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TMI Blog1967 (10) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... nting and was carried on through a press under the name and style of Shivraj Fine Art Litho Works. The capital of the partnership under the partnership deed was Rs. 10,50,000. Clause (4) of the partnership deed enumerated the share capital contributed by the partners as follows : "1. Baburao alias Vasantrao Dattaji Dhanwatey. Two annas 2. Marotirao Dattaji Dhanwatey. Three annas. 3. Shamrao Dattaji Dhanwatey. Two annas, three pies 4. Shankarrao Dattaji Dhanwatey. Two annas, three pies 5. Krishnarao Dattaji Dhanwatey. Two annas three pies 6. Balu alias Yeshwantrao Dattaji Dhanwatey Two annas, three pies 7. Shivaji Vasantrao Dhanwatey. Two annas." Clause (5) states that interest at the rate of 5 per cent. per annum shall be payable to each partner on the amount of the capital. Clause (7) provides that general management and supervision of the partnership business shall be in the hands of Shri V. D. Dhanwatey. Clause (8) states that Marotirao Dhanwatey shall be the manager in charge of the works and both he and Vasantrao Dhanwatey shall have power to make contracts and arrange terms with constituents or customers. Cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see that Shri V. D. Dhanwatey was an employee of the firm even before the family was taken as a partner. It was said that on partition of the larger Hindu undivided family in 1939, of which Shri V. D. Dhanwatey was a member, Shri V. D. Dhanwatey representing the small Hindu undivided family of which he became the karta, became a partner in the said firm and received salary from it. The Tribunal, by its order dated September 4, 1962, dismissed the appeal of the assessee. The Tribunal accepted the contention of the assessee that Shri V. D. Dhanwatey was rendering services to the firm and was getting salary even before his family became a partner in the firm. But the Tribunal held that Shri V. D. Dhanwatey, who was a partner of the firm, could not at the same time be an employee of the partnership firm and the remuneration received by him must be held to be only an adjustment of the share in profits of the Hindu undivided family in the partnership. At the instance of the assessee the Appellate Tribunal stated a case to the High Court under section 66(1) of the Income-tax Act, 1922, on the following question of law : " Whether, on the facts and in the circumstances of the case, the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Yajnavalkya who, while dealing with property not liable to partition, states : " Whatever else is acquired by the coparcener himself, without detriment to the father's estate, as a present from a friend or a gift at nuptials, does not appertain to coheirs. Nor shall he, who receives hereditary property which had been taken away, give it up to coparceners; nor what has been gained by science. " (Yajnavalkya 2, verses 119-120) Commenting on this text of Yajnavalkya the author of Mitakshara states : " The author explains what may not be divided : whatever else is acquired by the coparcener himself, without detriment to the father's estate, as a present from a friend, or a gift at nuptials, does not appertain to the coheirs. Nor shall he, who recovers hereditary property, which had been taken away, give it up to the coparceners; nor what has been gained by science. " The author sets out in verse 2 the text of Yajnavalkya in his own words and states in verse 6 : " Here the phrase anything acquired by himself, without detriment to the father's estate must be everywhere understood ; and it is thus connected with each member of the sentence; what is obtained from a friend, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nanced by the joint family. In proceedings for assessment of the Hindu undivided family, it was claimed that the managing director's remuneration were personal earnings of Rohatgi and could not be added to the income of the Hindu undivided family. The contention was rejected by this court and it was held that the managing director's remuneration received by Rohatgi was, as between him and the Hindu undivided family, the income of the family and should be assessed in its hands. In reaching that conclusion, the court first observed that a Hindu undivided family cannot enter into a contract of partnership with another person or persons. The karta of the Hindu undivided family, however, may, and in fact does, enter into partnership with outsiders on behalf and for the benefit of his joint family, but when he does so, the other members of the family do not, vis-a-vis the outsiders, become partners in the firm. So far as the outsiders are concerned, it is the manager who is recognised as a partner. Whether in entering into a partnership with outsiders, the manager acted in his individual capacity and for his own benefit, or he did so as representing his joint family and for its benefit, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rks from Milkhiram and others. The finding in this case is that the promotion of the company and the taking over of the concern and the financing of it were all done with the help of the joint family funds and the said B. K. Rohatgi did not contribute anything out of his personal funds if any. In the circumstances, we are clearly of opinion that the managing director's remuneration received by B. K. Rohatgi was, as between him and the Hindu undivided family, the income of the latter and should be assessed in its hands. " The same principle was reiterated by this court in a subsequent case---Mathura Prasad v. Commissioner of Income-tax. In that case, a Hindu undivided family owned considerable property and carried on many businesses. There was a partition among the six branches in the family and a sixth share of the property was allotted to the smaller Hindu undivided family of which M was the manager. After partition the managers of the six branches entered into an agreement of partnership to carry on the businesses. Under the agreement, M, who was to manage the affairs of one of the offices, was entitled to a monthly allowance of Rs. 1,500, such allowance not exceeding the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance which was claimed to be salary. The right to draw the allowance was, in the view of the Tribunal, made possible by the use of family funds. The family funds enabled him to become a partner and to claim the allowance for the services rendered. There was in the view of the Tribunal an inseparable connection between the joint family funds and the allowance received. The right to draw the allowance, therefore, arose directly from the joint family funds. It may be recalled that in the second paragraph of clause (8) of the partnership agreement, though a monthly allowance of Rs. 1,500 was named as the amount which Mathura Prased was entitled to withdraw, the amount was liable to be reduced, if the profits earned did not justify the withdrawals, and Mathura Prasad was bound to refund the excess of the withdrawals over his appropriate share in the profits. Therefore, by the agreement it was intended that subject to a maximum of Rs. 1,500 per month, Mathura Prasad will be entitled to make withdrawals commensurate with the profits of the firm. In the light of the principle laid down by this court in Kalu Babu Lal Chand's case, it must be held that on the finding recorded by the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be revised at any time if all the partners agreed to do so. It has been found by the Appellate Tribunal that the remuneration received by Shri V. D. Dhanwatey was only an increased share of the profits of the firm paid to him as representing the Hindu undivided family, and therefore the whole of the payment made to Shri V. D. Dhanwatey, viz., the share in the profits of the firm and his individual remuneration was taxable as income of the Hindu undivided family. It is manifest that Shri V. D. Dhanwatey was made a partner due to the contributions made by the joint family funds to the entire share capital of the firm. In other words, it was the utilisation of the joint family funds which enabled Shri V. D. Dhanwatey to become a partner in the partnership business. In our opinion, the remuneration paid to Shri V. D. Dhanwatey was directly related to investments from the assets of the Hindu joint family in the partnership business. In other words, there was a real and sufficient connection between the investment from the Hindu joint family funds into the partnership business and the remuneration paid to Shri V. D. Dhanwatey under clause (16) of the deed of partnership. It follows there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Tribunal can, therefore, be challenged on the ground that the relevant legal principles have been misapplied by the Tribunal in reaching its decision on the point; and such a challenge is open under section 66(1) because it is a challenge on a ground of law. For the reasons expressed we hold that the High Court rightly answered the question of law against the assessee and these appeals must be dismissed with costs---one set of hearing fees. HEGDE J.---I regret that it has not been possible for me to agree with the majority decision. The question for decision in these appeals is "whether on the facts and circumstances of the case, the sum of Rs. 18,000 was rightly included in the total income of the assessee family for the assessment years 1954-55 and 1955-56." The facts as found by the tribunal are these : The assessee is a Hindu undivided family of which Shri V. D. Dhanwatey (who will be hereinafter referred to as Dhanwatey) is the karta. He is one of the partners in a firm engaged in lithography and printing business. The partnership came into existence in August, 1939. But that very business was being carried on by Dhanwatey's family before its partition in 1939. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Shri V. D. Dhanwatey as the karta of the Hindu undivided family. " In support of the conclusion that no partner of a firm can get remuneration for taking part in partnership business, the Tribunal purported to rely on the decision of the Bombay High Court in S. Magnus v. Commissioner of Income-tax. From the above findings of fact reached by the Tribunal which were binding on the High Court and are binding on this court, it is established (1) that Dhanwatey was attending to the business in question even before the partnership came into existence and that he was getting remuneration for the work done by him, (2) after the partnership came into existence, he, one out of the several partners, was designated as the general manager and for that work he was given a monthly remuneration of Rs. 1,500, and (3) the said remuneration was received by him without any detriment to his family. We have now to see whether on the basis of these findings the remuneration received by Dhanwatey can be considered as an accretion to his family income. In my opinion, the High Court went wrong in thinking that the finding of the Tribunal that the remuneration received by Dhanwatey was without detri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nwatey acquired under the partnership deed was acquired on behalf of the family. Under clause (16) of the partnership, Dhanwatey as the general manager of the firm was given a remuneration of Rs. 1,500 per month. It cannot be said that Dhanwatey's joint family was the general manager of the family, nor could it be said that for any act or omission of his as the general manager of the firm his family could be held responsible. Dhanwatey evidently had great deal of experience in the business in question. To repeat, even before the partnership came into existence, he was attending to that very business and he was drawing a salary of Rs. 1,500 per month. For the capital supplied by his joint family, it was getting dividends. It may be the fact that he was a partner of the firm was a circumstance that had induced the other partners to appoint him as the general manager. But that could not have been the determinative circumstance. There were other partners who had subscribed more capital than he had done. It must be remembered that investment in a business is but one of its facets. The know-how and intelligent direction is no less important. Business concerns do not earn profits merely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonal income. A similar view was taken in Commissioner of Income-tax v. Darsanram. In Commissioner of Income-tax v. S. N. N. Sankaralinga Iyer, a Division Bench of the Madras High Court consisting of Satyanarayana Rao and Viswanatha Sastri JJ. held that the remuneration received by Sankaralinga Iyer as the managing director of a bank was his individual income, though he had acquired the shares in the bank which qualified him to be a director from out of the funds of his family of which he was the karta. It held that the remuneration received by him as the managing director's remuneration and director's sitting fee was earned by him in consideration of the services which he rendered to the bank, and as there was no detriment to the family property in earning that remuneration, his income as the managing director of the bank was his personal income and not the income of the Hindu undivided family of which he was the karta. Then came the decision of this court in Commissioner of Income-tax v. Kalu Babu Lal Chand. On the facts of that case, this court held that the remuneration earned by Rohatgi as the managing director of a firm was the income of his Hindu undivided family. The fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner of Income-tax v. Darsanram the finding of fact was that the joint family property had not been spent in earning the managing director's remuneration which was, therefore, held to be the personal earnings of the karta who had been appointed as the managing director. " From these observations it follows that this court did not dissent from the view taken in Darsanram's case. The facts found by the Tribunal in the present case are identical to those found in Darsanram's case. Dealing with Sankaralinga Iyer's case, this court observed in the aforementioned Kalu Babu's case : " The case of Commissioner of Income-tax v. S. N. N. Sankaralinga Iyer does not help the respondent because of the facts found in that case. In that case it was found that the remuneration of the managing director was earned by him in consideration of the services which he rendered to the bank and no part of the family funds had been spent or utilised for acquiring that remuneration except that the necessary shares to acquire the qualification of a managing director were purchased out of the joint family funds. It was said that there was no detriment to the family property in any manner or to any ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iar's case. Dealing with Sankaralinga Iyer's case this Bench observed thus in Palaniappa Chettiar's case : " We consider it also necessary to state that the decision of the Madras High Court in Commissioner of Income-tax v. S. N. N. Sankaralinga Iyer was not impliedly overruled by this Court in Commissioner of Income-tax v. Kalu Babu Lal Chand. It was merely pointed out that the material facts of that case were different from those of Kalu Babu Lal Chand's case. It was, for instance, found in Commissioner of Income-tax v. S. N. N. Sankaralinga Iyer that the remuneration of the managing director was earned by rendering services to the bank and no part of the family funds were utilised except that the necessary shares to acquire the qualification of a managing director were purchased out of the joint family funds. It was held that there was no detriment to the family property in any manner or to any extent. In view of this finding it follows that the remuneration of the managing director could not be treated as an accretion to the income of the joint family and taxed in its hands. The process of reasoning of the Madras High Court in Commissioner of Income-tax v. S.N.N. Sankaralin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilar to those before us in this case. I do not think that the rule laid down by this court either in Kalu Babu's case or in Mathura Prasad's case is applicable to the facts of the present case. It is unnecessary to go into the decisions rendered by the High Courts after the decision of this court in Kalu Babu's case. Most of them, we were told, are pending in this court in appeal. Further, they were decided on their own facts. Some of them appear to have been greatly influenced by the observations in Gokul Chand's case quoted with approval in Kalu Babu's case. The contention that if a coparcener of a Hindu joint family takes any aid from his family funds in making an acquisition, however slender that aid might be, the acquisition in question should be considered as a family acquisition, stands repelled by the decision of this court in Piyare Lal Adishwar Lal's case. Therein, one Sheel Chandra, who was the karta of his Hindu undivided family consisting of himself and his younger brother, furnished as security his family properties for being appointed the treasurer of a bank. He would not have been appointed treasurer of the bank but for the security given. In that case also, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. He could not have received the same on behalf of the family. There was no point in the family giving remuneration to him in one hand and taking it back in the other. Therefore, the remuneration drawn by him prior to 1939 must be held to be his individual income. That remuneration quite clearly must have been paid to him with the consent of the members of the family. Factually there was no change in the position after the partnership came into existence. Dhanwatey has always been treating that income as his individual income. In these cases it is the family which is contending that the income in question is Dhanwatey's individual income. From these facts it is reasonable to infer that his family had agreed to his receiving that income as his individual income. If that is so, the assessee's case falls within the rule laid down by this court in Jugal Kishore Baldeo Sahai v. Commissioner of Income-tax. It is true that at no stage the assessee had put forward the contention that Dhanwatey was getting the remuneration in question as his individual income with the consent of the members of his family, but that conclusion clearly flows from the facts found by the Tribunal and su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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