1. Remuneration paid to the Karta of a Hindu Undivided Family for services rendered to a partnership firm where the family's capital was invested. (Para 2 )
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1967 Supreme(SC) 307
SUPREME COURT OF INDIA
K.N. WANCHOO, C.J.I., R.S. BACHAWAT, V. RAMASWAMI, G.K. MITTER AND K.S. HEGDE, JJ.
M. D. Dhanwatey, Appellant
Versus
Commissioner of Income-tax, Madhya Pradesh, Nagpur and Bhandara, Respondent.
Civil Appeal No. 1371 of 1966,
D/- 26-10-1967.
Advocates Appeared
M/s. G. L. Sanghi, A. S. Bobde and P. C. Bhartari, Advocates and Mr. O. C. Mathur, Advocate of M/s. J. B. Dadachanji and Co., for Appellant Mr. C. E. Daphtary. Attorney-General for India, (M/s. A. N. Kirpal and R.N. Sachthey. Advocates with him), for Respondent.
Advocates:
A.N.KIRPAL, A.S.Bobde, C.K.DAFTARY, CO., G.L.SANGHI, J.B.DADACHAN, O.C.MATHUR, P.C.BHARTARI, R.N.SACH
A.N.KIRPAL, A.S.Bobde, C.K.DAFTARY, CO., G.L.SANGHI, J.B.DADACHAN, O.C.MATHUR, P.C.BHARTARI, R.N.SACH
Remuneration received by a Karta of a Hindu Undivided Family (HUF) for services rendered to a partnership firm, where the capital was contributed by the HUF, is taxable as income of the HUF and not as the Karta's individual income.
Headnote:(A) Indian Income-tax Act, 1922 - Section 66(2) - Hindu Undivided Family (HUF) - Remuneration of Karta - Partnership firm - Capital contributed by HUF - Whether remuneration received by Karta for services rendered to the firm is taxable in the hands of the HUF or the Karta individually - Where the share capital of the partner who is the Karta is entirely contributed by the HUF, the remuneration paid to the Karta is considered income of the HUF and not the individual Karta, as it serves as an adjustment of rights inter se between partners and is not without detriment to the joint family property. (Paras 2-3)
Facts of the case:
The assessee, a Hindu undivided family, had its Karta as a partner in a partnership firm. The entire share capital contributed by the Karta to the firm was provided by the joint family assets. Under the partnership agreement, the Karta was entitled to and received a monthly remuneration for managing the works. The assessee contended that this remuneration was earned by the Karta in his individual capacity and should not be included in the taxable income of the family.
Findings of Court:
The court found that the Karta represented the family in the partnership and the capital was sourced from joint family assets. The remuneration paid to the Karta was for the purpose of adjusting rights between partners and thus constituted income of the family.
Issues: Whether the payment made to the Karta for rendering services to a partnership firm, where the capital was contributed by the family, could be included in the total income of the family.
Ratio Decidendi: When a Karta enters a partnership using joint family funds, the remuneration received for services rendered to the firm is treated as income of the Hindu undivided family, as the Karta acts as a representative of the family and the remuneration is an adjustment of rights between partners.
Result: Appeal dismissed.
Legal Category Hierarchy
Table of Contents
2. Whether remuneration received by the Karta for services to a partnership firm is taxable as individual income or as income of the Hindu Undivided Family. (Para 2 )
3. Remuneration paid to a Karta representing the family in a partnership, where capital was joint family property, constitutes income of the Hindu Undivided Family. (Para 2 )
4. Remuneration paid to a Karta for services to a firm funded by joint family assets is taxable as income of the Hindu Undivided Family. (Para 2 , 3 )
5. Appeal dismissed; the remuneration is held to be taxable in the hands of the Hindu Undivided Family. (Para 4 )
6. Is remuneration paid to a Karta for services to a partnership firm taxable as individual income or HUF income?
If the Karta represents the Hindu Undivided Family in the partnership and the capital is contributed from joint family assets, the remuneration is considered income of the family, not the individual. (Para 2 , 3 )
7. How does the source of partnership capital influence the taxability of the Karta's remuneration?
When the share capital is contributed by the Hindu Undivided Family, the remuneration paid to the Karta for managing the business is treated as income of the family. (Para 2 )
8. Under what circumstances would remuneration paid to a Karta be considered individual income?
Remuneration would be individual income if there is evidence that the Karta was in the service of the partnership firm in an individual capacity, rather than as a representative of the family. (Para 2 )
Judgement
RAMASWAMI, J. :- This appeal is brought by certificate on behalf of the assessee from judgment of the Bombay High Court dated July 23, 1963, in Income Tax Reference No. 5 of 1962.
2. The appellant (hereinafter called the assessee) is a Hindu undivided family of which Shri M. D. Dhanwatey is the Karta. The assessment year involved in this appeal is 1954-55, the corresponding accounting year being the year ended September 30, 1953. Shri M. D. Dhanwatey was a partner in the partnership firm carrying on business under the name and style of M/s. Shivraj Fine Art Litho Works. The share capital of Shri M. D. Dhanwatey was entirely contributed by the assessee Hindu undivided family. The rights of the partners were governed at the relevant time by a partnership agreement dated April l, 1951. According to the agreement, the partnership was of lithography and art printing and was carried on by means of a press under the name and style of Shivraj Fine Art Litho Works . Clause (4) of the partnership deed enumerated various capital contributions of the partners. The share contribution of Shri M. D. Dhanwatey was shown as Rupees 1,96, 875. It is admitted that this amount belonged to the Hindu undivided family. Clause (5) provided for payment of interest at a certain rate to the partners on the share contribution. Clause (7) provided that general management and supervision of the partnership business shall be in the hands of Shri V. D. Dhanwatey. Clause (8) stated that Shri M. D. Dhanwatey shall be the manager in charge of the works and both he and Shri. V. D. Dhanwatey shall have power to make contracts, and arrange terms with constituents or customers. Clause (10) empowered three partners, viz., V. D. Dhanwatey, M. D. Dhanwatey and Shamrao Dhanwatey to appoint such person or persons on such salary as they deem fit for carrying on the work of the partnership and delegate to them such powers as they think proper. Clause (15) provided that the various adult members of the partnership shall devote their whole time and attention to the partnership in the sphere of their respective duties. Clause (16) is the material clause and it provides for various amounts to be paid by way of remuneration to the partners. The remuneration provided to be paid to Shri M. D. Dhanwatey under Cl. (16) is Rs. 1,250 per month. For the relevant accounting year Shri M. D. Dhanwatey was paid Rs. 7,500 as remuneration. For the assessment year 1954-55 the assessee showed the said amount in Section D of the return: It was contended that the salary received by Shri M. D. Dhanwatey, the karta of the assessee family was received by him in his individual capacity and that it was not taxable in the hands of the assessee. The Income-tax Officer, Special Investigation Circle B , Nagpur, by his assessment order dated May 28, 1955 negatived the contention of the assessee. The assessee took the matter to the Appellate Assistant Commissioner but the appeal was dismissed. The assessee preferred a further appeal to the Appellate Tribunal which rejected the contention of the assessee that the amount of Rs. 7,500 was earned by Shri M. D. Dhanwatey in his individual capacity and that it could not have been included in the taxable income of the assessee. As directed by the High Court, the Appellate Tribunal stated a case on the following question of law under Section 66 (2) of the Indian Income-tax Act, 1922 :
"Whether on the facts and circumstances of the case, the payment of Rs. 7,500 (Rupees seven thousand five hundred) paid to Shri M. D. Dhanwatey for rendering services to the firm, could be included in the total income of the assessee family ?"
The High Court answered the reference in favour of the Income-tax Department and against the assessee. The High Court observed that Shri M. D. Dhanwatey was one of the partners in the partnership as representing the Hindu undivided family consisting of himself and his two minor sons There was no evidence whatever to show that Shri M. D.
