1997 (10) TMI 4 - SC - Income Tax

Salary paid to partners of firm - Whether the Tribunal was justified in law in holding that the salary could not be assessed in the hands of the Hindu undivided family - Held, yes

Summary

Issues:
- Interpretation of law regarding assessment of salary received by a member of a Hindu undivided family (HUF) in a partnership firm.
- Conflict between different judgments of the Supreme Court on the treatment of salary income in the hands of HUF.
- Application of rule 24 of the Indian Income-tax Rules in determining the taxability of salary paid to a partner in a partnership firm engaged in agricultural activities.

Analysis:
The case involved a question of law regarding the assessment of salary received by a member of a Hindu undivided family (HUF) in a partnership firm. The Tribunal rejected the application under section 256(1) of the Income-tax Act, and the Revenue subsequently appealed to the High Court, which also rejected the application. The Revenue then appealed to the Supreme Court, seeking clarity on whether the salary could be assessed in the hands of the HUF.

The Supreme Court referred to established legal principles that if a member of an HUF receives a salary for managing or providing special services to a partnership firm, that salary is considered the individual income of the member. However, if the salary is a return on investments made by the HUF in the partnership firm, it should be added to the income of the HUF. The Court cited previous judgments to support this principle, including the cases of Raj Kumar Singh Hukam Chandji v. CIT and Prem Nath v. CIT. The High Court referred to the case of CIT v. R. M. Chidambaram Pillai, suggesting a conflict with the earlier judgments.

The Supreme Court clarified that there was no conflict between the judgments cited. It explained that the case of R. M. Chidambaram Pillai dealt with whether a salary paid to a partner in an agricultural partnership firm should be treated as agricultural income. The Court held that if a portion of the partnership income is given to a partner for services, that share of income retains the character of the firm's profits. Applying rule 24 of the Indian Income-tax Rules, the Court determined that 60% of the salary paid to a partner should be assessed as agricultural income, while 40% would be taxed under the Income-tax Act.

The Appellate Assistant Commissioner and the Tribunal had both held that the salary received by the managing partners individually for their services should not be assessed in the hands of the HUF. The Tribunal's decision was upheld on the basis that the salary was paid for services rendered by the partners to the firm. Consequently, the Supreme Court dismissed the appeals, stating that the Tribunal had made the correct decision based on the factual findings. No costs were awarded in the case.