1967 (10) TMI 5 - SC - Income Tax

HUF Income: Remuneration Taxable as Joint Family Funds

The Supreme Court upheld the High Court's decision that the remuneration received by Shri V. D. Dhanwatey was taxable as the income of the Hindu undivided ... Karta of HUF was partner of a firm, contribution made to the firm out of capital of HUF - Salary drawn by karta of HUF from earning of firm as partner was assessable as family income - Assessee's appeal is dismissed Issues Involved:1. Whether the remuneration of Rs. 18,000 received by Shri V. D. Dhanwatey was rightly included in the total income of the assessee-family for the assessment years 1954-55 and 1955-56.Issue-wise Detailed Analysis:1. Nature of Remuneration:The primary issue was whether the remuneration received by Shri V. D. Dhanwatey should be taxed as the income of the Hindu undivided family (HUF) or as his individual income. The assessee contended that the remuneration was earned by Shri V. D. Dhanwatey for services rendered to the partnership and should be taxed in his individual capacity. The Income-tax Officer, Appellate Assistant Commissioner, and the Income-tax Appellate Tribunal rejected this contention, holding that the remuneration was an adjustment of the share in profits of the HUF in the partnership.2. Capital Contribution and Partnership Deeds:The capital contribution of Rs. 10,50,000 to the partnership was made by the HUF, and Shri V. D. Dhanwatey was a partner representing the HUF. The partnership deeds for the assessment years 1954-55 and 1955-56 outlined the terms, including the remuneration payable to partners, which was revised to Rs. 1,500 per month for Shri V. D. Dhanwatey.3. High Court's Decision:The High Court held that the entire capital contribution was made by the HUF, and the remuneration paid to Shri V. D. Dhanwatey was an increased share in the profits of the firm, thus taxable in the hands of the HUF. The High Court relied on the Supreme Court decision in Commissioner of Income-tax v. Kalu Babu Lal Chand, which established that remuneration received by a karta of an HUF, who was also a partner in a firm representing the HUF, was taxable as the income of the HUF.4. Arguments by the Assessee:The assessee argued that the remuneration was earned by Shri V. D. Dhanwatey due to his exertions and without any aid from the joint family assets. It was contended that there was no nexus between the joint family funds and the remuneration, and thus it should be treated as his individual income.5. Legal Principles and Precedents:The Supreme Court reiterated the general doctrine of Hindu law that property acquired by a karta or coparcener with the aid of joint family assets is impressed with the character of joint family property. The principles from Yajnavalkya and Mitakshara texts were cited, emphasizing that self-acquired property must be without detriment to the ancestral estate. The court also referred to previous judgments, including Commissioner of Income-tax v. Kalu Babu Lal Chand and Mathura Prasad v. Commissioner of Income-tax, which supported the view that remuneration earned with the aid of joint family funds is taxable as HUF income.6. Tribunal's Findings:The Tribunal found that Shri V. D. Dhanwatey was receiving remuneration even before the partnership was formed, but this was not relevant for determining the nature of the remuneration post-partnership. The Tribunal concluded that the remuneration was an increased share of the profits of the firm paid to him as representing the HUF.7. Supreme Court's Conclusion:The Supreme Court upheld the High Court's decision, stating that the remuneration paid to Shri V. D. Dhanwatey was directly related to the investment of joint family funds in the partnership business. There was a real and sufficient connection between the joint family funds and the remuneration, making it taxable as HUF income.Separate Judgment by Hegde J.:Hegde J. dissented, arguing that the remuneration was earned by Shri V. D. Dhanwatey without detriment to the family funds and should be considered his individual income. He emphasized that a partner could be remunerated for services rendered to the partnership and that the remuneration was not linked to the share capital subscribed by the family. He also highlighted that the remuneration was treated as individual income with the consent of the family, thus falling within the rule laid down in Jugal Kishore Baldeo Sahai v. Commissioner of Income-tax.Final Order:In accordance with the majority opinion, the appeals were dismissed with costs, and the remuneration was held to be taxable as the income of the HUF.