DHANWATAY M D Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) ON requisition made by this Court under Sub -S. (2) of S. 66 of the Indian IT Act (hereinafter referred to as the Act), the Tribunal, Bombay, has submitted a statement of the case and referred to this Court the following question of law arising out of its appellate order :

(2.) THE assessee before us is an HUF of which Shri M. D. Dhanwatay (hereinafter referred to as Marotirao), is a Karta. The assessment years is 1954 -55, the relevant accounting period being the years ended September 30, 1953. The facts in brief are : Marotirao was a partner in the partnership concern which carried on business under the name and style of M/s Shivraj Fine Art Litho Works. The share capital contributed by Marotirao was entirely contributed by the HUF (hereinafter referred to as the assessee) of which he was a Karta. The rights of the partners inter se were at the relevant time governed by the partnership agreement which according to the statement of the case is annexure "A" to the statement. However, it appears that annexure "A" which has been incorporated in the statement of the case is not a deed of partnership but a deed amending certain clauses of the deed of partnership wherein the remuneration paid to each partner has been altered. The deed of partnership dated April 1, 1951, which governed the rights of the partner has been filed on record by Mr. Joshi, counsel for the Department. Mr. Bobde admits it to be a true copy of the deed of partnership and it has been agreed between the parties that it should be accepted on record as part of the statement of the case. We direct so. The business done by the partnership is of lithography and art printing and is carried on by means of a press under the name and style of the Shivraj Fine Litho Works. It is a partnership for a period of 10 years. The total capital is Rs. 10,50,000. It may be stated that the partnership consists of Dhanwatays. Clause (4) of the partnership deed enumerates various capital contributions of the partners. The share contribution of Marotirao is shown as Rs. 1,96,875. As already stated, the said sum belonged to the HUF. Clause (5) provides payment of interest at a certain rate to the partners on the share contribution. Clause (6) relates to the bankers of the business. Clause (7) provides that general management and supervision of the partnership business shall be in the hands of Vasantrao, one of the partners. Clause (8) provides that Marotirao Dattaji Dhanwatay shall be the manager in charge of the works and both he and Vasantrao Dhanwatay shall have power to make contracts, arrange terms with constituents or customers. Clause (9) enumerates duties which Shamrao Dattaji Dhanwatay, another partner, has to perform. Clause (10) empowers three partners, viz., Vasantrao, Marotirao and Shamrao, to appoint such person or persons on such salary as they deem fit for carrying on the work of the partnership and delegate to them such powers as they think proper. As regards cls. (11), (12), (13) and (14) it is not necessary to go into details of these clauses. Clause (15) provides that the various adult members of the partnership shall devote their whole time and attention to the partnership in the sphere of their respective duties. Clause (16) is the material clause and provides various amounts which are paid by way of remuneration to the partners mentioned therein, and further provides that these amounts of remuneration paid to the various partners will be paid to them out of the gross earnings of the partnership business. The remuneration provided to be paid to Marotirao in cl. (16) is Rs. 1,250 per month. In the relevant accounting period in pursuance of this cl. (16) Marotirao had been paid a sum of Rs. 7,500 and the question that arises in this case is whether the said sum which is paid to Marotirao under the said clause can be included in the income of the assessee. In the return filed by the assessee, the salary of Rs. 7,500 received by Marotirao from the firm was show in S. D of the return and it was contended by the assessee before the ITO that the salary received by Marotirao, the Karta of the assessee family, was received by him in his individual capacity and hence it was not taxable in the hands of the assessee. This contention raised on behalf of the assessee was not accepted by the ITO. The ITO found as a fact that the assessee of which Marotirao was the Karta was a partner in the partnership concern of Shivraj Fine Act., Litho Works, that Marotirao represented the assessee in the firm, that the funds contributed in the partnership belonged to the assessee, the salary paid to Marotirao was paid to him in the status of a partner and that there was no evidence to show that Marotirao rendered services to the partnership in his individual capacity. It was also found that what was paid to Marotirao in the form of salary was only for the purpose of adjustment of the rights inter se between the partners, and therefore, it was not open to the assessee to split up the share income from the firm in the manner suggested. The assessee took an appeal to the AAC but on the same line of reasoning the contention had been rejected. The assessee took the matter further in second appeal to the Tribunal. The contentions raised before the Tribunal were two -fold. In the first instance, the assessee contended that the said amount of Rs. 7,500 was the earning of Marotirao in his individual capacity and, therefore, it did not belong to the assessee and ought to be excluded from the total income. The Tribunal affirmed the view taken by the IT authorities that the said amount was not paid to him for the services rendered individually but it was part of the profits earned by him as a partner in the firm since the agreement of partnership provided remuneration to the partners who rendered service to the firm in carrying on its business.

(3.) IN our opinion, the answer to the question is afforded by the principle deducible from the two decision of the Supreme Court in CIT vs. Kalu Babu Lal Chand (supra), on which reliance is placed by Mr. Joshi and Piyare Lal Adishwar Lal vs. CIT (supra), on which reliance is placed by Mr. Bobde. The facts in Kalu Babu's case were : R, the Karta of an HUF, was one of the promoters of a company to be floated, took over a business as a going concern and carried on the business on behalf of the company until it was incorporated in December 1930. The articles of association of the company provided that R would be the first managing director and specified his remuneration. The question was whether the remuneration received by R for the work of the managing director was the income of the HUF of which R was the Karta or was his personal earning. The facts found by the Tribunal were that the shares held in the name of R and his brother were acquired with the fund belonging to the joint family and the family was in enjoyment of dividend paid on these shares. It was also found that the company was floated with the funds provided by the family and R made no contribution in this respect. The company was all along financed by the family. Prior to the accounting year relevant to the asst. year 1943 -44 the managing director's remuneration received by R was credited in the books of the family. In the asst. year 1943 -44 for the first time it was claimed that the whole of the managing director's remuneration constituted the personal earnings of R and should not be added to the income of the family. Their Lordships held that the managing director's remuneration received by R was, as between him and the HUF, the income of the family and should be assessed in its hands. Their Lordships also considered when a Karta of the HUF joins a partnership with the aid of funds of the HUF. In considering this question their Lordships observed (1969)37 ITR 123 :