1983 (12) TMI 115

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....present 27, Shri K. Nataraja Rao, at present 25, Shri K. Venkateswara Rao, at present 23 and Shri K. Rama Subrahmanyam, at present 18, are divided sons of Shri Sobhanachalam. Originally, the first three were carrying on the said business under the partnership deed dated 29-4-1976 to which they have admitted the last two to the benefits of partnership as they were minors at that time. However, on 16-5-1978, the fourth among the above became a major and agreed to continue as a full-fledged partner of the firm. In order to enable him to do so, a change in the partnership was brought about by executing a partnership deed dated 17-5-1978 with which we are concerned in these matters. Under this deed, the first four are full-fledged partners and also persons who agreed to share the losses at one-fourth each. The fifth among them was admitted to the benefits of partnership and his share in the profits was stated to be 20 per cent. It is specifically stipulated that he had no share in losses. Clause 3 of the deed of partnership acknowledged that each of the partners including the minor contributed Rs. 10,000 towards capital in the firm. As the controversy centres round clause 9 of the partn....

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....ered and there was a specific clause in the partnership deed which provided that the remuneration will be paid for rendering independent services in regard to the business of the firm. The AAC held about the argument advanced before him as follows : "After due consideration of different facts, it appears that the plea of the appellant carries much weight, when it is seen that the remuneration was given to the appellant as per the partnership deed for the services being rendered in individual capacity and the same was not detrimental to the investment of the HUF funds." He further held that there may not be any employee-employer relationship between the assessee and the firm, yet the fact cannot be lost sight of that the remuneration was given for rendering certain services in individual capacity and the same was not related to the HUF investment as such. He directed deletion of the amount received as remuneration by each of the assessees from the hands of their HUFs and allowed their appeals. 5. Aggrieved by the first appellate orders, the revenue has filed second appeal before this Tribunal whereas the assessees have filed cross-objections. In the cross-objections, the as....

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....e Act, which deals with the method of computing a partner's share in the income of the firm, are as follows: "67. (1) In computing the total income of an assessee who is a partner of a firm, whether the net result of the computation of total income of the firm is a profit or a loss, his share (whether a net profit or a net loss) shall be computed as follows:--- (a) any interest, salary, commission or other remuneration paid to any partner in respect of the previous year, and, where the firm is a registered firm or an unregistered firm assessed as a registered firm under clause (b) of section 183, the income-tax, if any, payable by it in respect of the total income of the previous year, shall be deducted from the total income of the firm and the balance ascertained and apportioned among the partners;" According to the above provision, the salary paid to any partner has to be deducted from the total income of the firm and the balance only is to be ascertained and apportioned among the partners. 7. The next argument of the learned departmental representative was that because of the investment made by each of these three HUFs, their managers were selected as employees of th....

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....ataraja Rao was allowed a salary of Rs. 2,233.50. At page 8 is given the extract of the return filed on behalf of K. Sobhanachalam for the assessment year 1975-76. It is significant to note that the assessable income returned was Rs. 43,209.42. At page 9 is given the extract of the assessment order dated 25-2-1976 for the assessment year 1975-76 of the HUF headed by K. Sobhanachalam. In that assessment, it is significant to note that neither remuneration of Rs. 6,000 received by K. Sobhanachalam nor Rs. 2,534.35 received by K. Panakala Rao nor Rs. 2,233.50 received by K. Nataraja Rao were included as the income of the bigger HUF which was the assessee in the assessment year 1975-76, though the assessment was made under section 143(3) of the Act. 8. Thus, all the above would lead us to believe that there would not have been any connection between the investment made by each of the partners in the firm and the remuneration received by the three managers of the assessees now before us. We hold that Shri K. Sobhanachalam, Shri K. Panakala Rao and Shri K. Nataraja Rao were having extensive experience in conducting sale and purchase of hosiery goods and because of their business acume....

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....divided 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 utilisation of family assets ; (3) whether the family had suffered any detriment in the process of realisation or the income ; 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 principle 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 circumsta....