1982 (7) TMI 83 - HC - Income Tax

Issues Involved:
1. Whether the salary received by Laxman Das from the firm M/s. Rama Textiles, where he was a partner as karta of his HUF, is includible in the assessment of the HUF.

Issue-Wise Detailed Analysis:

1. Inclusion of Salary in HUF Assessment:

The primary issue was whether the salary received by Laxman Das, acting as the karta of his HUF, from the partnership firm M/s. Rama Textiles, should be included in the HUF's assessment. The Income Tax Officer (ITO) considered the salary as part of the HUF's income, adding Rs. 12,000 for each of the assessment years 1972-73 and 1973-74.

Assessee's Argument:
The assessee contended that the salary was earned by Laxman Das in his individual capacity for services rendered to the firm, not as income of the HUF. The Appellate Assistant Commissioner (AAC) supported this view, citing Supreme Court decisions in CIT v. Gurunath V. Dhakappa and Raj Kumar Singh Hukam Chandji v. CIT, which emphasized that remuneration for individual services should not be included in the HUF's income.

Department's Argument:
The department appealed, arguing that the salary was part of the partnership agreement and thus should be treated as HUF income. The Appellate Tribunal agreed, relying on the Supreme Court's decision in CIT v. R. M. Chidambaram Pillai, which stated that salary to a partner is essentially a share of the firm's profits and retains the same character as the firm's income.

Court's Analysis:
The court examined the partnership agreement, specifically Clause 6, which stated that Laxman Das would receive Rs. 1,000 monthly for managing the firm's affairs due to his special aptitude. The court noted that under Section 13 of the Partnership Act and Section 40(b) of the Income Tax Act, salary payments to a partner are permissible and should not automatically be considered HUF income.

The court distinguished the present case from Chidambaram Pillai's case, noting that the latter dealt with the taxability of salary in the context of agricultural income, not the inclusion of salary in HUF income. The court found that the salary was paid for services rendered by Laxman Das and not due to any detriment to the HUF's assets.

Precedents Cited:
- CIT v. Gurunath V. Dhakappa: The Supreme Court held that salary received by a karta for services rendered to a firm, without detriment to HUF assets, is not HUF income.
- CIT v. D. C. Shah: Similar to Gurunath V. Dhakappa, the court ruled that remuneration to a karta for individual services, without affecting HUF assets, is not HUF income.
- V. D. Dhanwatey v. CIT: The Supreme Court emphasized that unless there is a direct connection between HUF funds and the remuneration, the salary paid to a karta is not assessable as HUF income.
- S.RM.CT.PL. Palaniappa Chettiar v. CIT: The court held that remuneration to a karta as managing director, without detriment to HUF assets, is not HUF income.
- Raj Kumar Singh Hukam Chandji v. CIT: The broader principle established was that remuneration for individual services, not linked to HUF investments, is individual income.

Conclusion:
The court concluded that the salary paid to Laxman Das was for services rendered by him individually and had no connection with the HUF's investment in the firm. Therefore, it should not be included in the HUF's income. The court answered the referred question in the negative, favoring the assessee and awarding costs of Rs. 250.

Final Judgment:
The disputed payments to Laxman Das for services rendered to the firm, without any detriment to the HUF's funds, cannot be treated as the assessable income of the HUF. The court ruled in favor of the assessee, against the department.

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