1993 (2) TMI 10 - SC - Income Tax

Karta, partner in firm - Whether Tribunal was right in holding that the salary received by Shri Brij Mohan was to the extent of Rs. 12,000 assessable in the hands of the assessee family - held that the sum of Rs. 1,400 per month as an allowance to Brij Mohan was for the services rendered by him and that no part of it can reasonably be said to be related to the investment of the family - appeal is allowed and the question referred shall be answered in the negative, i.e., in favour of assessee

Summary

Issues:
Interpretation of income tax law regarding the assessment of salary received by an individual from a partnership firm and its treatment as individual income or Hindu undivided family income.

Detailed Analysis:

Issue 1: Assessment of Salary from Partnership Firm
The case involved a dispute over the assessment of salary received by an individual, Brij Mohan, from a partnership firm. The partnership underwent several reconstitutions, with changes in profit-sharing ratios and allowances paid to partners over the years. The key contention was whether the increased allowance of Rs. 1,400 per month to Brij Mohan was to be considered as his individual income or as part of the income of the Hindu undivided family represented by him.

Issue 2: Business Decision or Income Diversion
The Tribunal had apportioned the allowance of Rs. 1,400 per month, treating Rs. 400 as individual income of Brij Mohan and adding the balance to the income of the Hindu undivided family. The High Court upheld this decision, stating that the increase in Brij Mohan's allowance was not justified by business requirements. However, the Supreme Court disagreed, emphasizing that the increase in allowance was a bona fide business decision, considering the growth in the firm's turnover and income. The Court held that the increase in allowance was not a front for diverting income from the Hindu undivided family.

Issue 3: Legal Principles and Precedents
The Supreme Court relied on legal principles established in previous judgments to determine the nature of the allowance received by Brij Mohan. Referring to the decision in Raj Kumar Singh Hukam Chandji v. CIT, the Court applied the test of whether the remuneration received was for services rendered by the individual or as a return on family investment in the business. The Court concluded that the allowance of Rs. 1,400 per month to Brij Mohan was for services rendered by him and not related to the family's investment.

Conclusion
In conclusion, the Supreme Court allowed the appeal, ruling in favor of the assessee and against the Revenue. The Court held that the allowance of Rs. 1,400 per month to Brij Mohan was for services rendered by him and should be treated as his individual income, not as part of the income of the Hindu undivided family. The judgment highlighted the importance of considering business decisions and the context of partnership arrangements in assessing individual income from a partnership firm.