Case: V. D. Dhanwatey Vs. The Commissioner Of Income Tax, M.P. Nagpur(With Connected

1. These appeals are brought, by certificate, on behalf of the assessee from the judgment of the Bombay High Court dated July 23, 1964 in Income Tax Reference No 85 of 19632. The appellant (hereinafter called the assessee) is a Hindu Undivided Family represented by its Karta, Shri V. D. Dhanwatey. The assessment years involved in these appeals are 1954-55 and 1955-56. For the year 1954-55 there was a deed of partnership dated April 1,1951 governing the relationship of the partners. For the year 1955-56 there was another partnership deed dated October 1, 1953. There was, however, no material change in the terms of the two deeds of partnership. The business carried on by the partnership was of lithography and art printing and was carried on through a Press under the name and style of Shivraj Fine Art Litho Works. The capital of the partnership under the partnership deed was Rs. 10,50,000. Clause (4) of the partnership deed enumerated the share capital contributed by the partners as follows:"1. Baburao alias Vasantrao Dattaji Dhanwatey Two annas2. Marotirao Dattaji Dhanwatey Three annas3. Shamrao Dattaji Dhanwatey Two annas4. Shankarrao Dattaji Dhanwatey Two annas, three pies5. Krishnarao Dattaji Dhanwatey Two annas, three pies6. Balu alias Yeshwantrao Dattaji Dhanwatey Two annas, three pies7. Shivaji Vasantrao Dhanwatey Twoe (5) states that interest at the rate of 5 per cent per annum shall payable to each partner on the amount of the capital. Clause (7) provides that general management and supervision of the partnership business shall be in the hands of Shri V. D. Dhanwatey. Clause (8) states that Marotirao Dhanwatey shall be the manager incharge of the works and both he and Vasantrao Dhanwatey shall have power to make contracts and arrange terms with constituents or customers. Clause (10) empowered three partners, viz., V. D. Dhanwatey, M. D. Dhanwatey and Shamrao Dhanwatey 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. Clause (15) provided that the various adult members of the partnership shall devote their whole time and attention to the partnership in the sphere of their respective cubes. Clause (l6) is to the following effect:"The said Baburao alias Vasantrao Dattaji Dhanwatey shall be paid remuneration at the rate of Rs. 1250 (Rupees Twelve Hundred Fifty) per month, the said Marotirao Dattaji Dhanwatey shall be paid remuneration at the rate of Rs. 1000 (Rupees One thousand) per month, the said Shamrao Dattaji Dhanwatey shall be paid remuneration at the rate of Rs. 700 (Rupees Seven hundred) per month, the said Shankarrao Dattaji Dhanwatey and Krishnarao Dattaji Dhanwatey shall each be paid remuneration the rate of Rs. 500 (Rupees five hundred) each out of the gross earnings of the partnership business. This amount of remuneration of any or all can, however, be revised at any time if all the partners agree to revise."According to this clause the remuneration paid to the various partners shall be paid to them out of the gross earnings of the partnership business. The remuneration provided for Shri V D Dhanwatey was later raised to Rs. 1500 per month. For the accounting period relating to the assessment years 1954-55 and 1955-56 Shri V. D. Dhanwatey had been paid Rs. 18,000 in each year. The assessee showed the said amount in his return in Section D. It was contended on behalf of the appellant that the amount was not taxable because it was the income earned by Shri V. D. Dhanwatey for the services rendered by him to the partnership and the amount constituted his individual income and not the income of the Hindu Undivided Family. It was urged that the said amount should be taxed in the hands of Shri V. D. Dhanwatey in his status as individual and not in his status as karta of the Hindu Undivided Family. The Income Tax Officer rejected the contention of the assessee. The appeals of the assessee were disallowed by the Appellate Assistant Commissioner of Income-tax, Nagpur. The assessee took the matter in further appeal before the Income-tax Appellate Tribunal in Bombay. It was contended by the assessee that Shri V. D. Dhanwatey was an employee of the firm even before the family was taken as a partner. It was said that on partition of the larger Hindu Undivided Family in 1939 of which Shri Y. D. Dhanwatey was a member, Shri V. D. Dhanwatey representing the small Hindu Undivided Family of which be became the karta, became a partner in the said firm and received salary from it. The Tribunal, by its order dated September 4, 1962 dismissed the appeal of the assessee. The Tribunal accepted the contention of the assessee that Shri V. D. Dhanwatey was, rendering services to the firm and was getting salary even before his family became a partner in the firm. But the Tribunal held that Shri V. D. Dhanwatey who was a partner of the firm could not at the same time be an employee of the partnership firm and the remuneration received by him must be held to be only an adjustment of the share in profits of the Hindu Undivided family in the partnership. At the instance of the assessee the Appellate Tribunal stated a case to the High Court under S. 66 (1) of the Income-tax Act, 1922 on the following question of law :"Whether on the facts and in the circumstances of the case, the sum of Rupees 18,000 was rightly included in the total income of the assessee-family for the assessment years 1954-55 and 1955-56?"By its judgment dated July 23, 1964 the High Court answered the reference against the assessee, holding that the entire capital contribution was made by the Hindu Joint family, that the remuneration paid to Shri V. D. Dhanwatey was paid under a clause of the deed of partnership, that the remuneration paid was only an increased share in the profits of the firm paid to Shri V. D. Dhanwatey as representing the Hindu undivided family and so the said amount of remuneration was taxable in the hands of the assessee. The High Court took the view that the case was governed by the decision of this Court in Commr. of Income-tax West Bengal v. Kalu Babu Lal Chand, 1960-1 SCR 320  : (AIR 1959 SC 1289  ).

Court's reasoning:
It is not in dispute that the capital contribution of Shri V. D. Dhanwatey in the partnership belonged to the Hindu undivided family, which he represented. In other words, the entire capital contribution to the partnership was made by the Hindu undivided family of which Shri V. D. Dhanwatey was the karta. It has been found that Shri V. D. Dhanwatey was in the partnership as representing the Hindu undivided family and he became a partner on account of the investment of the joint family assets in the capital of the partnership. It is also not disputed that Shri V D. Dhanwatey got remuneration at the rate of Rs. 1,500/- per month by virtue of clause (16) of the deed of partnership. In other words. the payment was made to Shri V. D. Dhanwatey because of the investment of the capital by the joint family in the partnership business and had it not been for such investment Shri V. D. Dhanwatey would not have got the remuneration.It was stated by Counsel on behalf of the assessee that the Appellate Tribunal had found that even before the partnership was formed Shri V. D Dhanwatey was receiving salary from December 1930 to August l939 from the business which was carried on by the larger joint family. In our opinion, this finding is not relevant for the determination of the question of law in the present case.Even assuming that Shri V. D. Dhanwatey was rendering services to the business before the partnership was formed it does not necessarily follow that the remuneration paid to Shri V. D Dhanwatey after the formation of the partnership should be deemed to be individual income in his hands and did not belong to the Hindu joint family of which he is the karta. The salary given to Shri V. D Dhanwatey from December, 1930 to August, 1939 has no connection with the remuneration earned by him after the contract of partnership and has a different character and arises out of a different legal relationship.On the other hand the remuneration in the present case was given to Shri V. D. Dhanwatey by virtue of the contract of partnership. It should also be noticed that under Cl. (16) of the partnership deed the amount of remuneration of Shri V. D. Dhanwatey or of any other partner could be revised at any time if all the partners agreed to do so. It has been found by the Appellate Tribunal that the remuneration received by Shri V. D. Dhanwatey was only an increased share of the profits of the firm paid to him as representing the Hindu undivided family, and therefore the whole of the payment made to Shri V. D. Dhanwatey, viz., the share in the profits of the firm and his individual remuneration was taxable as income of the Hindu undivided family. It is manifest that Shri V. D. Dhanwatey was made a partner due to the contributions made by the joint family funds to the entire share capital of the firm. In other words, it was the utilisation of the joint family funds which enabled Shri V. D. Dhanwatey to become a partner in the partnership business. In our opinion, the remuneration paid to Shri V. D. Dhanwatey was directly related to investment from the assets of the Hindu joint family in the partnership business. In other words, there was a real and sufficient connection between the investment from the Hindu joint family funds into the partnership business and the remuneration paid to Shri V. D. Dhanwatey under CL (16) of the deed of partnership. It follows therefore that the remuneration of Shri V. D. Dhanwatey was not earned without detriment to the Hindu joint family funds and the case falls directly within the principle laid down by this Court in 1960-1 SCR 320  : (AIR 1959 SC 1289  ) and in (1966) 80 ITR 428 (SC)We are unable to accept the argument put forward on behalf of the appellant.It is true that the jurisdiction conferred on the High Court by Section 66 (1) of the Income-tax Act is limited to entertaining reference on question of law.In the present case, however, the conclusion reached by the Tribunal is not a conclusion on a question of pure fact but it is a conclusion on a mixed question of law and fact. In other words, though the conclusion of the Tribunal is no doubt based upon primary evidentiary facts, its ultimate form is determined by the application of the relevant legal principle of Hindu Law which has been discussed in the course of this judgmentIn dealing with finding on question of mixed law and fact the High Court must no doubt accept the finding of the Tribunal on the primary question of fact; but It is open to the High Court to examine whether the Tribunal had applied the relevant legal principles correctly or not in reaching its final conclusion; and in that sense, the scope of enquiry and the extent of the jurisdiction of the High Court in dealing with such points is the same as in dealing with pure points of law.For example, in G. Venkataswami Naidu and Co. v. Commr. of Income-tax, (1959) 35 ITR 594 (AIR 1959 SC 359)  , it was pointed out by this Court that where the question is whether a transaction is in the nature of trade, even if the conclusion of the Tribunal about the character of the transaction is treated as a conclusion on a question of fact, in arriving at its final conclusion, on facts proved, the Tribunal lies necessarily to address itself to the legal requirements associated with the concept of trade or business.The final conclusion of the Tribunal can therefore, be challenged on the ground that the relevant legal principles have been misapplied by the Tribunal in reaching its decision on the point; and such a challenge is open under Section 66 (1) because it is a challenge on a ground of lawThe High Court answered the reference in favour of the Income tax Department and against the assessee. The High Court observed that Shri M. D. Dhanwatey was one of the partners in the partnership a, ; representing Hindu undivided family consisting of himself and his two minor sons. There was no evidence, whatever to show that Shri M. D. Dhanwatey was in the service, of the partnership firm in his individual capacity and the High Court held that what was paid to him in the form of remuneration was only form the purpose of adjustment of the rights inter se between the partners. The remuneration paid to karta was there-fore the income of the Hindu undivided family and it cannot be said, on the facts found in the case, that the remuneration paid to Shri M. D. Dhanwatey was without any detriment to the, joint family property. It was also found that the share capital contributed by Shri M. D. Dhanwate came from the joint family assetsThe material facts of the present case are almost identical with those in Shri V. D. Dhanwatey v. Commissioner of Income Tax A.P. Nagpur (Civil Appeals Nos. 1372 &1373 (, r 1966.) judgment in which has been pronounced today. For the reasons, elaborately set out in that case we hold that the decision of the question of law in the present case is governed by the decisions of this Court in The C.I.T. West Bengal v. Kalu Babu Lal Chand ([1962] 1 S. C. R. 320.) and in Mathura Prasad v. C.I.T.U.P. (60 1. T. R. 4, 28.)We are accordingly of the opinion that the question referred to the High Court was rightly answered against the assessee and this appeal must be dismissed with costsHegde, J.I agree with the conclusion reached by my learned brothers. For the reasons stated in my judgment in Civil Appeals 1372 and 1373 of 1966 (Shri V. D. Dhanwatey v. Commissioner of Income Tax, M.P., Nagpur) I am unable to subscribe to the observation in the majority judgment that the material facts of the present case are almost identical with those in Shri V. D. Dhanwatey v. Commissioner of Income Tax, M.P., Nagpur R.K.P