1. Manager of Hindu undivided family enters partnership using family funds; dispute over whether remuneration received as managing partner is individual or family income under Income-tax Act. (Para 1 , 2 )
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1965 Supreme(SC) 350
SUPREME COURT OF INDIA
K. SUBBA RAO, J. C. SHAH and S. M. SIKRI JJ.
MATHURA PRASAD
Versus
COMMISSIONER OF INCOME-TAX, U. P.
Date of decision : 9/12/1965.
Civil Appeal No. 10 of 1965.
Appeal by special leave from the judgment and order of the Allahabad High Court dated February 8, 1962, in Income-tax Miscellaneous Case No. 431 of 1960.
Advocates appeared
A. N. Kirpal and B. N. Kirpal for the appellant.
A.V.Viswanatha Sastri, Senior Advocate (Gopal Singh and R. N. Sachthey with him), for the respondent.
Remuneration received by a manager of a Hindu Undivided Family (HUF) from a partnership entered into using HUF funds is taxable as income of the HUF, as the right to such remuneration is derived from the investment of family assets.
Headnote:(A) Income-tax Act, 1922 - Sections 66(1) and 66(2) - Hindu Undivided Family - Remuneration received by manager - Income of family vs. individual - Where a manager enters into a partnership using joint family funds for the benefit of the family, any remuneration or allowance received by him as a partner is assessable as income in the hands of the family.
(B) Distinction between using family funds to enter a partnership and using family property as security for a personal benefit - In the former, income is that of the family; in the latter, it is personal income of the manager.
Facts of the case:
A manager of a branch of a partitioned Hindu undivided family entered into a partnership agreement to carry on businesses formerly conducted by the larger family. The manager used joint family funds to become a partner and was entrusted with the management of a specific business unit, receiving a monthly allowance based on profits. The tax authorities treated this remuneration as income of the Hindu undivided family rather than the individual manager.
Findings of Court:
The right to draw the allowance was made possible by the use of family funds. There was an inseparable connection between the joint family funds and the allowance received.
Issues: Whether remuneration received by the manager of a Hindu undivided family from a partnership firm, where he was inducted using joint family funds, constitutes the income of the family or the manager in his personal capacity.
Ratio Decidendi: If a manager enters into a partnership using the funds of the Hindu undivided family, he is regarded as acting for the benefit of the family. Consequently, any profits or remuneration received by him in that capacity are assessable as income of the Hindu undivided family, as the right to such income arises directly from the investment of family funds.
Result: Appeal dismissed.
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JUDGMENT
SHAH J.-A Hindu undivided family consisting of five brothers-Jagan Prasad, Har Prasad, Mathura Prasad, Sheo Prasad, Basdeo Prasad and their nephew, Dilsukh Rai (son of Badri Prasad, deceased), owned considerable property and carried on different businesses in the names of Messrs.Agarwal Iron Works, Agra, Messrs. Jagan Prasad Sheo Prasad, Messrs. Jagan Prasad Har Prasad and Messrs. Nek Ram Jagan Prasad. On October 11, 1948, a partition of the properties and the businesses of the family was made among the six branches and as a result of that partition a sixth share was allotted in the assets partitioned to the smaller Hindu undivided family of which Mathura Prasad was the manager.
After partition of the joint family estate, the managers of the six branches entered into an agreement of partnership to carry on in the name of Badri Prasad Jagan Prasad the businesses which were formerly conducted on behalf of the larger Hindu undivided family. By clause 8 of the partnership agreement, it was provided :
" That the business of a place shall be managed by one of the members who reside at a place of the business to the best of his or their ability. The allowances of the managing partners of a particular place shall be debited to the profit and loss account of that place at the end of the year. But such allowance shall not be more than profits disclosed by that business of that place in that particular year. If the business is managed by more than one partner, such allowance shall be divided equally between them. The member or members shall be entitled to withdraw for such allowance a sum of money monthly which will approximately be proportionate to the expected profits of the year. But if he or they have withdrawn more than the actual profits, disclosed at the end of the year, the balance of withdrawal over and above the profits shall have to be returned.
As to Agra office, i.e., Agarwal Iron Works, Shri Mathura Prasad who will manage (sic) the allowance of Rs. 1,500 but for him too the terms mentioned above will apply, i.e., if the profits disclosed at the place do not justify the withdrawals in the manner mentioned above, he will have to refund the excess of the withdrawals over the profits. "
For the assessment year 1950-51 the Hindu undivided family of Mathura Prasad filed a return for the previous year Samvat 2006. Mathura Prasad filed another return in the status of an individual for the same previous year and in that year he disclosed an income of Rs. 21,000 " received as remuneration from the firm of Messrs. Badri Prasad Jagan Prasad ". The Income-tax Officer, F-Ward, Agra, held that the income disclosed by Mathura Prasad as an individual was liable to be taxed in the hands of the Hindu undivided family and directed inclusion of that amount in the assessment of the Hindu undivided family of Mathura Prasad. The order passed by the Income-tax Officer was confirmed in appeal by the Appellate Assistant Commissioner and by the Income-tax Appellate Tribunal.
The appellant then applied under section 66(1) of the Indian Income-tax Act, 1922, for an order referring the following question to the High Court for its opinion :
" Whether, on the facts and in the circumstances, the sum of Rs. 21,000 (received by Shri Mathura Prasad as salary from Agarwal Iron Works. Agra) was the income of the assessee family or Shri Mathura Prasad in his personal capacity ? "
The Tribunal rejected the application, and refused to state a case to the High Court. A petition submitted to the High Court under section 66(2) of the Act was also rejected. The Tribunal and the High Court were of the view that the question of law sought to be raised was concluded by a judgment of this court in Commissioner of Income-tax v. Kalu Babu Lal Chand {[1959] 37 I.T.R. 123 : [1960] I S.C.R. 320.} and need not be referred for opinion. With special leave, the appellant has appealed to this court.
Counsel for the appellant has raised two contentions in support of the appeal:
(1) th
