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TMI Blog1966 (3) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... Nath, karta of the assessee-Hindu undivided family, for services rendered to the firm of Messrs. K. C. Raj and Company and the sub-partnership of Messrs. Kishan Lal in which he is a partner representing the interests of the assessee-Hindu undivided family, was rightly included in the total income of the assessee-Hindu undivided family?" Shri Prem Nath (Hindu undivided family), hereinafter for convenience referred to as the assessee, is a Hindu undivided family represented by its karta, Prem Nath. The said Prem Nath representing the interest of the assessee became a partner in the firm styled as Messrs. K. C. Raj and Company. He was also a partner in the sub-partnership styled as Messrs.Kishan Lal. Clause 7 of the partnership agreement constituting the firm of Messrs. K. C. Raj and Company entered into between Messrs. Kishan Lal Prem Nath, Balkishan and Smt. Ram Piari provides---" The working partners shall be entitled to charge an allowance of Rs. 750 per month each which shall be considered as business expenditure." In pursuance of this clause in the instrument of partnership, the three partners, except Smt. Ram Piari, have been drawing Rs. 750 per month each as remuneration, cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a legal attribute of the gains in question, and a presumption in favour of detriment to the patrimony involved in acquiring the specialised learning, the use of which has produced the gain, which is a question of fact, but, in their Lordships' opinion, if it is in general incumbent upon the joint family member to prove that his case is an exception to the prevailing rule of partibility it is also incumbent upon him to prove the particular facts which are needed to establish the exception." In the later part of the judgment, it is said : " Then, can it be said that the gains, which are partible, are such as result only directly from the use of joint family funds, and that emoluments, which are the consideration for the personal services of an official selected for his special personal qualifications, result remotely only and too remotely from any family outlay ? Not only is no authority forthcoming for the first part of this contention, but the contrary has been continuously assumed in all the cases which turn on ' gains of science '. The point of all of them is that persons qualified for earning money by specialised education, enjoyed to the detriment of family funds, become, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered a demise at the hands of the legislature in the year 1930, when the Hindu Gains of Learning Act, 1930 (Act No. XXX of 1930), was passed, which provided that no gains of learning shall be held not to be the exclusive or separate property of the acquirer, merely by reason of his learning having been imparted to him by any member of his family or with the aid of the joint funds of his family or with the aid of the funds of any member thereof, or by reason of the fact that while such member was acquiring his learning, he had been maintained or supported, wholly or in part, by the joint funds of his family or by the funds of any member thereof. This dent was, however, not deep enough to destroy the principle that the income of a member of a joint family would be impartible only if obtained by his own exertions and without any detriment to the father's estate, that is, without the aid of joint family property, and that such earning would be joint if earned at the expense of the joint family property. It was in this state of law that a similar question arose before the Patna High Court in Indra Singh v. Commissioner of Income-tax. In that case, the amount was the remuneration earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f which he was the karta, because no part of the family funds was spent or utilised for earning the remuneration and the fact that family funds were utilised for acquiring the qualification shares did not constitute such detriment to the family property as to make the said remuneration partible. The matter was considered by the Supreme Court for the first time in Kalu Babu Lal Chand's case. In that case, a company was floated with the funds provided by a joint family and the managing director acquired qualification shares also with the funds belonging to the family. The Supreme Court held that the remuneration received by the managing director was assessable as the income of the joint family. It was observed that : " Here was the Hindu undivided family of which B. K. Rohatgi was the karta. It became interested in the concern then carried on by Milkhi Ram and others under the name of India Electric Works. The karta was one of the promoters of the company which he floated with a view to take over the India Electric Works as a going concern. In anticipation of the incorporation of that company, the karta of the family took over the concern, carried it on and supplied the finance at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that his appointment was the result of any outlay or expenditure of or detriment to the family property and, therefore, the salary paid to the treasurer belonged to and was assessable as his individual income and not as the income of the family. Giving of joint family property in security for the good conduct of the treasurer was held not to constitute any detriment to the family property or risk of loss within the meaning of the term as used in the various decided cases so as to make his income partible. Dealing with Kalu Babu Lal Chand's case, the Supreme Court said : "That case is distinguishable. There the karta of a Hindu undivided family took over a business as a going concern and carried on the business till the company was incorporated. The shares in the name of the karta and his brother were acquired with the funds of the joint family. The company was floated with the funds of the joint family and was financed by it and the remuneration received was credited in the books of the family. The office of the managing director itself was assignable. The articles of association provided that the karta or his assigns or successors in business whether under his name or any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r business, the allowance received by him was directly related to the investment of the family funds in the partnership business and, therefore, taxable as income of the family. Dealing with Piyare Lal Adishwar Lal's case, it was observed that : "We see no analogy between a case in which the property of the Hindu undivided family is sought to be encumbered for obtaining a benefit which is essentially personal to the manager, and a case in which with the aid of the family funds the manager of the family is able to enter into a partnership and to earn allowance, which he would not otherwise have been entitled to receive." Another contention raised before the Supreme Court was that Mathura Prasad earned the allowance because of the special aptitude he possessed for managing the particular branch of business and was not earned by the use of joint family funds. The Supreme Court declined to go into that question on the ground that no such contention was raised before the High Court. It is necessary to recur for a moment to Kalu Babu Lal Chand's case, and to see the treatment accorded to the two decisions of the Patna High Court and the decision of the Madras High Court in Sankaralinga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the High Court decided the question in disregard of the principle that if the family funds qualified the member to earn that remuneration, the same would be taxable in the hands of the family, even though earned by the member for services rendered by him. Consequently, I am unable to hold that the Supreme Court intended to lay down that the said amount should have been taxed in the hands of the family at all events and no amount of circumstances could have admitted of any exception. As I read the decision in Kalu Babu Lal Chand's case, therefore, I am of the opinion that there is no rigid rule of law one way or the other and the enquiry to be directed in all cases is to find out whether the income was earned by a member to the detriment of the family funds and it is immaterial whether the use of family funds was direct or indirect. In other words, if the use of family funds is direct in the sense that the income directly arises from the investment of the family funds, it would be the income of the family, and, similarly, where the family funds qualify a member to earn that income and, therefore, the use of funds is remote or indirect, even then the income will belong to the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the post. Similarly, in Mathura Prasad's case, the decision was based on a finding that the member was able to enter into a partnership because of the family funds and he would not have earned the allowances if he had not entered into the partnership. In other words, it was decided that the member earned the remuneration because he was a partner and he would not have earned it otherwise. It is significant that the Supreme Court declined to go into the suggestion that Mathura Prasad was appointed because of the special aptitude he possessed for managing the particular branch of business as the point had not been raised. If there had existed no exception, the Supreme Court would have answered the suggestion by saying that that question could not arise at all. Mayne on Hindu Law and Usage, eleventh edition, at page 354, refers to Jimutavahana as laying down that : " Where it is attempted to reduce a separate acquisition into common property on the ground that it was obtained with the aid of common property, it must be shown that the joint stock was used for the express purpose of gain. ' It becomes not common, merely because property may have been used for food or other necessaries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... qualified civil engineer. Such a firm takes a contract for execution of certain works and all the partners do some work or other in this connection every day and are paid for the same. The qualified engineer partner says to the other partners : " You have employed an engineer to do overtime work at night, for which you pay him Rs. 2,000 a month. I am as qualified as he is, and if you pay me half of that remuneration I will do that overtime work. " And the other partners agree. In such circumstances, it may be possible for that engineer partner to show that " this income is entirely the result of my personal exertion and it cannot be said that I would not have earned this amount if I were not a partner ". In such a case, I think, the presumption in favour of partibility may possibly be rebutted. Of course, it would be a question of fact to be decided in each case and all that I say is that exceptions cannot be completely ruled out. Again, a member may be appointed to do a particular job not because he is a partner but because of the special aptitude possessed by him to do the job. I cannot understand why, in such circumstances, such a partner cannot say that " my income is not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h as the furnishing of security was not the sole or the main reason for being appointed a treasurer. The Madras High Court was again faced with a similar problem in Commissioner of Income-tax v. Palaniappa Chettiar, and it was held that the character of income has to be determined taking into account the basic foundation from which it emanates and if the income is traceable to the family property, it must partake of the joint family character. The learned judges, however, thought that they were not concerned to consider as to what would result where the detriment to the family funds was trifling or unsubstantial ; the question whether an acquisition was made to the detriment of the family estate, being largely a question of fact. Considering the facts, the learned judges thought that the root cause of the member's income was certainly his share position and, therefore, a dichotomy between the earning by the managing director as remuneration for services and as dividends on shares was not possible. There again the decision turned on the finding that the investment in shares was the root cause of the ultimate income. There then remains to consider a decision of the Mysore High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s appear to have ever been alleged to rebut the presumption so prominently brought out by the judicial Committee in Amar Nath's case. Mr. Bajaj then says, " Look at the question referred " which shows that it was assumed that the remuneration was for services rendered. That, however, does not improve the position so far as the assessee is concerned, in view of what I have said above, namely, that there is a presumption in such a case of the income being partible, even if earned in consideration of services rendered. The exception, as contemplated by me in the discussion above, has not been either alleged or proved. As a matter of fact, the perusal of clause 7 of the partnership agreement, referred to by me already, shows that it was intended to operate merely as a removal of the bar to a partner receiving remuneration, as provided in section 13(a) of the Indian Partnership Act. I think the case squarely falls within the rule laid down by the Supreme Court in Mathura Prasad's case, and the answer must be in the affirmative, that is, in favour of the revenue. The Commissioner will have the costs in this court, which I fix at Rs. 250. A. N. GROVER J.---I agree. S. S. DULAT J.---I a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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