1981 (7) TMI 24 - HC - Income Tax

Summary

Issues Involved:
1. Whether the salary received by Rajeshwar Pershad from Vijay Shri P. Ltd. should be treated as his individual income or as the income of the Hindu Undivided Family (HUF).
2. The financial relationship between the assessee-family and the company.
3. The qualifications and role of Rajeshwar Pershad in the company.
4. The treatment of similar income in past instances.
5. The application of the Supreme Court's principles on the remuneration of a coparcener.

Issue-wise Detailed Analysis:

1. Treatment of Salary as Individual Income or HUF Income:
The primary question was whether the sum of Rs. 9,000 received by Rajeshwar Pershad from Vijay Shri P. Ltd. should be treated as his individual income or included in the assessments of the HUF. The ITO included the salary in the HUF's income, arguing that the remuneration was linked to the family's investment in the company. However, the assessee contended that the salary was paid for Rajeshwar Pershad's personal services and qualifications.

2. Financial Relationship between Assessee-Family and Company:
The assessee-family initially invested Rs. 3,27,000 in Vijay Shri P. Ltd. and subsequently withdrew substantial amounts, making the family a debtor to the company. By March 31, 1970, the family owed Rs. 3,47,300 to the company. This financial relationship was crucial to determine whether the salary was a return on the family's investment or compensation for services rendered.

3. Qualifications and Role of Rajeshwar Pershad:
Rajeshwar Pershad was appointed as a working director after the death of Smt. Yeshwant Kumari, who previously managed the cinema hall. The company resolved to pay him Rs. 1,500 per month due to his qualifications and experience. The assessee argued that his appointment and salary were necessary for managing the business, especially after the manager left, leaving only an assistant manager in charge.

4. Treatment of Similar Income in Past Instances:
In 1963-64, Rajeshwar Pershad was paid Rs. 7,175 for supervising the renovation of the cinema hall, which was accepted as his individual income by the Department. This precedent supported the assessee's claim that the current salary was also for personal services rendered by Rajeshwar Pershad.

5. Application of Supreme Court's Principles:
The Supreme Court in Raj Kumar Singh Hukam Chandji v. CIT laid down that remuneration received by a coparcener should be treated as individual income if it is compensation for services rendered, rather than a return on the family's investment. Applying this principle, the court examined whether the salary was for the family's investment or for Rajeshwar Pershad's services.

Conclusion:
The court concluded that the remuneration received by Rajeshwar Pershad was for his services rendered to the company and not a return on the family's investment. The family's substantial withdrawals from the company and the lack of dividends further supported this conclusion. The court found that Rajeshwar Pershad's qualifications and the necessity of his role justified the salary as his individual income.

Judgment:
The court answered the referred question in the negative, holding that the salary received by Rajeshwar Pershad was his individual income and not the income of the HUF. The assessee was entitled to costs, with counsel's fee set at Rs. 350.