2007 (4) TMI 45 - HC - Income Tax

If Karta of HUF being a partner in a partnership firm and there is no evidence that he has service the firm in his individual capacity remuneration and salary received by the Karta of HUF from firm is includible in the total Income of the assessee HUF and was not the individual income of Karta.

Summary

Issues:
1. Inclusion of salary and commission received by a partner in a firm as Karta of HUF in the total income of the Assessee HUF.
2. Whether the income allocated to the share of the Karta under Section 67 of the Income-tax Act, 1961, is the real income of the HUF or the individual income of the Karta.

Issue 1: Inclusion of Salary and Commission in HUF's Total Income:
The judgment revolves around the question of whether the salary and commission received by a partner, acting as Karta of a Hindu Undivided Family (HUF), should be considered as part of the total income of the HUF. The firm in question had two partners, one being the Karta of the HUF and the other being his son. The Income Tax Appellate Tribunal held that the salary and commission should be included in the HUF's income. The court referred to precedents like Prem Nath case, where it was established that if there is a "real and sufficient" connection between the HUF and the remuneration, it is taxable as the HUF's income. In the present case, the court found that the firm was essentially run as a family concern with family funds invested. The court noted that no evidence was presented to show that the partner rendered services in his individual capacity, separate from his role as Karta of the HUF. Consequently, the court concluded that the salary and commission should be included in the total income of the Assessee HUF.

Issue 2: Nature of Income Allocated to Karta's Share under Section 67:
The second issue pertains to whether the income allocated to the share of the Karta under Section 67 of the Income-tax Act, 1961, should be considered the real income of the HUF or the individual income of the Karta. The court analyzed the circumstances of the case and the lack of evidence showing that the partner rendered services in his individual capacity. The court emphasized the "real and sufficient" connection between the joint family funds and the salary and commission paid by the firm to the partner. It was noted that the partner's efforts in managing the firm were in his capacity as Karta of the HUF and not in his individual capacity. The court concluded that the income received by the partner was includible in the total income of the Assessee HUF and was not his individual income.

In conclusion, the judgment clarifies the treatment of income received by a partner in a firm acting as Karta of an HUF. It emphasizes the importance of establishing a "real and sufficient" connection between the HUF and the income received to determine its taxability. The decision provides insights into the interpretation of relevant provisions of the Income-tax Act and reinforces the principle that income generated using joint family funds should be considered as the income of the HUF rather than the individual partner.