Appeals Nos 817 and 818 of 1966
Appeals by special leave from the judgment and order dated January 19 1965 of the Mysore High Court in ITRC No 1 of 1964
Niren De Attorney General section C Manchanda and R N Sach they for the appellant
597 M C Chagla Sharad J Mhaispurkar O P Malhotra and O C Mathur for the respondent
The Judgment of the Court was delivered by Ramaswami J
The respondent is a Hindu Undivided Family hereinafter called the assessee of which Shri D C Shah is the karta
The assessment years are 1959 60 and 1960 61 and the relevant accounting periods are Samvat years 2014 and 2015
The assessee through its karta Shri D C Shah was a partner in the firms of 1 Ms C U Shah and Co and 2 Ms Oriental Can Manufacturing Co as per terms and conditions set out in the Instruments of Partnership dated 5 6 1961 and 11 9 1957
Shri D C Shah was paid a remuneration of Rs 12000 per 1 year for both the assessment years by Ms C U Shah and Company
He was paid Rs 10000 for the assessment year 1959 60 by the Oriental Can Manufacturing Company
The amounts received by Shri D C Shah were shown by the assessee in its returns of income along with balance of the share income from the aforesaid firms
The Income Tax Officer in assessing the Hindu Undivided Family included the remuneration received by Shri D C Shah as a part of the share income from the respective firms
Before the Appellate Assistant Commissioner the assessee contended that remuneration received by Shri D C Shah was his personal income and the amounts were wrongly shown in the returns of the  Hindu Undivided Family as its income and should not have been included in the assessment
In so contending the assessee relied on clauses 8 9 and 10 of the Instrument of Partnership dated 5 6 1961 by which the firm of Ms C U Shah and Company was constituted
The assessee also relied on clauses 14 15 and 16 of the Instrument of Partnership dated 11 9 1957 by which the firm of Ms Oriental Can Manufacturing Company was constituted
Clauses 8 9 and 10 of the Instrument of Partnership dated 5 6 1961 are to the following effect 8
The partner No 1 Shri D C Shah who has been managing the business of this firm shall hereinafter also continue to act as Managing partner for conducting the said business free from any interference of other partners of whatsoever nature
The said Managing partner shall manage direct appoint andor remove any one of the employees andor do all other things which include right to draw cheques to make deliver and accept documents either legal or commercial in respect of the partnership business as may be deemed necessary for effectively carrying on the partnership business
The said Managing partner shall be paid Rs 1000 Rupees one thousand only per month in addition to all other benefits that he is entitled to enjoy as a partner of the firm
588 9
The said Managing partner shall continue to be the Managing Partner for his life time or his retirement whichever is earlier
All other partners shall devote as much time to the furtherance of the partnership business as they think proper
necessary and a visable
Clauses 1415 and 16 of the Instrument of Partnership dated 11 9 1957 are to the following effect  14
The partner No 2 shall be the Managing Partner for conducting the said business free
from any interference of whatsoever nature by others
The said Managing Partner shall manage carry direct appoint andor remove any of the employees andor Agent and do all other things as may be deemed necessary for effectively carrying on the Partnership business
The said Managing Partner shall be entitled in addition to all other benefits to a monthly remuneration of Rs 2000 Rupees two thousand only
The Partner No 2 shall continue to be the Managing Partner for his lifetime or retirement
In the event of Partner No 2 s demise or retirement whichever is earlier the Partner No 1 shall then act and perform duties and functions of Managing Partner
In the event of the demise or retirement of Partner No 1 the Managing Partner shall be appointed by the remaining partners or their legal representatives as the case may be 16
Partner No 3 shall be responsible for the duties and functions to be performed under the direction of No 2 the Managing Partner
In the event of failure on the part of No 3 to perform duties and functions or otherwise entrusted by No 2 the Managing Partner the matter shall be referred to No 2 and his decision shall be binding on No 3
The Appellate Assistant Commissioner accepted the contention of the assessee and held that the remuneration paid and re ceived by Shri D C Shah should be deleted from the assessment of the assessee
The Income Tax Officer thereafter preferred appeals to the Income Tax Tribunal which set aside the order of the Appellate Assistant Commissioner and held that the remuneration paid should be included in the total income of the assessee
At the instance of the assessee the Income Tax Appellate Tribunal stated a case to the High Court on the following question of law  Whether on the facts and in the circumstances of the ease
 was the salary received by D C Shah from the 589 two firms of Ms C U Shah  Co and Ms Oriental Can Manufacturing Co includible in the assessment of the HUF of which Shri D C Shah was the Karta The High Court relying upon its earlier decision in Gurunath V Dhakappa vs Commissioner of Income tax Mysore 1 held that the salary received by Shri D C Shah from the aforesaid firms cannot be included in the assessment of the Hindu Undivided Family of which he was the karta
These appeals are brought by special leave on behalf of the Commissioner of Income Tax Bangalore from the judgment of the Mysore High Court dated 19th January 1965 in Income Tax Reference No 1 of 1964
The question whether the remuneration earned by a member of a Hindu Undivided Family as an officer of a company or
a firm in which the assets of the Hindu Undivided Family have either been invested or the office has been acquired with the aid of the funds of the family is the income of the family or the individual income of the member has been the subject matter of consideration in several cases before this Court
In V D Dhanwatey vs Commissioner of Income tax2 V the karta of a Hindu Undivided Family contributed to the capital of a firm out of the funds of the family
Under the agreement of the partnership the general management and supervision of the partnership business was to be in the hands of V and he was to be paid a monthly remuneration out of the gross earnings of the partnership business
It was found that V joined the partnership as representing the family and became a partner on account of the investments of the joint family assets in the capital of the partnership and that the remuneration received by V was only an increased share of the profits paid to him as representing the family
In this state of facts it was held by this Court that the remuneration paid to V was directly related to the investments of the assets of the family in the partnership business and there was a real and sufficient connection between the investment from the joint family funds and the remuneration paid to V
It was therefore held by this Court that the salary paid to V was rightly assessed as the income of the Hindu Undivided Family
In M D Dhanwatey vs Commissioner of Income Tax1 the facts were parallel to the facts in V D Dhanwatey s case 2  and the salary received by the karta of the Hindu Undivided Family was treated as the income of the family
In section R M CT
Palaniappa Chettiar V Commissioner of Income Tax4 the material facts were different
The karta of a Hindu Undivided Family acquired 90 out of 300 shares in a transport company with the funds of the family
In course of time he 1 2 3 4 L10Sup69 3 became the Managing Director of the Company
As Managing Director the karta was entitled to salary and commission on the
net profits of the company and was entrusted with control over the financial and administrative affairs of the company
The only qualification under the Articles of Association for the office of a Director was the holding of not less than 25 shares in his own right
It was found that the shares were acquired by the family not with the object that the karta should become the Managing Director but in the ordinary course of investment and there was no real connection between the investment of the joint family funds in the purchase of the shares and the appointment of the karta as Managing Director of the company
It was held therefore that the remuneration of the Managing Director was not earned on account of any detriment to the joint family assets and the amounts received by the karta as Managing Director s remuneration commission and sitting fee  were not assessable as the income of the Hindu Undivided Family
In P N Krishna Iyer V Commissioner of Income Tax Kerala1 the principle laid down in V D Dhanwateys case2 was applied
It was held that the remuneration received by the assessee from the company of which he was the Managing Director together with commission and sitting fee   should be included in the assessment of the Hindu Undivided Family
It was pointed out that the shares which qualified the assessee to become a member of the company were purchased with the aid of the joint family funds
The shares which were allotted to the assessee in lieu of this services were also treated as shares belonging to the joint family
The entire capital assets of the company originally belonged to the joint family and were made available to the company in consideration of a mere promise to pay the amount for which the assets were valued
The income was primarily earned by utilising the joint family assets or funds and the mere fact that in the process of gaining the advantage an element of personal service or skill or labour was involved did not alter the character of the income
In cases of this class the character of the receipt must be determined by reference to its source its relation to the assets of the family and the proximity of the connection between the investment from the joint family funds and the remuneration paid
Applying the principle laid down in V D Dhanwatey s case3 it was held that the tribunal wag justified in holding that the income from the salary commission or sitting fee  obtained by the assessee did not represent his individual income but was the income of the Hindu Undivided Family of which he was the karta
1 2 591 In Commissioner of Income Tax Mysore vs G V Dhakappa1 the principle laid down in V D Dhanwateys2 case was applied again
It was held that there was no finding that the income which was received by G V Dhakappa was directly related to any assets of the family utilised in the partnership and therefore the income of G V Dhakappa cannot be treated as the income of the Hindu Undivided Family
In our opinion the present case falls within the principle laid down by this Court in SRM CT
Palaniappa Chettiar s case3
It has been found that Shri D C Shah was a man of rich experience in the line of business which these two firms were carrying on
Clauses 9 and 10 of the Partnership deed dated 5 6 1961 indicate that the remuneration was paid not because of the family funds invested in the partnership but for the personal qualification of Shri D C Shah
In the case of Oriental Can Manufacturing Company clause 14 provided for Shri K K Dhote being appointed as the Managing partner
After the said Shri Dhote retired Shri D C Shah was appointed as the Managing partner during the assessment year 1959 60
Clause 15 of the partnership deed provided for such an appointment
A reading of clauses 14 15 and 16 of the Partnership Deed indicates that the remuneration was paid for the specific acts of management done by Shri D C Shah resting on his personal qualification and not because he represented the firm
It should also be noticed that no other partner was paid any salary
Upon the particular facts of this case it is manifest that there was no real or sufficient connection between the investment of the joint family funds and the remuneration paid by the partnership to Shri D C Shah
It follows that the remuneration of Shri D C Shah was not earned on account of any detriment to the joint family assets and the amounts of remuneration received by Shri D C Shah as the Managing partner of the two partnerships were not assessable as income of the Hindu Undivided Family
For these reasons we hold that there is no merit in these appeals which are accordingly dismissed with costs
There will be one hearing fee
YP Appeals dismissed
1 Civil Appeal No 713 of 1965 decided on 23 7 1968


Summary:
The assessee a Hindu undivided family through its karta was a partner in two firms
The Karta had rich experience in the line of business carried on by the firms
in one of the firms the Karta was appointed as its Managing Partner and paid a remuneration as Managing Partner in addition to the benefits enjoyed as a partner
in the other firm another partner was appointed as the Managing Partner and it was provided that on his retirement the Karta was to be appointed as the Managing Partner and entitled to the remunerations
The Karta was appointed the Managing Partner of the second firm also on the retirement of its earlier Managing Partner
The assessee family claimed that the remunerations received by the Karta as Managing Partner should be deleted from the assessment of the assessee and they were the personal income of the Karta
HELD The remuneration of the Karta was not earned on account of any detriment to the joint family assets and the accounts received by the Karta as the Managing Partner of the two partnerships were not assessable as the income of the Hindu undivided family
591 F Upon the facts of the case there was no real or sufficient connection between the investment of the joint family funds and the remuneration paid by the partners to the Karta
The remuneration was paid not because of the family funds invested  in the partnership but for the personal qualifications of the Karta
591 D F S R MCT PL
Palaniappa Chettiar vs Commissioner of Income tax  followed
Gurunath V Dhakappa vs Commissioner of Income tax Mysore  V D Dhanwatey vs Commissioner of Income tax  M D Dhanwatey V Commissioner of Income tax  P N Krishna Iyer vs Commissioner of Income tax Kerala and Commissioner of Income tax Mysore vs G V Dhakappa Civil Appeal No 713 of 1965 decided on 23 7 1968 referred to