COMMISSIONER OF INCOME TAX Vs. SURENDRA MANILAL MEHTA

JUDGEMENT

(1.) THESE tax cases are dealt with together, as at the instance of the Revenue, a common question has been referred for the opinion of this court in all those cases, though the assessees, which are HUFs, and the assessment years, are different. While T.Cs. Nos. 3 to 7 of 1980 relate to a HUF, which is a partner in the firm of M/s. Bapalal and Company, represented by its karta, Sri Suresh B. Mehta, for the assessment years 1968-69 to 1972-73, T.Cs. Nos. 637 of 1978 and 638 of 1978 are concerned with another HUF, which is also a partner in the firm of M/s. Bapalal & Co., represented by its karta, Sri Surendra Manilal Mehta, in respect of the assessment years 1971-72 and 1972-73. For the assessment year 1968-69, though the assessee in T.Cs. Nos. 3 to 7 of 1980 originally declared a certain income, a revised return was subsequently filed showing a reduced income and claiming that the difference of Rs. 12,000 being the salary received by Shri Suresh B. Mehta in his individual capacity should be excluded in computing the income of the HUF. Similar claims were made for the assessment years 1969-70 to 1972-73. The ITO was of the opinion that the income of Rs. 12,000 was earned by the utilisation of the joint family funds and that the rendering of personal service by Shri Suresh B. Mehta to the firm would not in any way alter the character of the income. In this view, the amount of Rs. 12,000 was added back in each of the relevant assessment years. On appeal, the AAC took note of the recognition by the Government of India of Sri Suresh B. Mehta as one of the approved valuers and concluded that he had attained skill in valuing diamonds and precious stones for making which available to the firm by his services he was paid a salary and, therefore, the amounts received by him would be compensation for services rendered and cannot be treated as a return made to the HUF, because of the investment of its funds in the firm, M/s. Bapalal & Co. In computing the total income of the assessee-HUF, the salary paid to Sri Suresh B. Mehta was deleted. The Revenue appealed to the Tribunal contending that as the assessee initially had not treated the salary as belonging to the coparcener but as belonging to the HUF (the contention that), the payment of the salary was for special services rendered by the coparcener cannot be accepted and that in a business depending upon the skill of partner, the salary paid should not be only for services rendered but should be viewed as also relatable to the membership in the partnership in which the HUF had invested its capital. On behalf of the assessee, relying upon the terms of the deed of partnership, it was contended that payment of salary had been provided only in respect of four out of six partners indicating that such payment was only towards compensation for special services rendered by them which was something more than the ordinary services rendered as partners in the firm. Dealing with the appeals for the assessment years 1968-69 and 1969-70, the Tribunal took note of the provision for the payment of salary to four only out of six partners in the deed of partnership and the non-denial that the coparcener to whom the salary was paid had certain special skill and held that such payment of salary was only in respect of special skill exercised by the partner not because he was a partner, but as he was working in the business. Relying upon the principle enunciated by the Supreme Court in Rajkumar Singh Hukam Chandji v. CIT , the Tribunal concluded that the remuneration paid was in respect of services rendered by the coparcener and such receipt would not partake the character of income of the HUF for purposes of tax treatment. On this conclusion, the Tribunal dismissed the appeals. Following its earlier orders relating to the assessment years 1968-69 and 1969-70, the Tribunal dismissed the appeals preferred by the Revenue even in respect of the assessment years 1970-71 to 1972-73.

(2.) IN T.Cs. Nos. 637 of 1978 and 638 of 1978 relating to the assessment years 1971-72 and 1972-73, the salary received by one Shri Surendra Manilal Mehta from the firm of M/s. Bapalal & Co., in a sum of Rs. 12,000 every year was included by the ITO in the income of the assessee family in computing its income. On appeal to the AAC, he took the view that the question had been considered in the appeal preferred by another partner of the same firm, wherein it had been held that the remuneration received from the firm was not includible in the hands of the HUF and following the very same reasoning, directed the deletion of the salary received by Sri Surendra Manilal Mehta from the assessment of an HUF. On further appeal to the Tribunal, if followed its earlier order with reference to the assessee in T.Cs. Nos. 3 to 7 of 1980 regarding the assessment years 1968-69 and 1969-70 and dismissed the appeals.

(3.) IT may be recapitulated that in this case also there is no finding that the salary paid to the karta was in any manner related to the utilisation of the assets of the HUF in the partnership or was in the nature of a return made to the family because of its investment. In CIT v. Shah , a HUF through its karta was a partner in two firms and he was paid remuneration as a managing partner as he had rice experience in the line of business carried on by the two firms. No other partner was paid any salary, though other provisions were there in the deed of partnership with reference to the management of the business. On those facts, the Supreme Court held that there was no real or sufficient connection between the investment of the joint family fund and the remuneration paid and the remuneration was not earned on account of any detriment to the joint family assets and, therefore, the remuneration received form the two firms was not assessable as the income of his undivided Hindu family. This decision emphasises again the need for a nexus between the investment of the family funds in the business and the payment of remuneration by way of return to the family in order to constitute such income as that of the HUF. In Rajkumar Singh Hukam Chandji v. CIT , the managment of a company was carried on by a HUF consisting of three branches and that family was disrputed. The assessee was a branch of that family. There were further aquisitions of shares in the company and the shares which were more in the name of the assessee's family members and the shares which were more in the name of the assessee's family members and the subsequent acquisitions were all treated as the property of the assessee's family. The remuneration recived as the managing director of the company was claimed as assessable in his individual hands and not in the hands of the HUF. The Supreme Court laid down the principles applicable in such cases at page 43 as under :