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TMI Blog1977 (7) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... d two daughters, all children being minors. The HUF was a partner through its karta in the following four firms in the first two years and in five partnership firms for the subsequent years covered by the other reference as under : 1. M/s. H. K. Dave, Bhavnagar. 2. M/s. H. K. Dave, Morvi. 3. M/s. Dave Brothers, Bhavnagar. 4. M/s. Dinkar Brothers, Bhavnagar. 5. M/s. Deesawala Co. Besides shares in the partnership firms, the HUF's assessable income was in respect of the self-occupied property to the tune of Rs. 2,500 and there was also some income relating to dividends, interest, etc. The assessee's claim for remuneration for services rendered for looking after the interests of the HUF firms in the partnership firm which was advanced under the agreement in question dated October 30, 1965, was turned down by the ITO by relying on the settled ratio in the case of Jitmal Bhuramal v. CIT [1962] 44 ITR 887 (SC) and as there was no independent business of the HUF. In appeal, the AAC, however, agreed with the assessee's contention in view of the subsequent Supreme Court decision in the case of Jugal Kishore Baldeo Sahai v. CIT [1967] 63 ITR 238. The AAC, in terms observed in h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtnership firms were concerned, the HUF had no place and it was the karta who was everything. If this proposition is correct, then we fail to see as to how the HUF could exercise any control or management over the firms. If the karta was serving the partnerships, though in his representative capacities, he was serving entities, which were entirely different from the respondent-assessee before us. If the coparcener has no place in the partnership in which a member or its karta is a partner, then naturally the services rendered to the partnership cannot be termed as services rendered to the HUF. " Thereafter, the Tribunal observed that the AAC has misdirected himself in relying on the Jitmal ratio for holding that the services rendered by the karta in the present case were allowable on the ground that Jitmal's case [1962] 44 ITR 887 (SC), laid a clear guideline that if a member rendered services to certain partnership concerns, in which the HUF was a partner through him, such services rendered could not be termed as services rendered to the HUF. The AAC's attempt to superimpose the ratio of a subsequent decision was also commented upon by the Tribunal by observing as under : If t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome before us. At the outset we would refer to the relevant terms of the agreement and also point out the settled legal position in connection with the allowance of this remuneration paid for services rendered to the HUF firm for looking after its interest in other partnership firms. The agreement in question dated October 30, 1965, has been entered into between Shankerlal Harishanker Dave in his capacity as karta and managing member of a joint and undivided Hindu family consisting of himself, his wife, Shardaben, and his children, Pramod and two daughters, all minors; and the wife, Shardaben, and the three children, all minors, under the age of 18, by their mother and natural guardian, the said Shardaben, wife of the said Shankerlal Harishanker Dave, all of whom were treated as party of one part, and the said Shankerlal Harishanker Dave in his personal capacity, called " the said Shankerlal " of the other part. In the earlier preamble clauses, it is first stated that the party of the one part were the only members of a joint and undivided Hindu family of which the said Shankerlal was the karta and managing member and the said joint and undivided Hindu family was a partner in var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive from the party of the one part a sum of Rs. 24,000 per annum as and by way of remuneration from and out of the annual income of the said joint and undivided Hindu family in managing and looking after the affairs and interests of the said joint and undivided Hindu family in the said various businesses of the said joint and undivided Hindu family. 2. That the said remuneration of Rs. 24,000 per annum will be the sole separate and absolute property of the said Shankerlal in which none of the party of the one part shall have any right or claim whatsoever. 3. That the party of the one part and the said Shankerlal may by mutual consent increase or reduce the said remuneration of Rs. 24,000 per annum depending upon the annual income of the said joint and undivided Hindu family and other circumstances and such remuneration as may be fixed by mutual consent shall be payable by the party of the one part to the said Shankerlal. 4. It is hereby expressly agreed by and between the parties hereto that the said remuneration payable to the said Shankerlal will not and is not intended to cover any services rendered by him to the said businesses apart from whatever he is required to do fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of fact which was relied upon by the assessee made its case further more difficult. The legal principle was laid down by their Lordships that an HUF was allowed to deduct salaries paid to members of the family, if the payment is made as a matter of commercial or business expediency. But their Lordships emphasised that the services must be to the family. The decision in Dulichand Laxminarayan v. CIT [1956] 29 ITR 535 (SC) and in other cases had been followed and it was held by their Lordships that as under the partnership law a " person " contemplated must be a natural or artificial, i.e., legal person, and neither a firm nor an HUF can be that person, so, where an HUF became a partner through its karta, the coparcener had no place in the partnership but only the karta was everything, and, therefore, both under the Hindu law and under the law of partnership, the HUF as such could exercise no control and management over the business of a partnership, of which the coparcenary was a member through the karta. In view of the settled legal position, their Lordships laid down the crucial ratio as under (p. 890 of 44 ITR) : " All these cases show that if the junior members of the coparc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eason of his being a karta to manage all the businesses of the family without being entitled to any remuneration for the service of management. The High Court thought on the basis of the authoritative view of the commentators of Hindu law and the decisions of the courts that it would be anomalous to consider a karta who represented the family as being an employee of himself or being entitled to remuneration for acting as such and receiving payment from his own self. It had, therefore, held that the karta, Babu Ram, was not entitled to draw any remuneration even for carrying on business of the HUF, In appeal, however, their Lordships held at page 241, that the correct legal position was that the right to receive remuneration was negatived with some qualifications as, ordinarily, the karta was not entitled to remuneration. Their Lordships, therefore, held that it was necessary that before a karta receives remuneration, it should be under a valid agreement. In judging what was a valid or proper agreement which would justify the payment of remuneration to a karta of the HUF for managing the business of the family to be deductible as an expenditure under s. 10(2)(xv) of the I.T. Act, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision in CIT v. Jainarayan Jagannath [1945] 13 ITR 410, for evolving the principle that when such remuneration was paid, which was not excessive and was reasonable and it was not a device to escape income-tax but a legitimate deduction in computing profits of the business. Therefore, even that ground was negatived of there being any device when Babu Ram's remuneration was found to be commensurate with the services rendered by him to the HUF. Thereafter, their Lordships considered this crucial question when this alternative ground was urged that the remuneration was paid to Babu Ram not only to manage the HUF business carried on under the name of Jugal Kishore Baldeo Sahai bat also for those other partnership firms' business in which Babu Ram was a partner in his own name though representing the HUF. In that context, their Lordships distinguished Jitmal's ratio in terms pointing out that Jitmal's case [I962] 44 ITR 887 (SC) was a case where there was a finding of fact that two junior members of the HUF, Gulzarilal and Madanlal, were employed in the partnership business in which the karta of the family was a Partner and had rendered services to that business. Therefore, even though t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion which was widely drafted by using the word " business " was even held to mean that he was to manage the affairs of the HUF and also to look after the interests of the HUF in other businesses. Such remuneration was never intended to cover any services rendered to the partnership firm, but only for looking after and managing the affairs of the HUF. This decision, therefore, lays down distinctly two legal categories of services rendered to the HUF and to the partnership firms by the karta who enters such partnership firms in a representative capacity. If the remuneration to the karta under the agreement in question is not for the services to the partnership firms but it is for looking after the interests of the HUF, even in the partnership business, that would be a distinct legal category of services rendered to the HUF, because it was for managing the affairs of the HUF by looking after the interests of the HUF in those other partnership businesses, Therefore, the ratio of their Lordships does not depend upon the fact that in Jugal Kishore's case [1967] 63 ITR 238 (SC), the HUF had also some independent HUF business as well. The ratio evolved by their Lordships is to make a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nesses and it was not in any sense for services rendered to the partnership businesses. If in the light of the aforesaid settled legal position and the agreed term of the aforesaid agreement we consider the conclusion reached by the Tribunal, it would be obvious that the aforesaid settled legal position has completely been misunderstood by the Tribunal. The Tribunal righly set out at the outset the entire controversy in the present case which was not as to whether the salary paid to the karta of this HUF was excessive or not a bona fide one but the dispute was whether such remuneration was paid for any services rendered to the HUF at all because if that remuneration was in respect of the services Tendered to the HUF then certainly it was allowable. In that context, if we refer to the various reasons given by the Tribunal, which we have reproduced at the outset, the whole position will be amply clarified as to how the Tribunal has fallen into an error by misconstruing this foundation document of title to this remuneration and because the legal distinction evolved by their Lordships as to two categories of services, one to the partnership by looking after and managing the interests o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Tribunal is basically erroneous because their Lordships had repelled that very contention because of the wide word " business " used in the agreement in question in Jugal Kishore's case [1967] 63 ITR 238 (SC). Their Lordships,noted that when remuneration was paid to the karta, Babu Ram, for services rendered to the HUF in the shape of looking after the interests of the HUF in the other partnership businesses the remuneration was not for services to the partnership firms but for services rendered to the HUF by looking after and managing the interests of the HUF in those businesses. Therefore, this part of the entire conclusion of the Tribunal proceeds on the misconstruction of the true ratio in Jugal Kishore's case [1967] 63 ITR 238 (SC) and because the legal distinction made by their Lordships as to the two distinct concepts of services to the partnership and services to the HUF was not appreciated by the Tribunal, which led to the Tribunal misreading the present agreement, which was in almost the same terms as in Jugal Kishore's case [1967] 63 ITR 238 (SC). Next reasoning given by the Tribunal was that the AAC had misdirected himself in relying on Jitmal's [1962] 44 ITR 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he present case and as services rendered to the firm could not be termed as services rendered to the HUF no services were rendered by the karta to the HUF for which there was any necessity of remunerating him by giving the aforesaid remuneration to the tune of Rs. 24,000. This finding can never be characterised as a finding of fact when it has been based on the aforesaid misreading of the agreement in question which is almost in identical terms with that in Jugal Kishore's case [1967] 63 ITR 238 (SC) when the Tribunal has not appreciated the categorical distinction laid down by their Lordships in Jugal Kishore's case [1967] 63 ITR 238 (SC) for distinguishing Jitmal ratio by allowing the claim of the karta for remuneration for services to the HUF in the shape of looking after and managing the interests of the HUF in the partnership businesses. The category of this finding is not one of finding of fact but of a mixed question of fact and law which is vitiated by the basic error of law pervading throughout the reasoning of the Tribunal on a complete misconception of the binding ratio laid down in Jugal Kishore's case [1967] 63 ITR 238 (SC). This being the only controversy as to the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds any elaboration but as the learned standing counsel bid vehemently relied on this question in a number of cases, we would point out the settled legal position in the matter. In CIT v. S. P. Jain [1973] 87 ITR 370 (SC), at page 381, their Lordships pointed out that it is true that on the question about the finding being perverse which was raised in the application under s. 66(2) in the form of question No. 3 the Tribunal was not asked to state the case, because the High Court thought that questions Nos. 2 and 3 would cover the scope and ambit of this question No. 3 as to the finding being perverse having regard to the evidence on the record. Their Lordships, however, went into this larger question, in what circumstances could the High Court and the Supreme Court have always the jurisdiction to intervene by interfering with the finding given by the Tribunal or by arriving at a conclusion different from that arrived at by the Tribunal. At page 381, their Lordships held : " In our view the High Court and this court have always the jurisdiction to intervene if it appears that either the Tribunal has misunderstood the statutory language, because the proper construction of the stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... universally conceded that, though it is a pure finding of fact, it may be set aside on grounds which have been stated in various ways but are, I think, fairly summarised by saying that the court should take that course if it appears that the Commissioners have acted without any evidence or upon a view of the facts which could not reasonably be entertained. It is for this reason that I thought it right to set out the whole of the facts as they were found by the Commissioners in this case. For, having set them out and having read and re-read them with every desire to support the determination if it can reasonably be supported, I find myself quite unable to do so. The primary facts, as they are sometimes called, do not, in my opinion, justify the inference or conclusion which the Commissioners have drawn : not only do they not justify it but they lead irresistibly to the opposite inference or conclusion. It is, therefore, a case in which, whether it be said of the Commissioners that their finding is perverse or that they have misdirected themselves in law by a misunderstanding of the statutory language or otherwise, their determination cannot stand. " It is true, their Lordships po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the two different approaches of Lord Radcliffe and Viscount Simonds, and their Lordships held in [1959] 35 ITR 594, 604 (SC) that in effect this decision of the House of Lords in Edwards V. Bairstow [1955] 28 ITR 579 was not inconsistent with the view which had been taken by their Lordships because, as shown by them, to avoid confusion or unnecessary complications it would be safer and more convenient to describe the question about the character of the transaction in the context as a question of mixed law and fact as distinct from one of fact, because that involved appliction of legal principles which was an essential part in reaching the said conclusion and was undoubtedly a matter of law and if there had been an error in the application of those principles, it could be challenged as error of law. Therefore, these two cases of findings on mixed question of law and facts or on a pure question of law as to the construction of a statute or a document of title would always have to be distinguished from the third type of cases of pure finding of fact which operate as a bar to the High Court going into that question without an express reference, challenging first the said finding as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as right in law in disallowing the remuneration paid by the HUF to the karta, Shri Shankerlal H. Dave, for the assessment years in question. The width of the question itself reveals that it was a question of law which had arisen and which was referred and which arose because the legal character of the services had to be properly appreciated which would allow the person concerned to earn remuneration in question. The second question raised by the learned standing counsel was that the finding of the Tribunal was justified on evidence and it was a reasonable possible view, would also not be tenable because that contention is also based on the same misconception that this was a pure finding of fact, which could only be challenged on the ground of its perversity as being not sustainable on the evidence on record. The finding being on mixed question of law is attacked on the ground of its basic error in law in not making the crucial distinction between the two settled categories of services. In that context, as earlier pointed out, it was immaterial whether the HUF had any independent business of its own other than these partnership businesses where the karta was acting in his represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness would be chargeable under this section though he may carry on the business not personally but through a manager or other servant or agent who is remunerated by a share of profits or otherwise. The tax is leviable on the person to whom the profits accrue or by whom the profits are received. No tax can be levied on a benamidar in whose name the business transactions are effected and who is not really entitled to the profits. This settled legal position clearly emerges from this relevant scheme. The learned standing counsel marshalled in aid the decision in Saifudin Alimohomed v. CIT [1954] 25 ITR 237 by the Bombay High Court. It was in the context of the business which was run by two guardians appointed by the court for the two minor daughters of the deceased Mahomedan. The question had arisen as to whether the guardian can be assessed in respect of this business income as an association of persons under s. 40 as the guardians ran business; on behalf of the minors. In that context, their Lordships held that under s. 10, unlike s. 9, it was the person who had Carried on business who was liable to pay tax. Therefore, what was emphasised was not the ownership of the business bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncapacity to carry on business or that the HUF looking after and managing its share in various businesses could not be said to be carrying on business activity because it does not carry on that activity in its personal capacity but only through a representative person like a karta or other family member, for complying with the provisions of the Partnership Act. The learned Advocate-General rightly relied upon the decision of the Bombay High Court in CIT v. Hind Commission Agents [1963] 48 ITR 615 in this connection. In that case, the assessee-firm was appointed by the Hindustan Sugar Mills as their selling agents and the assessee-firm appointed several sub-agents and brokers and requested the sugar mill to give instructions to other agents for delivery. The firm held itself responsible for any loss sustained by the sugar mill for the non-fulfilment of any contract or non-realisation of money in respect of goods sold through the sub-agents and the brokers. The registration of the firm was refused under s. 28A both on the ground that this was a mere device of diverting a part of the selling commission and also on the material ground that the assessee did not carry on business activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it would not become a partner, actually participating in the business of the partnership firm. That is why it has to act through its representative but that does not change the legal character of the business activity being indulged in by the HUF when there was no prohibition whatever under the Hindu law or under the general law against the HUF undertaking in any such business activity, of course, through such representative so as to conform to the provisions of the Partnership Act. This legal position is completely well settled as their Lordships in a number of decisions have examined this aspect of the case by going through the impact of the various branches of law, Hindu law, Partnership Act and Income-tax Act and other provisions of the Companies Act. In Firm Bhagat Ram Mohanlal v. Commr. of EPT [1956] 29 ITR 521 (SC), a question had arisen before their Lordships as the Excess Profits Tax Officer set off the profits of the firm for the year ending 1943-44 and for the year ending 1944-45 under s. 7 of the Excess Profits Tax Act and directed refund of the excess profits tax. The partnership in that case consisted of a karta of the HUF, B and C, their shares being respectively 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his position with that of Chhotalal and Bansilal being also partners in the firm in their individual capacity, which could only be in respect of separate or divided property. It was pointed out by their Lordships that if the members of a coparcenary were to be regarded as having become partners in a firm with strangers, they would also become under the partnership law partners inter se, and it would cut at the very root of the notion of a joint undivided family to hold that with reference to coparcenary properties, the members can at the same time be both coparceners and partners. Therefore, even where the karta of a joint Hindu family enters into partnership, it is the HUF entering into partnership in a representative capacity and, therefore, its reality had to be taken into account by holding that with reference to the coparcenary property, members could not be at the same time both coparceners and partners. Their Lordships had also held that when the karta enters into partnership with strangers, the members would not ipso facto become partners in the firm. They had no right to take part in its management or to sue for its dissolution. The creditors of the firm would no doubt be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtnership was likely to have a precarious existence. In that context, it was mentioned by their Lordships that the assumption in s. 4(3) of the Companies Act that a Hindu joint family could be a partner in a partnership appeared to be based on an erroneous view of the law because the HUF as such could not enter into the partnership. Thereafter, their Lordships considered the entire legal position as to what happens when the HUF enters into such partnership business through its individual members or the karta, whether in the individual capacity or in the representative capacity. The aforesaid observations in Bhagat Ram's case [1956] 29 ITR 521(SC) were specifically referred to. The other decisions were also relied upon and the dual position of the family member entering into such partnership which was considered in the case of CIT v. Bagyalakshmi Co. [1965] 55 ITR 660 (SC) was also referred to. In such cases, the person who enters into partnership on behalf of the HUF occupies a dual position qua the partnership, he functions in his personal capacity. The third parties whom one of the partners represented could not enforce their rights against the other partners nor can the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disputed that a person need not carry on business himself personally, but he can carry on business through agents and managers or representatives, it could never be urged that the HUF carrying on business in representative capacity forming such partnership was not carrying on business activity. That is why, their Lordships never went into this question and sub silentio the decision in Jugal Kishore's case [1967] 63 ITR 238 (SC) was reached, allowing the claim for deduction of a remuneration to the karta for services rendered to the HUF itself and not to the partnership firms by way of looking after the business interest of the HUF in these firms. The net of the income-tax law is to rope in real business profits. Therefore, their Lordships were at great pains to point out that this was not in any manner a device so long as remuneration claimed was a bona fide claim and was not an excessive one as it was genuine business expenditure justified by commercial expediency, when the HUF paid its member for looking after and managing its interest even in the partnership business. Therefore, even this third contention raised by the learned standing counsel is wholly misconceived in view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equently, an expenditure deductible under s. 10(2)(xv) of the Act. It was pointed out that Babu Ram and Gordhandas could certainly enter into this agreement and the two minor sons of Babu Ram and Gordhandas could certainly be represented by Babu Ram himself and Gordhandas. It was pointed out that in any event Babu Ram being the karta could represent them under that agreement. The fact that under the agreement some payment was to be made out of the income of the family to Babu Ram so as to become his separate property would not invalidate the agreement, merely because Babu Ram represented some of the minors on whose behalf the agreement was made. Once the agreement was held to be in the interest of the family, the agreement would not be invalidated when executed on behalf of the minors by the person authorised to act on their behalf simply because the minors happened to be represented by a person who receives some benefit under the agreement. Their Lordships held that the test of the validity of an agreement on behalf of a minor was that it should be for the benefit of the minor, and, in this case, there was no finding that the agreement entered into on behalf of the HUF including t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere could not be a contract of service, in strict law, between a firm and one of its partners. So that, any agreement for the remuneration of a partner for taking part in the conduct of the business must be regarded as portion of the profits being made as a reward for the human capital brought in. Sections 13 and 16(1)(b) of the Partnership Act were referred to as fitting into this understanding of the law behind the law. The very scheme of the Act with special reference to ss. 10(4)(b) and 16(1)(b) was relied upon, which designated employee's salary as profits, where the servant is none other than a partner, i.e., co-owner of the business. It was held to disclose the rationale of the relevant provisions, and which would thereby furnish a key to the solution of the problem before their Lordships. The necessary inference from the premises that partnership is only a collection of separate persons and not a legal person in itself was of the further conclusion that the salary stipulated to be paid to the partner from the firm was in reality only a mode of division of the firm's profits, because no person could be his own servant in law as the contract of service postulated two differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... principles of Hindu law, the true principle underlying the claim of such deduction under the relevant provisions of the I.T. Act and the nature of such payment having all been duly considered and when this pertinent question, as to whether this was a claim of remuneration for being an employee of one's self or for receiving payment from one's self, itself had been duly considered by their Lordships, this binding decision could never be departed from by us. In fact, even for a concurrent court their Lordships held in Smt. Somawanti v. State of Punjab [1963] 33 Comp Cas 745, 757; AIR 1963 SC 151, 160, that the binding effect of a decision does not depend upon whether a particular argument was considered therein or not, provided the point with reference to which an argument was subsequently advanced was actually decided. In that case, the Supreme Court held that the earlier decisions had negatived the attack based on the ground of art. 19(1)(f) and so it refused to have the question reopened on the ground that the particular argument had not been advanced on the earlier occasion. This view was reiterated in T. Govindaraja Mudaliar v. State of Tamil Nadu, AIR 1973 SC 974, by pointing o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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