1984 (12) TMI 130 - AT - Income Tax

Tribunal affirms decision on share income, emphasizes connection between family funds & salary

SECOND INCOME TAX OFFICER. Versus AS RAJESH.

SECOND INCOME TAX OFFICER. Versus AS RAJESH. - TTJ 022, 569, Issues:1. Assessment of salary income of the Karta in an HUF.2. Determination of the nature of salary income in relation to family funds invested in a firm.3. Application of Supreme Court principles in assessing the salary income.Analysis:1. The appeal involved the assessment of salary income of the Karta in an HUF, who was paid by a firm where the HUF was a partner. The ITO taxed the salary income along with the share of profits, citing a Tribunal decision in Janagarajan.2. The AAC, however, deleted the inclusion of salary income based on several reasons. Firstly, distinguishing Janagarajan's case, the AAC noted that the salary was paid by the firm to the Karta of the assessee-family for services rendered as a partner, not by the HUF directly. Additionally, the Karta's role in the firm, his experience, and the separate accounting of salary indicated no direct relation between the income earned by the assessee and the salary paid.3. The AAC further emphasized that while salary payable to a Karta is assessable as individual income, it must be reasonable and not excessive. The AAC found that the major portion of the share income was diverted as salary to reduce tax, and determined a reasonable amount of Rs. 8,000 as remuneration for services rendered, excluding the excess amount from the share income assessed by the ITO.4. The Revenue appealed, arguing that the entire salary income should be assessable in the hands of the assessee-family. The Departmental Representative relied on Supreme Court and High Court decisions to support this argument, contending that excessive salary should not be excluded.5. The Tribunal examined the relevance of the cited decisions and emphasized the need to establish a real and sufficient connection between the family funds invested in the firm and the salary paid to the Karta. Referring to the Supreme Court's principles in Prem Nath, the Tribunal concluded that the ITO failed to provide evidence of such a connection, and the salary was essentially for services rendered by the Karta as an individual.6. The Tribunal rejected the Revenue's argument that the entire salary should be assessable in the hands of the assessee-family, upholding the AAC's decision to exclude the excess amount based on the lack of a real and sufficient connection with the family funds invested in the firm. The Tribunal found the inclusion of Rs. 5,099 out of the salary to be justified and declined to interfere with the AAC's decision.7. Ultimately, the appeal was dismissed, affirming the AAC's decision to exclude the excess amount of salary from the share income assessed by the ITO, based on the principles established by the Supreme Court regarding the nature of salary income in relation to family investments in a firm.