1963 (8) TMI 65 - HC - Income Tax

Summary

Issues Involved:
1. Whether the salary paid to Shri G.V. Dhakappa should be considered his individual income or the income of the Hindu undivided family (HUF).
2. Applicability of Section 10(4)(b) and Section 16(1)(b) of the Income-tax Act, 1922.
3. Interpretation of partnership agreements in relation to remuneration of partners.

Detailed Analysis:

1. Whether the salary paid to Shri G.V. Dhakappa should be considered his individual income or the income of the Hindu undivided family (HUF):

The primary issue in this case was whether the remuneration of Rs. 6,000 paid to Shri G.V. Dhakappa should be included in the assessment of the Hindu undivided family or treated as his individual income. The court noted that the business was initially a Hindu undivided family concern, and even during that period, Shri Dhakappa was remunerated for his management services. The partnership deed, which was formed after the family partition, explicitly stated that Shri Dhakappa would continue as the manager with a monthly remuneration of Rs. 500.

The court emphasized that the remuneration paid to Shri Dhakappa was for his personal skill and management abilities, which were recognized even when the business was run by the Hindu undivided family. The court rejected the argument that the remuneration was merely a share of profits, stating that the partnership agreement specifically provided for his remuneration, thus falling under Section 13(a) of the Indian Partnership Act, 1932, which allows partners to be remunerated if there is a contract to that effect.

2. Applicability of Section 10(4)(b) and Section 16(1)(b) of the Income-tax Act, 1922:

The court clarified that the provisions of Section 10(4)(b) and Section 16(1)(b) of the Income-tax Act, 1922, were not applicable in this case. The court reasoned that if a partnership firm could not remunerate a partner, there would be no need for these sections. The court further noted that the issue was not about the deduction of remuneration from the profits of the partnership firm but about whether the remuneration should be considered as individual income or family income.

3. Interpretation of partnership agreements in relation to remuneration of partners:

The court examined the partnership deed and noted that it explicitly provided for the remuneration of Shri Dhakappa as the manager. The court distinguished this case from others by emphasizing the specific contractual agreement to remunerate Shri Dhakappa for his management services. The court also referred to various precedents, including the decision of the Supreme Court in Piyare Loll Adishwar Lal v. Commissioner of Income-tax, which supported the conclusion that remuneration for specific services rendered by a partner could be considered individual income.

The court rejected the revenue's reliance on the Supreme Court decision in Kalu Babu Lal Chand's case, stating that the facts were distinguishable. In Kalu Babu Lal Chand's case, the managing director's remuneration was linked to the family's investment and control over the company, whereas in the present case, the remuneration was for specific management services rendered by Shri Dhakappa.

Conclusion:

The court concluded that the remuneration of Rs. 6,000 paid to Shri G.V. Dhakappa should be considered his individual income and not the income of the Hindu undivided family. The court answered the referred question in the negative and in favor of the assessee, stating that the inclusion of the salary in the total income of the assessee family was illegal and improper. The revenue was directed to pay the costs, with an advocate's fee of Rs. 250.