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V.D Dhanwatay v. Commissioner Of Income-Tax, Madhya Pradesh And Bhopal, Nagpur
Factual and Procedural Background
The assessee is a Hindu undivided family (HUF) with V.D. Dhanwatay as its karta. The family had a business carried on by a partnership under a deed dated 1st April 1951, where V.D. Dhanwatay was a partner representing the HUF consisting of himself and his two minor sons. The partnership deed included a clause providing for remuneration to partners, with Dhanwatay receiving Rs. 1,250 per month, later increased to Rs. 1,500 per month, totaling Rs. 18,000 for the accounting year. The Income-tax Appellate Tribunal found no evidence that Dhanwatay rendered services individually to the partnership and held that the remuneration was an adjustment of rights among partners and thus belonged to the HUF's income. Initially, the Rs. 18,000 was included in the HUF's income return, but subsequently, the HUF claimed it was the personal income of the karta, relying on the partnership deed and arguing the remuneration was for services rendered by Dhanwatay individually.
Legal Issues Presented
- Whether the sum of Rs. 18,000 was legally included in the assessee family's (HUF) total income or constituted the personal income of the karta, V.D. Dhanwatay.
Arguments of the Parties
Assessee's Arguments
- The remuneration of Rs. 18,000 was paid to V.D. Dhanwatay for services rendered as the general manager of the partnership business.
- Therefore, this amount should be treated as the personal income of the karta, not as income of the Hindu undivided family.
- The inclusion of this sum in the HUF's return was a mistake of law.
- Relied on three reported decisions establishing the principle that remuneration paid to a karta for services rendered, without detriment to family property, is his individual income.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Commissioner of Income-tax v. S.N.N. Sankaralinga Iyer [1950] 18 I.T.R 194 | Remuneration paid to karta for services rendered is his personal income if no detriment to family property. | Supported the principle that remuneration for services by karta is individual income, not HUF income. |
| Murugappa Chetty & Sons v. Commissioner of Income-tax [1952] 21 I.T.R 311 | Same principle regarding remuneration to karta for services rendered without detriment to family property. | Reinforced the established legal principle regarding karta's remuneration. |
| Knightsdale Estates v. Commissioner of Income-tax [1955] 28 I.T.R 650 | Remuneration paid to karta managing the business is his personal income if not acquired by expenditure detrimental to joint family property. | Specifically cited for the clear statement that remuneration for services without detriment to family property is karta's individual income. |
Court's Reasoning and Analysis
The court acknowledged the well-established legal principle from the cited precedents that remuneration paid to a karta for services rendered, without detriment to the joint family property, constitutes the karta's personal income. However, the court found no evidence that V.D. Dhanwatay actually rendered any services to the partnership in his individual capacity beyond the designation as general manager in the partnership deed. The remuneration clause appeared to be a mechanism to adjust rights among partners rather than payment for services. Given the Tribunal's factual finding that the remuneration was solely for inter se adjustment and no proof of services rendered, the court held that the sum rightly belonged to the Hindu undivided family. The initial inclusion of the Rs. 18,000 in the HUF's income return was consistent with this view until the family sought to reclassify it based on legal advice. The court, bound by the factual findings, concluded that the remuneration was properly included in the HUF's total income.
Holding and Implications
Reference answered in the affirmative.
The court held that the sum of Rs. 18,000 was lawfully included in the income of the Hindu undivided family. The assessee was directed to pay the costs. This decision directly affects the parties by affirming the tax treatment of the remuneration as HUF income, and no new precedent was established beyond reaffirming existing principles applied to the facts of this case.
Tendolkar, J.:— A very short question of law arises for determination upon this reference, and the question is:
“Whether the sum of Rs. 18,000 was legally included in the assessee family's total income ?”
2. The assessee is a Hindu undivided family.
3. Its karta is one V.D Dhanwatay. There was a business known as Shivaji Fine Art Litho Works which was carried on by a partnership under a deed of partnership dated the 1st April, 1951. V.D Dhanwatay was one of the partners and it is common ground that in this partnership he represented the Hindu undivided family consisting of himself and his two minor sons. Clause (16) of the partnership deed provided for the payment of remuneration to V.D Dhanwatay as well as the other partners at the rates mentioned in that clause. V.D Dhanwatay was to get Rs. 1,250 per month, which appears subsequently to have been increased to Rs. 1,500 per month in the accounting year, so that the remuneration he received during the accounting year was Rs. 18,000. It was found by the Tribunal that there was not an iota of evidence to show that Dhanwatay rendered any service to the partnership in his individual capacity and the Tribunal held that what was paid to Dhanwatay in the form of remuneration was only for the purpose of adjustment of the rights inter se between the parties. In that view, the Tribunal considered that the remuneration received was received by him on behalf of the Hindu undivided family and was, therefore, properly included in the income of the Hindu undivided family.
4. Now, in the first instance, it must be noted that this income of Rs. 18,000 was included in the return filed by the Hindu undivided family and it was subsequently that, by a letter addressed to the Income-tax Officer, the Hindu undivided family put forward the claim that this was the personal income of the karta and relied upon the deed of partnership in that regard. Apart from clause (16) which fixes the remuneration to be paid to each partner, there is in the deed one other clause which provides that V.D Dhanwatay shall be designated general manager of the business. The contention of Mr. Thakar on behalf of the assessee is that since this was remuneration given to Mr. Dhanwatay for services rendered, it was not the income of the Hindu undivided family but was his own individual income and it was included in the return of the Hindu undivided family under a mistake of law. Now, Mr. Thakar, in support of his argument, has drawn our attention to three reported decisions in Commissioner of Income-tax v. S.N.N Sankaralinga Iyer [1950] 18 I.T.R 194., Murugappa Chetty & Sons v. Commissioner of Income-tax [1952] 21 I.T.R 311. and Knightsdale Estates v. Commissioner of Income-tax [1955] 28 I.T.R 650. and the principle of law that appears to emerge from these decisions is by now well established; and that principle is that if a karta of a joint Hindu family receives a remuneration in consideration of services rendered and without any detriment to the family property, it is his own personal income and not the income of the Hindu undivided family. Out of these three decisions, the decision in Knightsdale Estates v. Commissioner of Income-tax is a decision in which a karta was paid remuneration for managing the business, and, dealing with this item of remuneration, Rajagopalan, J., in his judgment, specifically states at pages 667-8:
“It could not be said that the income that he received as remuneration for the services that he rendered was in any way acquired by expenditure detrimental to the property of the joint family of which he was the karta.”
5. Therefore, the ratio is quite clear, that if it is established that the remuneration was for services rendered and without detriment to the family property, then it is the individual income of the karta and not that of the Hindu undivided family. Now, apart from the clause in the partnership deed that V.D Dhanwatay shall be designated as a general manager, there is no evidence on the record to show that in fact he rendered any services to this partnership. Moreover, the clause which deals with remuneration to different partners, which is clause (16), may well give rise to the presumption which apparently the Income-tax Appellate Tribunal raised, that what was being sought to be done was not to give remuneration for services rendered, but remuneration was provided in the said clause merely for the purpose of adjustment of the rights inter se between the partners. Undoubtedly, V.D Dhanwatay became a partner by reason of the fact that the joint family invested its capital in the partnership, and in the absence of proof that he rendered any services to the partnership and on the basis of the finding of fact by which we are bound on this reference that the remuneration was only for the purpose of adjustment of the rights inter se between the partners, in our opinion, no other conclusion was possible than that the income was that of the Hindu undivided family and indeed, the Hindu undivided family in making its return, also had taken the same view until legal advice intervened.
6. In our opinion, therefore, the answer to the question is in the affirmative. Assessee to pay the costs.
7. Reference answered in the affirmative.
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