Hegde, J.:— This is a reference made by the Income-Appellate Tribunal, Bombay Bench “B”, under Section 66(1) of the Indian Income-tax Act, 1922, in I.T.A No. 2789 of 1961–1962 on its file.

Statement of Case:

“The assessment year under reference in 1960–1961, the relevant previous year being the years ended on 3rd October, 1959. The assessee is a Hindu Undivided Family. It was carrying on a business. For services rendered in carrying on the said business, one of the members of the H.U.F Shri G.V Dhakappa was paid remuneration at the rate of Rs. 500 p.m This business was converted into a partnership business. There is a deed, dated 26th August, 1957 constituting the said firm and it is annexed hereto as Annexure “A” and forms part of the case. The then kartha Shri G.V Dhakappa has entered into the agreement of partnership on behalf of the family. Clause 7 of Annexure “A” runs as follows:

“Gurunath Venkatrao Dhakappa, party of the first part and hereto Manager of the partnership business shall continue as a Manager on a remuneration of Rs. 500.”

For the relevant year the firm was registered and the total share of profit allocated under Section 23(6) as per the assessment made on the registered firm is Rs. 14,734 which includes Rs. 6,000 being salary payable as per Clause 7 extracted above at the rate of Rs. 500 p.m It was claimed before the Income-tax Officer that a sum of Rs. 6,000 paid to Shri G.V Dhakappa was his individual income and as such it should not be included in the assessment of the H.U.F under consideration. This claim was rejected by the Income-tax Officer observing as follows:

“Though there are other employees, nothing is discussed in the partnership deed. The appointment of Shri Gurunath v. Dhakappa by the firm in Clause 7 of the deed, dated 26th August, 1957 is of Sri Gurunath v. Dhakappa party of the first part, i.e, partner shown at Sl. No. 1 in the partnership deed and no other person. For the assessment year 1957–1958 and 1958–1959 salary income of Rs. 6,000 of Shri Gurunath v. Dhakappa was included in the total income of the assessee. On the ground that as permitted by Clause 9 of the partnership deed assessee had employed Sri Triambak G. Dhakappa, the Tribunal has only allowed salary paid to Sri Triambak G. Dhakappa by the assessee family. These circumstances and the fact that by Clause 9 of the partnership deed, the manager (in the present case assessee) has been given power to appoint one or more assistant managers from amongst the partners to assist him on the salary to be borne by the assessee which indicate that the salary to the Manager Shri Gurunath v. Dhakappa is in the capacity of a partner (assessee) and not as an outsider. I, therefore hold that the salary of Rs. 6,000 received by Sri Gurunath v. Dhakappa is in his capacity as a partner and not in his individual capacity, and therefore include the salary income of Rs. 6,000 from V.K Dhakappa in the total income.”

A copy of the assessment order is annexed hereto as Annexure “B” and forms part of the case.

There was an appeal to the Appellate Assistant Commissioner in which this objection was repealed. The Appellate Assistant Commissioner, whose order is annexed as Annexure “C” and forms part of the case, upheld the assessment and in the course of his order observed:

“A partner cannot be an employee of a partnership. The “firm” is only a compendious term used to refer to the partners. Therefore an agreement of partnership in which a partner is to be remunerated for services gets his remuneration by virtue of his membership of the firm. The salary is therefore only as a part of the share of profits received from the firm. This view is supported by the decision of the Bombay High Court in the case of S. Magnus (33 I.T.R 538). Since the salary of Rs. 6,000 is part of the share of profits received from the firm of V.K Dhakappa and since such share is admittedly the income of the firm, the action of the Income-tax Officer in including the whole of the share of profits in the assessment of the family was in my opinion, justified.”

On further appeal to the Tribunal it was contended that the sum of Rs. 6,000 was the individual income of Shri G.V Dhakappa. The Tribunal also did not accept the assessee's claim set out in its order (made Annexure “D” and forming part of the case) mainly for 2 reasons:

(1) A partner in a partnership cannot be the firm's employee and therefore this is only a share of profit from the firm.

(2) If the person who received the salary was a partner, whatever may be the capacity in which he received salary whether as partner or in any different character, the provisions of Section 16(1)(b) would justify the inclusion of the same in assessing the share income.

On the aforesaid facts, the following question of law arises:

“Whether on the facts of this case, and having regard to Section 10(4)(b) and Section 16(1)(b) of the Income-tax Act, 1922, the salary paid as per Clause 7 of Annexure “A” is liable to be excluded from the assessment of the assessee H.U.F and assessed in the hands of the individual Sri G.V Dhakappa.”

Both parties agree to the statement as drafted above. The learned Counsel for the assessee wants the following question also to be referred to the High Court:

“Whether the inclusion of the salary paid by the firm to Shri Gurunath Dhakappa, for services rendered by him as Manager in the total income of the assessee family, is legal and proper?”.

We consider that the controversy between the parties is brought out in the question as formulated in Para 6 above. We, therefore, reject this suggestion.”

The concern with which we are concerned in this reference was originally a Hindu Undivided Family concern. It was dealing in and continues to deal with betelnuts, cardamoms, pepper, etc. Its place of business is at Sirsi in North Kanara District. Even during the time when the business was run by the joint Hindu undivided family of the parties, the petitioner Shri Gurunath v. Dhakappa was in charge of the management and for the work done by him, he was being remunerated at Rs. 500 per month. At the time of the hearing of this reference, we were told that Shri Gurunath v. Dhakappa is a Law Graduate and that before he took up the management of the partnership business, he was an Advocate by profession. But this submission was not substantiated by any material on record.

The Hindu undivided family of Shri Dhakappa was divided in the year 1957 and thereafter the coparceners entered into a partnership, as per the registered deed, dated 26th August, 1957 and marked as Annexure “A” in the case. As seen from that deed there were as many as 13 partners. Under the deed of partnership the partners are to share the profits and losses of the partnership business in accordance with the provisions contained in the deed. Under Clause 7 of the deed, partners have agreed that Shri Gurunath Venkatrao Dhakappa (the petitioner herein) “party of the first part and hereto manager of the partnership business shall continue as manager on a monthly remuneration of Rs. 500”. Clause 8 provides that Mohan Vasudevrao Dhakappa the eighth party to the deed and Shri Shamsunder Vasudevrao Dhakappa “hereto Assistant Managers of the Partnership business shall continue as Assistant Managers on a monthly remuneration of Rs. 200 each”. Clause 9 says that “the manager may at any time for the good and efficient conduct of the partnership business appoint and/or continue appointment of one more Assistant Manager from amongst the partners to assist him on a salary to be Borne by him”. Clause 10 provides for the maintenance of account nooks, to which the partners should have access at all time. Clause 11 prohibits the manager from doing certain things. Clause 15 enumerates the powers of the manager. Clause 16 sets out the duties of the Assistant Managers. On an examination of the partnership deed, it is clear that the partners had agreed to remunerate the manager for the duties performed by him. Therefore, the present case is not one that falls within the scope of Section 9 of the Indian Partnership Act, 1932, but it falls under Section 13(a) of that Act, which provides that subject to contract between the partners, a partner is not entitled to receive remuneration for taking part in the conduct of the business. In the instant case there is a contract to the contrary. Hence it is not possible to agree with the learned Counsel for the Revenue that the remuneration received by Shri Gurunath v. Dhakappa is only a share of his profits. We do not think that the decision of the Court of Appeal in Ellis v. Joseph Ellis & Co.(1) is apposite for our present purpose. That decision turned on the provisions of the English Workmen's Compensation Act, 1897. The rights and duties of the partners in a partnership firm, in this Country is governed by the provisions of the Partnership Act and not by abstract doctrines such as that a person cannot be an employee as well as his employer. Further in this case, we are not on the question whether the remuneration received by Shri Gurunath v. Dhakappa should be deducted from the profits of the partnership firm. The only question that we have to decide is whether the remuneration received by Shri Gurunath v. Dhakappa should be considered as his individual income or that of his family. Hence we are not concerned with Section 10(4)(b) or Section 16(1)(b) of the Indian Income-tax Act, 1922 in this case. But, if under the law of partnership a partnership firm cannot remunerate a partner, there was no need for Section 10(4)(b) or Section 16(1)(b) of the Income-Tax Act. But this is only by the way. In my view the correctness of the decision of the Bombay High Court in S. Magnus… v. Commissioner Of Income-Tax, Bombay City Ii, Bombay,…., Bombay City II(2) which accepted and adopted the law as enunciated in Ellis v. Joseph Ellis & Co. is open to doubt. But the question of law decided in that case does not specifically arise for decision in this case.

As mentioned earlier, all that we have to decide in this case is whether remuneration received by Shri Dhakappa should be considered as his income or that of his family. In that view, the decision of the Madras High Court in R.A Goodsir & Co., Madras v. Commissioner of Excess Profits Tax, Madras is also not relevant.

Now coming to the real point in controversy, namely whether the remuneration given to Shri Dhakappa should be held to be his individual income or the income of his family, this essentially a quest on of fact, and we have to answer that question with reference to the facts of this case. It is true that the capital for the partnership firm was provided by Shri Dhakappa's family and therefore the earnings made by the firm are in a way traceable to the capital supplied by the family. But it must be remembered that investment is but one fact of a bus ness. The know-how, and intelligent direct on is no less important. Business concerns do not earn profit's merely because capital is invested in them. Much depends on the persons who are in charge of the business. Captains of industries and managers of bus ness concerns should possess, business knowledge, tact, capacity, drive and numerous other qualities. The ability of Shri Gurunath v. Dhakappa in the matter of business management was evidently recognised by the family even when the bus ness was conducted by the Hindu undivided family. As mentioned earlier, even at that time he was paid a remuneration of Rs. 500 per month. The remuneration so paid must necessarily be held to be his personal income. Otherwise there was no point in the Hindu undivided family paying remuneration in one hand and receiving it by the other. There is no reason to think that there was any charge in the circumstances when the undivided family broke up and a partnership was formed. From the available material, it appears that all the partners did not take part in the business. Most of them merely supplied the capital and shared the profits and losses. Hence there is nothing surprising if they agreed to remunerate the manager and the assistant managers. It may be and it is very likely that one of the reasons for selecting Shri Gurunath v. Dhakappa as manager was that he was one of the partners. But that cannot be said to be the sole reason or the exclusive reason. There were thirteen partners. The choice need not have fallen on him if he had no extra qualifications. It is likely that he was selected for the reason that the partners thought that his services would benefit the partnership and therefore they agreed to remunerate him for his skill and ability.

In this case, it cannot be said that the management by Shri Dhakappa involved any risk to his family as such. Nor can it be said except in a very remote sense—that he took the and of the family for the purpose of management.

In my opinion, the present case falls within the rule laid down by the Patna High Court in Commissioner of Income-tax v. Darsanram which in my opinion, if I may say so with respect, lays down the law correctly.

In this connection I should have been happy to cite with approval the decision of the Madras High Court in Commissioner Of Income-Tax v. S.N.N. Sankaralinga Ayyar but for the doubt cast on its correctness by the Supreme Court in Commissioner of Income-Tax, West Bengal v. Kalu Bobu Lal Chand(3).

Then we come to the decision of the Supreme Court in Piyare Lal Adishwar Lal v. Commissioner of Income-Tax, Delhi(4) which supports the conclusion reached by me.

On behalf of the Revenue, strong reliance was placed on the decision of the Supreme Court in Commissioner of Income-Tax, West Bengal v. Kalu Babu Lal Chand. Therein one R, the karta of a Hindu undivided family, 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 specified his remuneration and required the company to enter into an agreement with R; the agreement however was not actually entered into until January 1934; it was found by the Appellate Tribunal that the shares held in the names of R and his brother were acquired with funds belonging to the joint family and the family was in enjoyment of the dividends paid on these shares; further, the company was floated with funds provided by the family and R made no contribution in that respect; the company was all along financed by the family prior to the accounting year relevant to the assessment year 1943–1944 the managing director remuneration received by R was credited in the books of the family in the assessment for 1943–1944 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; Art. 132 of the Articles of Association of the said company provided that the first managing director would be the said R. or “his assigns or successors in business whether under his name or any other style or firm” and that the said R would continue to be the managing director until he would resign or be found guilty of any act of fraud or dishonestly or be removed in the manner thereinafter provided. The right of management given to R was a vested right, assignable as well as heritable. It is under those circumstances the Supreme Court held that the managing director's remuneration received by R was as between him and the Hindu undivided family, the income of the family and should be assessed in its hands. Dealing with this case, this is what the Supreme Court observed in Piyare Lal Adishwar Lal v. Commissioner of Income-tax, Delhi: (at page 25):

“Counsel for the respondent also relied on Commissioner of Income-tax v. Kalu Babu Lal Chand where the managing director's remune-remuneration was held to be the income of a joint family to be assessed as such in its hands. That case is distinguishable. There the karat of a Hindu undivided family took over a business as a going concern and carried on the business till the company was incorporated. The shares in the name of the karta and his brother were acquired with the funds of the joint family. The company was floated with the funds of the joint family and was financed by it and the remuneration received was credited in the books of the family. The office of the Managing Director itself was assignable. The articles of association provided that the karta or his assigns or successors in business “whether under his name or any other style or firm” would be the managing director of the company and he was to continue for life until removed because of fraud or dishonesty. Thus the acquisition of business the flotation of the company and the appointment of the managing director were inseparably linked together. The facts of that case were quite different from that of the present case …………”

Counsel for parties have cited various other decisions. We have not thought it necessary to deal with them as such one of them turned on the peculiar facts of its case. As regards the principal of law concerned, there is not much room for dispute. The real difficulty arises in supplying that principle to the facts of a given case.

Applying the rule laid down by the Judicial Committee of the Privy Council in Gokul Chand v. Hukan Chand Nath Mal the Supreme Court in Kalu Babu Lal Chand's case and in Piyare Lal Adishwar Lal's case to the facts of the present have come to the conclusion that the question referred to us must be answered in the negative and in favour of the assessee. In other words, my answer to that question is that the inclusion of the salary paid by the firm to Shri Gurunath Dhakappa, for services rendered by him as manager, in the total income of the assessee family, is illegal and improper.

Revenue to pay the costs.

Advocate's fee Rs. 250.