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Issues Involved:
1. Whether the remuneration received by the partners should be treated as their individual income or as part of the income of their respective Hindu Undivided Families (HUFs). Detailed Analysis: 1. Background and Partnership Deed: The case involves a firm named K. Sobhanachalam & Sons, dealing primarily in hosiery goods. The partners are members of the same family, with the eldest being K. Sobhanachalam and his four sons. Originally, the first three sons were partners, and the younger two were admitted to the benefits of the partnership as minors. When the fourth son became a major, a new partnership deed was executed on 17-5-1978. Under this deed, the first four partners agreed to share losses equally, while the fifth partner, still a minor, had no share in losses but was entitled to 20% of the profits. Clause 3 of the deed stated that each partner, including the minor, contributed Rs. 10,000 towards the firm's capital. Clause 9 specified that the first three partners would receive Rs. 4,000 each per annum as remuneration for their personal skill and ability in making purchases and sales. 2. Income Tax Officer's (ITO) Decision: The ITO rejected the assessees' claim that the remuneration should be considered their individual income. The ITO held that the remuneration was a mode of adjustment in the share of the firm's income and should be treated as part of the total income of the firm, which has to be shared among the partners. The remuneration received by a coparcener was seen as a return made to the family because of the investment of family funds in the partnership business. 3. Appellate Assistant Commissioner's (AAC) Decision: On appeal, the AAC found that the remuneration was given to the partners for individual services rendered, as specified in the partnership deed, and was not related to the HUF investment. The AAC directed the deletion of the remuneration amounts from the taxable income of the respective HUFs and allowed the appeals. 4. Tribunal's Analysis: The Tribunal considered the revenue's appeal and the cross-objections filed by the assessees. The departmental representative argued that there could not be an employer-employee relationship between the firm and its partners, citing the Supreme Court's decision in CIT v. R.M. Chidambaram Pillai [1977] 106 ITR 292. However, the Tribunal found this argument irrelevant for the present case. The Tribunal noted that the remuneration was not connected to the investment of Rs. 10,000 by each HUF, as the amount of remuneration was disproportionate to the investment. The Tribunal also referred to the Supreme Court's decisions in V.D. Dhanwatey v. CIT [1968] 68 ITR 365 and M.D. Dhanwatey v. CIT [1968] 68 ITR 385, which held that remuneration received by a coparcener should be considered part of the profits derived by the HUF if there was a connection between the investment and the remuneration. However, in this case, the Tribunal found no such connection. The remuneration was given for the partners' business acumen and managerial skills, not for the investment made by their HUFs. 5. Supreme Court's Principles: The Tribunal also considered the principles laid down by the Supreme Court in Raj Kumar Singh Hukam Chandji v. CIT [1970] 78 ITR 33 and Prem Nath v. CIT [1970] 78 ITR 319. These cases distinguished between income received as a return on investment and income received as compensation for services rendered. The Tribunal concluded that the remuneration received by the partners was for their services and not related to the HUF investment. 6. Conclusion: The Tribunal upheld the AAC's decision, holding that the remuneration received by the partners should be treated as their individual income and not as part of the income of their respective HUFs. The appeals by the revenue were dismissed, and the cross-objections by the assessees were also dismissed as infructuous.
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