COMMISSIONER OF INCOME TAX Vs. N DEENADAYALAN

JUDGEMENT

(1.) AT the instance of the Department, the Income-tax Appellate Tribunal has stated a case and referred the following common question of law for the assessment years 1979-80 and 1980-81 under section 256(1)of the Income-tax Act, 1961, for our opinion :

(2.) THE assessee is a Hindu undivided family. THE assessee filed returns for the assessment years 1979-80 and 1980-81 and the Income-tax Officer completed the assessments rejecting the claim of the assessee to treat the payment of salary paid to Deenadayalan, its karta, was not liable to be assessed in the hands of the assessee. THE claim of the assessee was that Deenadayalan was a partner in a firm as the karta of the Hindu undivided family, but looked after the business and for the services rendered by him in his individual capacity, the firm paid salary and the salary was paid by the firm for the exertion made by Deenadayalan for the business of the firm. THE Income-tax Officer noticed that there were four partners in V. A. A. Natarajan and Sons, viz., N. Rajasekaran, N. Deenadayalan, N. Gunasekaran and N. Sivaraj and all of them were partners representing the Hindu undivided family firm. THE firm called V. A. A. Natarajan and Sons was reconstituted with five partners and one N. Parameswari was taken in as a partner along with other original partners who were already there representing the Hindu undivided family respectively in the firm. THE Income-tax Officer found that the partners represented their Hindu undivided family and whatever the salary was paid to the karta would be the income of the joint Hindu undivided family and, therefore, the salary income paid to Deenadayalan was assessable in the assessment of the Hindu undivided family and in this view of the matter, he completed the assessment for the two assessment years in question.

(3.) IN CIT v. Shri Surendra Manilal Mehta [1985] 154 ITR 264, another Bench of this court held that the remuneration paid to the karta or a coparcener of a family by a firm in which the family is a partner cannot be assessed as the income of the family unless there is a direct nexus between the investment of the funds of the family in the firm and the payment of the salary. Applying the principles laid down by the two decisions of this court, we are of the opinion that there was no direct or immediate nexus or link at all between the investment of the funds by the family and the payment of salary to Deenadayalan. The salary was paid to Deenadayalan and it was paid without any detriment to the investment of the family funds in the firm. It is also relevant to notice that only because of the special skill or the personal exertion of Deenadayalan, the salary was paid to him and the salary was paid for his personal exertion in looking after the business of the firm and the salary was earned by him without detriment to the investment of the funds of the family and therefore, the salary income received by Deenadayalan has to be regarded as the individual income of the person who received it and cannot be regarded as income of the joint family. We are of the view that since the income was liable to be assessed in the individual hands of Deenadayalan, it is not liable to be assessed in the assessment of the Hindu undivided family, though he was a partner in the firm in a representative capacity. We therefore, hold that there is no infirmity in the order of the Appellate Tribunal in holding that it cannot be assessed as a part of the income of the Hindu undivided family. Accordingly, we answer the common question of law referred to us in the affirmative and against the Revenue. No costs.