1991 (1) TMI 104 - HC - Income Tax

Summary

Issues:
1. Interpretation of section 64(1)(i) of the Income-tax Act, 1961 regarding the assessment of sums received by husbands from a firm for services rendered.
2. Determining whether the salary paid to the husbands of the assessees should be included in the assessments under section 64(1)(i) of the Act.

Analysis:
The case involved a dispute regarding the assessment of sums received by husbands from a firm for services rendered, specifically focusing on the application of section 64(1)(i) of the Income-tax Act, 1961. The assessees, wives of two brothers, were partners in a firm along with their husbands and other family members. The issue arose when the Commissioner of Income-tax initiated action under section 263 to include the salary paid to the husbands in the assessments of the assessees. The assessees contended that the husbands were not partners in the firm and, therefore, the salary should not be included under section 64(1)(i).

The Tribunal held that the husbands were indeed partners in the firm, and the salary received was directly linked to their membership in the firm. The Tribunal's decision was based on the premise that the salary paid to the husbands was a form of compensation for their services and expertise, thus constituting income arising from their membership in the firm. The assessees, dissatisfied with the Tribunal's decision, appealed to the High Court.

The High Court examined the legal framework, including the provisions of section 64(1)(i) of the Act and relevant case law. It was established that when a karta of a Hindu undivided family enters into a partnership, he does so in his individual capacity, making only the karta a partner and not the individual family members. Therefore, the husbands of the assessees were considered partners in the firm. Additionally, the court referenced previous judgments emphasizing that the salary received by a partner is a mode of adjustment in the share of the firm's income and retains the character of firm income.

Based on the legal principles and precedents, the High Court concluded that the salary received by the husbands of the assessees should be included in the assessments of the assessees under section 64(1)(i) of the Act. The court rejected the argument that the salary was for special skills, noting that it formed part of the husbands' share income from the firm. Ultimately, the court ruled in favor of the Revenue, upholding the inclusion of the salary in the assessments and awarding costs to the Revenue.

In summary, the judgment clarified the application of section 64(1)(i) of the Income-tax Act, 1961 in assessing sums received by husbands from a firm for services rendered. It highlighted the legal principles regarding partnership, income attribution, and the nature of salary received by partners, ultimately affirming the inclusion of the salary in the assessments of the assessees.