broader principle of general applicability were laid
down. They are :
"(1) Whether the income received by a
coparcener of a Hindu Undivided Family as remuneration had any real connection
with the investment of the joint family funds;
(2) whether the income received was directly
related to any utilization of family assets;
(3) whether the family had suffered any
detriment in the process of the family funds;
and (4) whether the income was received with
the aid and assistance of the family funds, and 1060 (5)The broader principle
is whether the remuneration received by the coparcener in substance though not
in form was but one of the modes of return made to the family because of the
investment of the family funds in the business or whether it was a compensation
made for the services rendered by the individual coparcener. If it is the
former, it is an income of the Hindu Undivided Family but if it is the latter
then it is the income of the individual coparcener. If the income was
essentially earned as a result of the funds invested the fact that a coparcener
has rendered some service would not change the character of the receipt. But if
on the other band it is essentially a remuneration for the services rendered by
a coparcener, the circumstance that his services were availed of because of the
reason that he was a member of the family which had invested funds in that
business or that he had obtained the qualification shares from out of the
family funds would not make the receipt, the income of the Hindu Undivided
Family". [1066 F-H, 1067 A-D] In the instant case the taxing authorities
as well as the Tribunal and the High Court were right in assessing the said
income in the hands of the Hindu undivided family assessee.
[1067 G] (a)Applying the subsidiary
principles Nos. 2, 3 and 4 it will be clear that the share income that was
received by the three minor sons during the relevant period was earned with the
aid and assistance of Hindu Undivided Family funds and was directly related to
the utilization of such funds by the firm and further that Hindu Undivided
Family had suffered detriment in the process of realization of such income
inasmuch as the capital amount lying to the credit of deceased Yudhisthir Lal
was utilized by the firm free of interest. [1067 E-F] (b) There was no question
of any services being renderedby the three minor sons and therefore applying
the broader principles the share income received by them must, in substance be
regarded as a return made tothe family because of the investment of family
funds in the business.
11067 F] Rajkumar- Singh Hukkumchandji v.
Commissioner of lncome Tax, M.P. 78 I.T.R. 33; applied.
P. D. Dhanwatey v. C.I.T., M. P., 68 I.T.R.
365;
explained.
(c) There was direct and substantial nexus
between the share income earned by and allocated to the three minor sons and
the family funds that remained with and were utilized by the firm and hence the
share income would not be their individual income but the income of the Hindu
Undivided Family. [1066 D-E] (i) It is clear that by the two letter s dated
January 11, 1968 all that the widow and the daughters did was that they
declined to become partners in the firm presumably because none wanted to take
the risk of being held liable for the losses the firm might incur, but it would
be significant to note that none of the heirs disclaimed or relinquished his or
her right to claim the share, right, title and interest of deceased Yudhisthir
Lal in the partnership firm and its assets. In fact no demand for the return of
the capital amount lying to the credit of Yudhisthir Lal's account, which
admittedly stood at Rs. 10,00,000, was made by any of the heirs from the date
of Yudhisthir Lal's death till the date of the new deed. [1065 E-G] (ii) Clause
6 is a tell-tale clause which carries its own tale that this new partnership
agreement containing such a term could not have come about without the assent
and agreement on the part of the widow on behalf of the Hindu Undivided Family.
[1066 A] (iii) the factual interest free retention and utilization of the said
capital amount of the Hindu Undivided Family by the Firm during the entire
relevant period i.e. from December 19, 1967 to August 31, 1968-presumably
pursuant t o the said clause-clinches the said inference.
It is true that the widow is not a signatory
to the new deed of partnership it is also true that the three minor sons could
1061 not in law be regarded as the nominees or benamidars of the Hindu
Undivided Family in the firm but the facts and circumstances discussed above,
especially the incorporation of a term like clause 6 in the new deed and the
factual interest-free retention and utilization of the Hindu Undivided Family's
Funds for the relevant period by the firm clearly lead to the inference that
the new partnership under the deed dated January 11, 1968 was brought about
with the tacit assent and agreement on the part of the widow representing the
Hindu Undivided Family and that the quid pro quo for admitting the three minor
sons of Yudhisthir Lal to the benefits of the partnership was the continued
free-of- interest- use of the capital amount lying in Yudhisthir Lal's account
for the firm which was ensured to it by clause 6. [1066 B-E]
CIVIL APPELLATE JURISDICTION : Civil Appeal
No. 1112 of 1976.
Appeal by Special Leave from the Judgment and
Order dated 23-3-76 of the Calcutta High Court in I.T.R. No. 206 of 1973.
S. T. Desai, V. D. Desai, Sanjay
Bhattacharya, P. K. Dhar, Sardar Amzad Ali and Rathin Das for the Appellant.
S. V. Gupte, Attorney General, R. N.
Sachthey, K. C. Dua and Miss A. Subhashini for the Respondent.
The Judgment of the Court was delivered by
TULZAPURKAR, J,--This appeal by special leave raises an important question as
to whether the sum of Rs. 3,08,187, being the share income of three minor sons
from the firm of M/s. Grand Smithy Works for the period from 19-12-1967 to
31-8-1968 is liable to be assessed as the income of the Hindu Undivided Family
M/s. Y. L. Agarwalla & Company-for the assessment year 1969-70 ? The facts
giving rise to the question may briefly be stated as follows : One Yudhisthir
Lal Agarwalla, since deceased, was the Karta of a Hindu Undivided Family known
as M/s Y. L.
Agarwalla & Co. (the Assessee herein).
During his life time in his capacity as the Karta of the said Hindu Undivided
Family he carried on business in partnership with three others (Shiv Charan
Lal, Ram Gopal Garodia and Tula Ram Budhia) in the name and style of M/s. Grand
Smithy Works.
His share in that firm was 36%. Under clause
13 of the Partnership Deed dated September 20, 1961, pursuant to which the said
firm used to carry on its business, it was provided that "the death or
retirement of any of the partners shall not have the effect of dissolving this
co-partnership; in such an eventuality the co-partnership business may be
carried on between the surviving partners and the heirs/legal representatives
of the deceased and of retiring partner or if mutually agreed upon between the
surviving partners and heirs etc. of the deceased or retiring partner without
siders also." Yudhisthir Lal 'died on December 18, 1967 leaving behind him
his widow Smt. Bhagwati Devi, six daughters (three married and three unmarried
out of-whom two were minors) and three minor sons. By two letters both dated
January 11, 1968, one addressed by the widow on behalf of herself and the Hindu
Undivided Family and 1062- the other by the four- major daughters, Smt.
Bhagwati Devi and the four major daughters declined to exercise the option
reserved to them under clause (13) of the deed and refused to join the
partnership business; however, the three minor sons were admitted to. the
benefits of the partnership.
Since Yudhisthir Lal died on December 18,
1967 i.e. before the expiry of the year of account of the firm which was from
1-9-1967: to 31-8-1968, the firm closed its accounts on December 18, 1967 and
the surviving partners after admitting the three minor sons to the benefits
thereof continued to carry on the business of the partnership with effect from
December 19, 1967 and a new deed of partnership was executed by the surviving
partners on January 11, 1968 the terms and conditions whereof were made
effective from December 19, 1967. Under this new deed each one, of the, three
minor sons of Yudhisthir Lal was given 14% share in the profits of the firm. as
also a right to become a full-fledged partner on, his attaining majority.
Clause 6 of the deed ensured to the firm the-continued use of the capital of
Hindu Undivided Family standing in the account of late Yudhisthir Lal free of
interest.
For the assessment year 1969-70, (the
relevant accounting period being 1-9-1967 to 31-8-1968) Smt. Bhagwati Devi
Agarwalla filed the return on behalf of Hindu Undivided Family disclosing the
share income from the firm of Grand Smithy Works for the period from September
1, 1967 to December 18, 1967 only i.e. up to the date when her husband was
alive and was a partner in that firm. It was claimed that with effect from
December 19, 1967 the Hindu Undivided Family of which her husband Was the Karta
and after whose death she was man aging the affairs had no interest in the said
firm and that her three minor sons were admitted to the benefits of partnership
in their individual and personal capacity as agreed to between the three'
surviving partners of that firm and, therefore, the share income of the firm
received by her three minor sons for the period December 19, 1967 to August 31,
1968 amounting to Rs. 3,08,187, could not be included in the income of the
Hindu Undivided Family and assessed as such. The Income Tax Officer negatived
that contention he noticed that in spite of the two letters of disclaimer
addressed to the surviving partners, the three minor sons of late Yudhisthir
Lal Agarwalla had been admitted to the benefits of the partnership with
collective shares of 42% which was more than what their father was holding at
the time of his death and further that the.
Hindu Undivided, Family had not charged any
interest on its capital amount which was permitted to lie with the firm for
which no explanation bad been offered by the assessee.
He, therefore, took the view that , the
family of late Yudhisthir Lal continued to have interest in the business of the
firm and that the share of profit allocated to the three minor sons really
belonged to the Hindu Undivided Family and was accordingly assessable in its
hands.
On appeal, the Appellate Assistant
Commissioner, by his.
order dated March 24, 1971, confirmed the
view of the Income Tax Officer. The assessee carried the matter in further
appeal to the Appellate 1063 Tribunal but the Tribunal also dismissed the
appeal. On a reference the High Court following the principles and guidelines
enunciated by this Court in the case of Raj Kumar Singh Hukumchandji v.
Commissioner of Income Tax, M.P.(1), in substance, held that the shares that
had been allocated to the three minor sons in the assessee Hindu Undivided
Family. The assessee has come up in appeal to this Court by special leave, In
support of the appeal counsel for the assessee raised two or three contentions.
In the first place he urged that when a minor was admitted to the benefits of a
partnership his share of profits of firm would be his individual income unless
it was shown by the Department that in the firm he was really a benamidar or
nominee of the Hindu Undivided Family of which he was a member and in that
behalf relying upon three undisputed circumstances it was urged that the
Department had failed to discharge that burden. In the first place it was
pointed out that the Department bad never doubted the genuineness or bona fides
of the transaction of the admission of the three minor sons of Yudhisthir Lal
to the benefits of the Partnership of M/s. Grand Smithy Works with effect from
December 19, 1967 under the new deed of partnership dated January 11, 1968; it
was further pointed out that the said three minors did not and could not in law
represent the Hindu Undivided Family in the firm and thirdly, it was pointed
out that the minors had been admitted to the benefits of the partnership after
Smt Bhagwati Devi on behalf of the Hindu Undivided Family and the four major
daughters had by their letters of disclaimer dated January 11, 1968 refused to
have any connection with the partnership business. In spite of these three
circumstances the Tribunal had, counsel contended, wrongly held that the minors
were either the, benamidars or nominees of the Hindu Undivided Family and that,
therefore, the share income allocated to them was of the Hindu Undivided,
Family.
It was further contended that there was no
finding recorded by the Tribunal that there was any agreement between the
surviving partners and anyone on behalf of the heirs of deceased Yudhisthir Lal
to the effect that the Hindu Undivided Family was to continue to be the real
owner of the shares given to the minors nor was there any evidence to that effect
and since the burden of proving any such transaction was on the Department
which the Department had failed to discharge, the Tribunal as well as the High
Court had wrongly come to the conclusion that the shares allocated to the three
minors constituted the income of the Hindu Un- divided Family and was
assessable as such in the bands of the Hindu divided Family. According to him
the decisions on the subject of renimuneration, commission, fees or salaries
earned by a Karta and other members of a Hindu Undivided Family such as. for
instance, Dhanwatey's(2) case and Raj Kumar(1) case could have no relevance to
the case of a minor admitted to the benefits of partnership. He, therefore,
urged that since the three minor sons could not in law (1) 78 I.T.R. 33.
(2) 68 I.T.R. 365.
1064 represent the Hindu Undivided Family in
the firm and in the absence of any finding that there was any agreement between
the surviving partners and any one on behalf of the heirs of Yudhisthir Lal to
the effect that the Hindu Undivided Family was to continue to be the real owner
of the shares given to the minors neither the Tribunal nor the High Court could
come to the conclusion that the share income allocated to the three minors
amounting in aggregate to Rs. 3,08,187 for the period from 19-12-1967 to
31-8-1968 was liable to be assessed as the income of the Hindu Undivided
Family.
On the other hand, on behalf of the Revenue
it was urged by the learned Attorney General that where a minor had been
admitted to the benefits of the partnership it was not necessary to show that
he was either the benamidar or nominee of the Hindu Undivided Family in the
partnership firm for the purpose of assessing his share of profit in the firm
as income of the Hindu Undivided Family but the real test was whether such
share income was earned with the aid and assistance of the Hindu Undivided
Family funds and the Hindu Undivided Family had suffered any detriment in the
process of realisation of such income, in fact, he urged that the question had
to be viewed from the broader principle, namely, whether the share income
received by minor coparcener was by way of. return made to the family because
of the investment of family funds in the business and if that was so it would
be the income of the Hindu Undivided Family. In this behalf reliance was placed
by the learned Attorney General upon the principles enunciated by this Court in
its two decisions, namely, Dhanwatey's, case and Raj Kumar's case (supra). He
pointed out that since in the instant case the three minor sons of Yudhisthir
Lal had been admitted to the benefits of the partnership there was no question
of any remuneration, commission, fees or salary being paid to any one of them
for rendering any services to the firm, and therefore, having regard to clause
6 of the new deed of partnership dated January 11, 1968, the direct nexus
between the share income allocated to the minors and the utilisation of the
capital amount belonging to the Hindu Undivided Family was established and what
was more such capital amount of the Hindu Undivided Family was permitted to be
retained and utilised by the firm to the detriment of the Hindu Undivided
Family since such retention or user of the said capital amount was free of
interest and, therefore, the share income allocated to the three minor sons had
been rightly assessed as income of the assessee Alternatively, he urged that
though no formal finding had been recorded by- the Tribunal the facts and
circumstances obtaining in the case furnished. clear material leading to-the
only inference that the admission of the three minors to the benefits of the
partnership on the terms contained in the new deed was not without t he assent
and agreement of the widow who was a natural guardian of the three minors
though she bad not formally executed the deed.. Therefore, no fault could be
found with the ultimate conclusion drawn by the Tribunal and the High Court.
Having regard to the rival contentions urged
by counsel on either side, which we have summarised above, it will be clear that
the question which really falls for our determination in this case is whether
the share of profits or income allocated and received from the partnership firm
for the period from December 19, 1967 to August 31, 1968 by the three minor
sons who were admitted to the benefits of the partnership is really the
individual income of the minors or that of the Hindu Undivided Family ? Dealing
with the factual aspect of the question we shall first indicate the broad and
undisputed facts that emerge clearly on the record. Admittedly, deceased
Yudisthir Lal represented the Hindu Undivided Family as its Karta in the firm
of M/s Grand Smithy Works right up to the time of his death and his share of
36% in the profits of the firm was always assessed as the income of the Hindu
Undivided Family. It is not disputed that on his death on December 19, 1967 the
family continued to be joint, and as per clause 13 of the partnership deed
dated September 20, 1961, the heirs of Yudhisthir Lal were given the option of
joining the partnership firm but by two letters b6th dated January 11, 1968,
the widow and the four major daughters declined the offer; instead the three
minor sons were admitted to the benefits of the partnership each one getting
14% share in the profits and a new deed of partnership dated January II, 1968
was executed by surviving partners having retrospective effect as from December
19, 1967. Since strong reliance was placed by counsel for the appellant on
these two letters of disclaimer it would be desirable to note what exactly was
disclaimed under these two letters. The four major daughters categorically
stated that "we do not intend to exercise our option to become partners
and declined to be partners with you in M/s Grand Smithy Works". The widow
stated : "Now I am a widow with minor sons and minor daughters. I already
understand that the amount of capital lying to the credit of H.U.F. in the firm
exceeds the liability of the H.U.F. In the circumstances I am not willing to
join the partnership business of my behalf and on the behalf of the
H.U.F." It will thus be clear that by these two letters all that the widow
and the daughters did was that they declined to become partners in the firm
presumably because none wanted to take the risk of being held liable for the
losses the firm might incur, but it would be significant to note that none of
the heirs disclaimed or relinquished his or her right to claim the share,
right, title and interest of deceased Yudhisthir Lal in the partnership firm
and its assets. In fact no demand for the return of the capital amount lying to
the credit of Yudhisthir Lal's account, which admittedly stood at Rs.
10,00,000, was made by any of the heirs from
the date of Yudhisthir Lal's death till the date of the new deed; on the other
hand clause 6 of the new deed runs thus :
"6. That the capital of the partnership
shall be the amount as will be found to the credit of the Parties Hereto of the
first (Shiv Charan Laul), Second (Ram Gopal Garodia) Third (Tola Ram Budhia)
Parts and the said Yudhisthir Lal Agarwalla since deceased." 1066 What is
more, there is no provision for payment of interest on the respective amounts
of capital lying to the credit of three surviving partners and the deceased
Yudhisthir Lal. In our view clause 6 is a tell-tale clause which carries its
own tale that this new partnership agreement containing such a term could not
have come about without the assent and agreement on the part of the widow on
behalf of the Hindu Undivided Family.
Further the factual interest-free retention
and utilization of the said capital amount of the Hindu Undivided Family by the
Firm for the entire relevant period i.e. from December 19.
1967 to August 31, 1968-presumably pursuant
to the said clause--clinches s the said inference. It is true that the widow is
not a signatory to the new deed of partnership; it is also true that the three
minor sons could not in law be regarded as the nominees or benamidars of the
Hindu Undivided Family in the firm, but the facts and circumstances discussed
above, especially the incorporation of a term like clause 6 in the new deed and
the factual interest-free retention and utilization of the Hindu Undivided
Family's Funds for the relevant period by the firm clearly lead to the
inference that the new partnership under the deed dated January 11, 1968 was
brought about with the tacit assent and agreement on the part of the widow
representing the Hindu Undivided Family and that the quid pro quo for admitting
the three minor sons of Yudhisthir Lal to the benefits of the partnership was
the continued free of interest use of the capital amount lying in Yudhisthir
Lal's account for the firm which was ensured to it by clause 6. In these
circumstances there was direct and substantial nexus between the share income
earned by and allocated to the three minor sons and the family-funds that
remained with and were utilized by the firm and hence the share income would
not be their individual income but the income of the Hindu Undivided Family.
Turning to the legal aspect of the question
it is unnecessary to refer to the several decisions cited at the bar but a
reference to only one decision of this Court in Raj Kumar's case (supra.) will
suffice. It is true that the question that arose for determination before this
Court in that case was whether the Managing Director's remuneration received
from the company by the Karta of a Hindu Undivided Family was assessable to tax
as his individual income or as the income of Hindu Undivided Family. But this
Court, after discussing the entire previous case law on the subject laid down
certain tests land guide lines which would cover the question raised in the
appeal before us. From the earlier decisions this Court culled out some Jr
tests which were described as subsidiary tests or subsidiary principles and
then indicated a broader test or, principle which would be of general
application. At pages 43-44 of the report, this Court has observed thus :-
"The other tests enumerated are:
(1) whether the income received by a
coparcener of a Hindu Undivided Family as remuneration had any real connection
with the investment of the joint family funds;
1067 (2) whether the income received was
directly related to any utilization of family assets;
(3) whether the family had suffered any detriment
in the process of the family funds;
and (4) whether the income was received with
the aid and assistance of the family funds.
In our opinion from these subsidiary
principles, the broader principles that emerges is whether the remuneration
received by the coparcener in substance though not in form was but one of the
modes of return made to the family because of the investment of the family
funds in the business or whether it was a compensation made for the services
rendered by the individual coparcener. If it is the former, it is an income of
the Hindu Undivided Family but if it is the latter then it is the income of the
individual coparcener. If the income was essentially earned as a result of the
funds invested the fact that a coparcener has rendered some service would not
change the character of the receipt. But if on the other hand it is essentially
a remuneration for the services rendered by a coparcener, the circumstance that
his services were availed of because of the reason that he was a member of the
family which had invested funds in that business or that he had obtained the
qualification shares from out of the family funds would not make the receipt,
the income of the Hindu Undivided Family." In the instant case the
question raised before us gets easily answered by applying the subsidiary
principles indicated at Nos. 2, 3 and 4 above as well as by applying the
broader principle indicated above. There can be no doubt that the share income
that was received by the three minor sons during the relevant period was earned
with the aid and assistance of Hindu Undivided Family Funds and was directly
related to the utilization of such funds by the firm and further that Hindu
Undivided Family had suffered detriment in the process of realisation of such
income inasmuch as the capital amount, lying to the credit of deceased
Yudhisthir Lal was utilized by the firm free of interest. Further in this case
there was no question of any services being rendered by the three minors and
therefore the share income received by them must, in substance, be regarded as
a return made to the family because of the investment of family funds in the
business. In our View therefore, the taxing authorities as also the Tribunal
and the High Court were right in assessing the said income in the, bands ,of
the Hindu Undivided Family assessee.
The appeal is, therefore, dismissed with
costs.
S. R. Appeal dismissed.
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