V. D. DHANWATEY versus THE COMMISSIONER OF INCOME TAX, M.P. NAGPUR

V. 0. DHANWATEY v. THE COMMISSIONER OF INCOME TAX, M.P. NAGPUR (With Connected Appeal) October 26, 1967

[K. N. WANCllOO, C.J., R. S. BACllAWAT. V. RAMASWAMI, G. K. MITTER AND K. S. HEGDE. JJ.) ~nconu·-1ax~Hindu 11ndh·ided Fc.1nily-KarlQ as parlner <>/ fir111--also 1:e111ng salary as 111anagrr utrdfr partnt•rsliip de'"'ed-capita/ co11tributio11 11uiclt• by .~a1ni/y alone-if .i;;a/ar,v inco1ne of fanrily or of ind.\·idual pf.rtncr. Tne appellant in Civil Appeals Sos. 13-72 and 1373, was a Hindu undivided family of \l•hich V v.·as the karta and v.·as. as such, a partner in a bu~incss of lithography and art printing "''ilh other members of the family, including M. who was 1hc karta of the appellant HUF in Civil Appeal No. 1371. Tl>' capilal in tht> c~<c of l>olh V '!lnd M was entirely contributed hy their rcspc~tive famili~s. The partnership was governed by two successive partnership deeds \.\o'hich v.·crc in .similar tenns durinJ? th: relevant period. v.hercby it \ll3S provid·:d. inter alia, that interest "·ou1J he payable to each partner on the amount of capital. th.it the general mana g·~ment and supervio;;ion of the business "·ould be in the hands o[ V; M would be the manager of the "'orks and l>olh he and V would have power to make contracts, etc. Provision v.·as also made for the payment of spt"Cified amounts by way of remuneration 10 various other partners out of the gross earnings of rhe p~rtncr"hio husine\s. For the accounting pcrio<l relating to the assessment year 1954-55 and 1955-56. V was paid a sum of Rs. 18.000 in each year and JI.I was paid Rs. 7.500 in respect of the assessment vear 1955·56. The appellants. being the assessee Hiodu un divided family in each of 1he appeals, sho"''d these amounts in Section D of their retums an<l it v.·as contended that these amounts v.·ere not taxahk: \' and f\.f for the in their hands as they represented income earned hy services rendered hy each of them to th·! pannero;;hip and constituted their individual income. The Income Tax Officer re~cted this contention and appeals to the Appellate Assistant Commissioner were dismiss·:?d. Further appeals were also dismissed by the Appellate Tribunal and it held that although V was an employee of the firm even before the family was taken as a partner. after hi.! v.-·as taken as such partner, he could not at lhe same time be an employee of th-~ partnership firm; the remuneration received by him must therefore l>o held to he only a~ adjustment of the share in profits of the family in the partnership. The High Court, upon a ref·~rcnce. also held again~t the a"sessecs.

On app,al to lhis Court. HeU/ : (By Majority)

Court had rightlv ansYt·crct..1 lhc question of Ja,,· rhc appeals must therefore be dismissed.

in Appeals l'<os. 1372 and 1373 : The High against the assessce and

(i) It was the investment· or the joint family funds in the partne~hip v.·hich enabled V ro become a partner and there was a real and sufficient connection. bctYt·ecn that investment and the remuneration paid to V under It follov.·s therefore that the remuneration of V the deed of partnership. .,.·as not earned without detrin1cnt to the Hindu joint family funds and tne case fell dir..ctly within the principle laid down in The C.l.T .. Wes, Ben!M v. Kalu Babu Lal Chand. [1960) I S.C.R. 320; and in Mathur, Prn<<1d. v. C.I. T .• U.P. 60 l.T.R. 428. [7~ C.E!

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V. D. DHAllWATEY I'. C.!.'f.

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Mis. Piyare Lal Adislm-ar Lal v. Tile C.l.T., Delhi, [1960] 3. S.C.R.

669; referred to.

The general doctrine of Hindu Law is that property acquired by a karta or a ccparcener with the aid or assistance of joint family assets is impressed with the character of joint family property. The test of self acquisition by the karta or copartener is that it should be without detriment to the ancestral estate and before an acquisition can be claimed to be a, separate property, it must be shown that it was made without any a,jd or assistance from the ancestral or joint family property.

[68B, CJ

The finding of the Tribunal that even before the partnership was from cel V was receiving the salary from the business which \Vas carried on the larger joint family. was not relevant for the determination of the question of Jaw in the present case. The salary given to V before he became a: partner had no connection with the remuneration earned by him aft.er the contract of partnership "'·hich had a different character. and whicll arose out of a different legal relationship and was paid to him by virtue of the partnership deed. [73H]

(ii) The conclusion reached hv the Tribunal that V had earned the remuneration in question without any ctetriment to the familY funds v.·as. not .a conclusion on a qu~stion of pure fact but 'A'as a conclusion on a mixed question of law and fact. Though this conclusion was based upon primary evidentiary facts, its ultimate form had to he determined by the In dealing: application of the relevant legal principles of Hindu v.·ith findings on questions of mixed la""· and fact the High Court must no doUbt accept the findings ·of the Tribunal on th!.! primary questions of fact~ but it is open to the High Court to examine v ... hether the Tribun~11 had applied the relevant legal principles c-0rrectly 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 dealin~ with pure points of law

[74G-75B]

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G. Venkataswa111i Naidu & Co .. v. C.l.T. 35 I.T.R. 594, referred to.

(Per Hegde. J., dlrsenting) The sum of Rs. 18,000 received by V as income of the

iricluded in the total

his remuneration was not rightly assessee.

From the facts found by the Tribunal it was established (i) that V 'A-·as attending to the business in question even· before the partnership came into existence and that he was getting remuneration for the work done by him: (ii) after the partnership came into existence, he,, OM our of the several partners, was designated as the general manager and for that work he was given a monthly remuneration of Rs. 1,500; and (iii) the said remuneration was received by him without ariy detriment to his family.

[76HJ

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There was no basis for the conclusion reached by the Tribunal that the remuneration received bv V was on1v "an increased share in the pro fits of the fir!ll paid to him "as r.eprescntiilg his HUF." The· remuneration received by V had no relationship with the share capital subscribed by him. He was not appointed general manager merely· because he -was a Jlt cannot be said that his joint family was the general manager partner. nor that for any act or omission of }:tis as the general manager his family It was the family which was contending that could. be held responsible. the jncome in question was V's individual income and it was therefore reasonable to infer that his family had agrted to his receiving that income

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[1968] 2 S.C.R.

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a~..._biS individual ·income; Jbe - assessee~s case \Vould therefore· fall. \vithin - A the' rule laid dO\\'n in Jugal Kis_hore Ba1deo Salri v.. Co1nnJissioner of lricome-rax.,'U.P._ [1967] I• S.C.R_ 416.

[77G, H; 85B,E]

Piyare Lal v. Conunissioner. -of Jnco;n.e' Tax:

[1960] 3 S.C.R. 669; Palc..f!iappa Chet1inr v .. Co11Jnti.rsioner of lnco111e· Tax. Bilzar and Orissa .. C.A. 1055 of 1966; Sardar Baluidur 1nclra··Singlz v .. Conunissioner of In come Tar, Bi!zar and Orissa; 11 I .. T.R.. 16; Conunissioner of Income Tax, Bihar- and Orissa v .. ,Darscnrani and Ors .. 13 I .. T.R. 419; and Co1n1nirstoner of Income Ta:c, lfadras v.. S..N.N .. Sankaralinga Iyer,. 18 I.T .. R .. 194; relied upon..

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, Com1nissioner of Jnconze Tax. JVest Ben1:al v .. Ka(u Babu Lr..[ Chand. (1960) t S.C .. R. 320; ~fathura Pr-asad _v .. Contntissioner of lnconte' tax,· V,P., 60 I.T.R. 428; distinguished. .

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"Palaniappa ChettiJT v .. Conunissioner of lnconte Tax, hfadraJ,-. [19~8] C

;! S.C,:.R- 55; referred to.

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The Tribunal and the High Court were wrong in thinking that the partner of _the firm can under no circumstances be given remuneration for taking part in the conduct of the partnership business.. It is clear from s. 13(a) of the Partnership Act that by agreoment between the partners, on-: of the partners can be remunerated for attendin·g to partner . 5hip, work; . (7701

S .. Afagnus "'· cOni11ii1sioner of lnconJe tdx. Bonibay City. 33 I .. T .. R ..

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The High Court V..'as wrong in thinking that the finding of the. tribunal that the_ remuneration received by V \Vas without detriment to his family is not a fini:Jing of fact but a legal inferenc.! drawn by the tribunal from the facts proved. The tribunal r·oached that finding on the basis of· the facts placed before it and it had given cogent reasons in support of that finding.. The conclusion reached by th~ tribunal was- therefore a finding of fact .. A finding of this character capnot be considered as a mixed question of Jaw and fact as no legal principle ··Nas required to be applied in arriving · at that conclusion.

[77B.CI

Ile/d: In Civil Appeal No. 1371 of 1966 (Per Wanchoo C.J., Bachawat. Ramasv.·ami and Mitt·~r, JJ): The material facts in the case of ~1 being almost identical with those in Civil Appeals 1372 and 1373 of 1966, the High Court rightly answered the, questton referred to it and the appeal must therefore be dismissed..

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(Hegde J. concurred with the decision of the majority that the appeal -should be dismissed but disagreed that the material facts in the case of ~l were almost, identical with· those in the case of V).

· ClViL.APPELLATE JURISDICTION: Civil Appeal No . .1371-73

-Of 1966. . Appeals from the judgments· and orders dated July 23, 1963 and July 23, 1964 of the Bombay High Court, Nagpur -Bench in Income-tax Reference No. 5 of 1962 and 85 of 1963.

G. L. Sanghi, A. S. Bobde, P; C. Bhartari and 0. C. Mathur,

for the appellant (in all the Appeals).

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C. K: Dizphtary, Attorney-General, A. N. Kirpal and R. N.

Sachthey; for the respondent.

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Y. D. DIIANWATEY v. c.1.T. (Ramas1vami, J.)

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The judgment of WANCHOO, C.J., BACHAWAT, RAMASWAMI AND MITTER, JJ. was delivered by RAMASWAMI J. HEGDE J. deli· vcrcd a dissenting Opinion.

Ramaswami, .l. These appeals arc brought, by certificate, on behalf of tile asscssce from the judgment of the Bombay High Court dated July 23, 1964 in Income Tax Reference. No. 85 of 1963.

The appellant (hereinafter called the 'asscssee") is a Hin<lu Undivided family represented by its Karta, Shri V. D. Dhanwatcy. The assessment years involved in these appeals arc 1954-55 anJ 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 dmcd October I, 1953. There was, however, no material change in the Icnns of the two deeds of partnership. The business carried on by the partnership was of lithography and art printing and was curried 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 partner· ship deed enumerated the share capital contributed by the Part- ners as follows :

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"I. Baburao alias Vasantrao Dattaji Dhanwatcy.

2. Marotirao Dattaji

Dhanwatcy.

.'l. Shamrao Dattaji

Dhanwatcy.

4. Shankarao Dattaji

Dhanwatey.

5. Krishnarao Dattaji

Dhanwatey.

6. Balu alias Yeshwanlrao

Dattaji Dhanwntey.

7: Shivaji Vasantrao

Two ann:<s.

Three ann•l' .

Two annas. three pies.

Two :mnas, three' pies.

Two.anna,, thrci! pies.

Two annas." three pies.

Dhanwatey.

Two annas.' Clause ( 5) states that interest at the rate of 5 '1c per annum shall be 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. DhanwaLcy

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Clause ( 8) stales that Marotirao Dhanwatey shah be the manager incharge of the works and both he and Vasantrao Dhanwatey shall ha\'c power to make contracts and arrange terms with cons titucnls or customers. Clause ( 10) empowered three partnen.. >'i: .. Y. D. Dhanwatey, M. D. Dhanwatey and Shamrao Dhan wate) to appoint such person or persons on such salary as they deem tit for c:irryinl! on the work of the partnership and delegate to them such powers as they thirlk proper. Clause ( 15) provided that the various adult members of the partnership shall devote their whole time and attention to the oartnership in the sphere of their respective duties. Clause°( 16) G to the follo..\-ing effect : '

"The said Baburao alias Vasantrao Dattaii Dhan watey shall be paid remuneration a: the rate of Rs. 1,250 (Rupees Twelve Hundred Fifty J per month, the said Marotirao Dattaji Dhanwatey shall be paid remunera tion at the rate of Rs. 1,000 (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 Dhan watey and Krisbnarao Dattaji Dhanwatey shall each be paid remuneration at the rate of Rs. 500 (Rupees five hundred) each out of the gross eaming.s of the partner ship business. This amount of remuneration of any or all can, however. be revised at any time if all the parti..~rs agree to revise."

According to this clause the remuneration paid to the variou, partners ~.hall be paid to them out of the gross eam:ng.~ of the partnership business. The remuneration provided for Shri V. D. raised to Rs. 1,500 per month. For the Dhanwatcy was later accounting period relating to the assessment years 1954-55 aod J 955-56 Shri V. D. Dhanwatey had been paid Rs. 18,000 io each r__ar. The a.ssessec 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 urJ.!ed 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 Kart.a of the Hindu Undi' ided family. The Income Tax Officer rejected the contention of the assessec. The appeals of the assessee were disailowed by the Appellate Assistant Commissioner of Incomc tax, Nagpur. The assessee took the matter in further appe:i.I be fore the lncome-:ax Appellate Tribunal in Bombay. It was contended by the asscssee that Shri V. D. Dhanwatey was an

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v. D. DHANWATEY v. C.I.T. (Ramaswami, I.)

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employee of the firm even before the family was taken as a part ner. It was said that on partition of ihe larger Hindu undivided family in 1939 of which Shri V. D. Dhanwatey was a .member. Shri V. D. Dhanwatey representing the small Hindu \undivided family of which he became the karta, became a partner in the said firm and received salary from it. The Tribunal, by its order <lated September 4, 1962 dismissed the appeal of the asscssee .. The Tribunal accepted the contention of the assessee that Shri V. D. Dhanwatey was rendering service~ to the ,firm and was getting salary even. before hi& family became a partner in the firm. But the 'tribunal h~ld that Shri V. D. Dhanwatey who was a. partner of the firn1 could. not at the same time be an employee of the partnership finn 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( I) of the Income Tax Act, 1922 on the follow ing question of law :

"Whether on the facts and in the circumstances ol the case, the sum of Rs. 18,000 was rightly included in the total income of the assessee-family fo1• the as'sessment years 1954-55 and I 955-56?"

By i" judgment dated July 23, I 964 the Il.igh Court answered the rciercnce against the assessee, holding that the entire capital con tribution was made by the Hindu Joint family, that the remune ration 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 ot 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 gov-· erned by the decision of this Court in The C.l.T., West Bengal v. Kalu Babu Lal Chand(').

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On behalf of the assessee learned Counsel stressed the argu ment that the remuneration to Shri V. D. Dhanwatey was by reason of his own exertions and it was not earned with the help It was contended that there was no of the joint family assets. nexus between the joint family funds and the remuneration paid to Shri V. D. Dhanwatcy for the services rendered by him and· there was no evidence that any training .had been given to Shri V. D .. Dhanwatcy at the expense of the family funds for equipping It was. him for the services rendered by him to the partnership. argued that the re1mmeration earned by Shri V. D. Dhanwatey could not be said to have been earned· by detriment to the joint

(I) [l 960] l S.C.R. 320.

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family funds. It was ·the.refor\: said. ~at the High Court was wrong in applying the .Principle laid down by this Court in The C.l.T., West Bengal v.'Ka/11 Babu Lal Chand(') in deciding th~ present case.

The general doctrinc .. of Hindu Law is that property acquired by ~ karta or a coparcene!' with the aid or assistance of joint family assets is impressed with the cl!aracter of joint family pro pcny. To 'put it differently, iti is. an essential feature of self-acquir ed property that it should have qeen" acquired without assi~tancc or aid of the joint family property. The test of self-acqi!iSiilon by the karta· or copafccner is that it should be without detriment to the ":mcestral estate .. It _is therefore dear that bef.ore an· acquisi tion can be.claimed to be a separate property; it must be shown th~t it was made without ~my aid or assistance from the ancestral or joint family property. The principle is based on the original lc.\t of Yajnavalkya who while dealing with property not. liable Ill p<irtition, stntes :

11<F11q

l'lqiiol<rflrl:liilf lf"l"li~ '<iq ~llHl<FrT if ITT" 'lf.lfFl'">lfl'Tn' ~"fl<T lf ~ ~~rq f<r¥P<T \'fiU!fq 'i:f 11

~'It""~ 1 '1i«{ 11

..it ifoll"<'I'~ I!: I

.. Whatever else is acquired by the coparcencr him-. self, without detriment to the father's estate, as a present from a friend or a gift at nuptials, does not appertain. to co-heirs. Nor shall he, who receives hereditary property whi(·'1 had been taken away, give it up to coparceners; nor what has been gained by science." (Y,1jnavalkya _2, verses· I 19~120).

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Commenting on this .text of Yajnava!kya the author of Mitak <-hiir~t states :

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'The author explains what may not· be divided whatevet else is acquired by the coparcc;ner himself, with·· out detriment to tho father's estate, as a present fro111 a - friend, or a gift at nuptials, does not appertain to the co heirs. Nor shall he, who recovers hereditary property, which had been taken away, give it up to the coparceners; nor what has been gained by science."

Th~ author seis out iii v;rsc 2 the text of Yajnavalkya in his 0wn .,,·urds and states in verse 6 :

3!'f 'I" "f'!cr;;oq-rf<i>)illf ll"k°"'f.fS'i:f<f<nf'l~'I" I ;:fu m WG": I ~q:izirf<n:'r>f~ 1!•ii'fl!f"P!lr, fq<(~fuifr'f 'f<;"iiITfy,_·.f firq...,.T fon:iiJ 'I 1wr.i1Prrnm;:<i, fir~m..:tillf f<r¥P<r 1!~~ i:r~<olff>Tll'<Ps:ira 1 11> [196JJ I S.C.R. 320.

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V, D. DHANWATEY I'. C.1.T. (Ramasll'ami. J.)

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<1>rr "f Fra-roiirf<n:r<T'f ll<'l'!'l'r~or >Rlflt. 3!Tip:rf• f'f'lr~'! 'l~'uii: <PH fini'i:oll~'! 'l""1fl'lITT::I<i ""' fii<r•''llllT'f <1o"'1<:'l N~l ~"11\ ITT! ~ 'l<r;.~.., , rr'l"r 'if r.-:.i;;;r.fl'l11 1

"Herc the phrase anything acquired by himself. with out detriment to t~ father's estate most be everywhcr~. understood; and-if is thus connected with each member of the seninfe; what is obtained from a friend, without detri111int to the paternal estate; what is received in mar riage. without waste of the patrimony: w' mt is redeemed. of the hereditary estate without expenditure of ancestr.al property: what is gained by science. without me of the father's goods. Consequently. what is obtained from a friend, as the ·return of m1 obligation conferred at the charge of the patrimony: what is received at a marriage concluded in the form tem1ed A~ura or the like; what is recovered. of the heredimry estate, by the expenditure of the father's goods: what is earned by science acquired at the expense of ancestral wealth: all that must be shared with the whole of the brethcrn and with the father."

'l he expression 'without detriment to the father's estate' iu the text al! ,Y ajnavnU .. -ya is : "fi«pr~lfr'f" Dealing with the same matter, Devanna Bhatta states in Smriti Chandrika :

"27. The principle contained in Yajnavalkya's text i.e .. 'Whatever else is acquired by the coparccner himself without detriment to the fatbcr's c.~tate' is 'explained by Manu in his passage, 'What has been acquired by labour without prejudice to \he father's estate.'

28. In boll\ the kbove passages, the word 'father' signifies an undivided co'heir generally-'By labour' means by acts requiting Jabour, such as agriculture, etc. Without prejudice,' 'means without detriment.

29. Yyasa, too; '-Whatev!!r a man gains by hL~ mvn labour without the assistance of the father's estate shalt not be given by him to the co-heirs.'

30. 'Without the assistance', means without deriving assistance for the purpose o_f gaining. The word 'father' is used to denote an undivided co-heir generally·· (Setlur's translation, Ch. VII. Paragraphs 27 to 30) ··

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Ti1is principle is implicit in the decision of this Court in Tile C.l.T., West Bengal v. Kalu Babu Lal Clzand(') in whkh 0111." Rohatgi, manager of a Hindu undivided family, who took over a 'business as a going co~ccm, promoted a company which wa'

(I) [1960] I S.C.R. 320.

SUPREME COURT REPORTS

(1968] 2 S.C.R.

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w :akc over the busmess. The Articles of Association of th~ first managing .comP.any provided that Rohatgi would be the l he share,, .Uil"~ctor at a remuneration sp!:Cificd in the Articles. which the name . of Rohatgi and his brother were acquired with funds belonging to the joint family ami th~ family was in enjoyment of the dividenels paid on those shares, and the company was tloatcd with funds provided by the family, and was at all material times financed by the joint family. Jn proceedings for assessment of the Hindu undivided family, it wa> cl~.irucd that the managing director's remune~ation were personal .earnings of Rohatgi and could not be added to the income of the Hindu undivided family. The contention was rejected by thi.s Court and it was held that the managing director's remuneration rc.ceived by Robatgi was, as between him and the Hindu undivided family, the income of the family and should be assessed in its Jn reaching that conclusion, the court fiN obsen·ed t!1at hands. .a Hindu undivided family cannot enter into a contract of panncr ship with another person or persons. The karta of the H_indu undivided family, however, may, and in fact, docs, enter into pannership with outsiders. on be}lalf and for the benefit of his joint family, but when he does so, the oth_er members of the family do not, vis-a-vi~ the outsiders, be.come partners in the firm. So far as the outsiders arc concerned, it is the manager who is re cognised as 2 partner. Whether in entering into a partnership with outsiders, the manager acted in his individual capacity and fur his own benefit, or he did so as representing his joint fami!y and for its benefit, is a question of fact. If, for the purpose of contribution of his share or the capital in the firm, the karta brought in monies uut of the till of the Hindu undivided family then he must be regarded as having entered into the partnership for the benefit of the _Hindu undivided family, and as between him .and the other members of his family ·he would be accountable for all profits rc.ccivcd by him as his share out of the partnership in the profits, and such profits would be assessable as income hands of the Hindu undivided family. The court then proceeded to consider whether that principle was a_!lplicable to the income derived by a manager as a panner-of a managing agent to remune ration received by the manager as the managing director of the company, and held that if the manager was appointed a managing director as representing the Hindu undivided family, the income rc.ccived would be taxable a~ the income of the Hindu undivided In the course of his judgment, S. R. Das, C. J. speaking family. for the Court observed as followes at pages 331-332 of the Report :

''The karta was one of the promoters of the Company which he floated with a view to take over the India In anticipation of Electric Works as a going concern. the incorporation of that Company the karta of the

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v. D. DHANWATEY ~ <;.I.T. (Ramaswami. J.)

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family took over the concern, carried it on and supplied the finance at all stages out of the joint family· funds and the finding is that he never contributed anything out of his separate property, if he had any. The Articles of Association of the Company provided for the appoint ment as managing director of the very person who, as the karta of the family, had promoted the Company. The acquisition of the business, the floatation of the Company and appointment of t1'.e managing director appear to us to be inseparably linked together. The jomt family assets were used for acquiring'the concern and for financ ing it ·and in lieu of all that detriment to the join~ family properties the joint family got not only the shar.:s stand ing in the names of two members of the family bu~ also, as part and parcel of the same scheme, the managing directorship of the company when incorpqrated ..... . . . . . . . . . . . . . . . . . The recitals in the agreement al<;o clearly point to the fact of B. K. Rohutgi having been appointed managing director because of his being a pro moter of the company and having actually taken over the concern of India Electri~ Works from Milkhi Ram and others. The finding in this case is that the promo tion of the Company and the taking oveq of the concern and the financing of it were all done with thd help of the joint family fund~ and the said B. K.. Rohatgi did not if any. contribute aiiything out of his personal funds In the circumstances, we are clearly of opinion that the managing director's remuneration received by • B. K. Rohatgi was, as between him and the Hindt1 undivided family, the income of the latter and should be assessed in its hands." The same principle was reiterated by this Coun in a sub;c quent case--Mathura Prasad v. C.l.T., U.P.(1) In that case. family owned considerable property and a Hindu undivided carried on many businesses. There was a partition among the six branches in the family and a sixth sh_are of the property was allotted to the smaller Hindu undivided family of which M_ was the manager. After partition the managers ;)f the six branche<; entered into an agreement of partnership to carry on the busi nesses. Under the agreement, M, who was to manage the affairs of one of the offices, was entitled to a monthly allowance of Rs. 1,500, such allowance not exceeding tht:- profits disclosed at that office. It was conceded before· the Tribunal ihat M had entered into partnership as representing his smaller Hindu un divided family for the benefit of the family. It was further found that M became a partner with tb! help of joint family funds and

(l) 6U l.T.R. 428.

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SUPREME COURT REPORTS

[1968) 2 S.CR.

that the allow:111ce received by him was directly relalCd to the investment of the family funds in the partnership business. Ac cordingly, his allowance was taxed as the income of the smaller Hindu undivided family in i:s hands. The appellant thereupon applied for a reference of the question whether the ailowance wa' the income of the Hindu undivided family or of M in his personal capacity. Both the Tribunal and the High Court were of the view that the question sought to be raised was concluded by the judgment of this Court in C.1.1'. v. Ka/ti Babu Lal Chand( 1 ) am! therefore it need not be referred for the opinion of the High Court. The assessce preferred an appeal to this Court from the •Jn.lee of the High Court rejecting his application for rcfcrcnc~. it wa» held by this Court that on the findings recorded by the Tribunal, · the question was concluded by the judgment of this Court in C.l.T. v. Ka/11 Babu Lal Chand(') nnd any further claborntion wus academic :ind thnt the Hi~h Court was in refusing to direct n case to be stated under s. ~6(2) of the Indiun lncome-tnx Act, 1922. Reference was made on behalf of the appellant to the decision of this Court in Mis. Piyare Lal Adishwur Lal v. Tire C.1.1' .. Delhi("). But that case w~s distinguished am! it was pointed out that there was no _analogy between a case in which the property of the Hindu undivided family was sought to he encumbered for obtaining a benefit which was essentially personal to the manager, and a case in which· with the aid of the family funds the manager of the family was able to enter into a partnership and to earn allowance, which he would not other Jn the course of his judgment " ise have been entitled to receive. at page 433 of the Report. Shah. J. speaking [o( the Court observ ed as follows :

therefore

right

"In the present ca-;es the Tribunal has

found that Mathura Prasad had 'become a partner in the firm of Badri Prasad fogan Prasad with the aid of the funds of. the Hindu undivided family. and as a partner of the firm he was entrusted with the management of the Agarwal Iron Works and he earned the allowance which was claimed to be salary. The right to draw the allowance was. in the view of the Tribunal, made possible by the use of family funds. The family funds enabled hin0 to become a partner anu to claim the allowance for the service> rendered. There was in the view of the Tribunal an inse parable connection between the joint fomily funds and received. The right to draw the allow the allowance ance therefore arose directly from the joint family funds.

It may be recalled that in the second paragraph of clause 8 of the partnership agreement. though a monthly (c> (191\<>I' s.c.

f·IJ 1196 l) I S.l.R. )~II.

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v. !}, DHANWATEY :r. <C.l.T. {11egde, .1.1

allowance of Rs. 1,500 was named as the amount which Mathura Prasad was entitled to withdraw, the amount was liable to be reduced, if the profits e'arne.;! uid not justify the withdrawals, and Mathura Prasad was bound to refund the excess of the withdrawals over his appro priate s_hare in the profits. Therefore, by the agreement it was intended that subject to a maximum of R». 1,500 per month, Mathura Prasad will be entitled to make withdrawals commensurate with the profits of the firm. In the light 0f the principle laid down by this Court in Kalu Babu Lal Chand's case .[(1960) l S.C.F 320], it must be held that on the finding recorded by the Tribunal, the question, which it was claimed should b.e referred to the High Court, was concluded by the judgment of this Court.''

Now whllt ure the facts fo.und in the present casc1 It is not in dispute that the capital contribution of Shri v. D. Dhanwatey in the partnership belongep to the Hiridu undivided family which In .. other ·words, the entire capital contribution he represe.nted. to the partnership was made by the Hindu undivided family of which Shri V. D. Dhanwatey was the karta. Xt 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 It .is also not disputed that shri V. D. Dhanwatcy partnership. 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 in vestment of the capital by. tb joinf family in the partnership business and had; it not been for such jnvestment -Shri V. D. Dhan .:watey would not h:cve 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 1939 from the business which was carried on by the larger joint In our opinion, this finding is not rP!evant for the deter family. mination of the question of. law in the present case. Even assum ing that Shri V. D. Dhanwatey was rendering services to the busi ness before the partnership was formed it does not necessarily follow that the remuneration paioi to Shri V. D. Dhanwatcy after the formation of the partnership should be deem.ed to be indivi clual 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 con nection with the· remuneration earned by him after thP- contract of partnership and has a different character and arises ouc of a different legal relationship. On the ofher hand, the remuneratio:i L11Sup.CI/68-6

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SUPREME COURT 11.EPORTS.

(1968] 2 S.CR.

in the present case was given to Snri V. D. Dhanwatcy by virtue of the contract of partnership. It should also be nouced that under cl. ( 16) of the partnership deed the amount of remunera tion of Shri V. D. Dhanwatcy or of any other partner could be revised at any time if all the partners agreed to do so. It has been found bv the Appellate Tribunal that the remuneration received bv Shri V. D. Dhanwatcy was only an increased share of the profit, oi" the firm paid to him ;1s representing the Hindu undivided familY. and therefore :he whole of the payment made to Shri V. D. Dhanwatcy, l"i;., the share in the profits of the firm and his in dividual remuneration "as tax;1blc as in.come Gf the Hindu un It is manifest that Shri V. D. Dhanwatey was divided family. 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 ousincs:;. In our opinion, the remuneration paid to Shri V. D. Dhanwatey was directly related to investments fron1 the assets of the Hindu joint family in the partnership business. In other words, ther~ was a real and suflicient connection between the investment from the Hindu joint family funds into the partnership business and the re- 1nuneration paid to Shri V, D. Dhanwatey under cl. (16) of the It follows therefore that the remuneration deed of partnership. of Shn V'.' D: Db:in;.l"atey was not earned without detriment to the Hindu joint family rtlrrds • .;i,nd the case falls directly within the principle laid down by this~ourt in The C.!.T., Wcrt Bengal v. Ka/u Babu Lal Clw11d(1) and in Math11ra Prasad v. C.l.T .. U.P.(').

It was finally contended on behalf of the appelfant ;iiat the Appeilate Tribunal had found that Shri V. D. Dhanwatey h~d earned the remuneration without any detriment to the family funds and the finding of the Appellate Tribunal on this point was a find ing on a question of pure fact and the High Court could not, in a reference under s. 66 ( 1 ) of the Income-tax Act, 1922, question the correctness or the validity of that finding. We are unable to :iccept the argument put forward on behalf of the appenant. It is true that the jurisdiction conferred on the High Court by s. 66( l) of the Income-tax Act is limitc<l to entertaining references In the present case. however, the conclusion Of"I questions of Jaw. rcJched hy the Tribunal is not a conclusion ori a question of pure fact hut it is a conclusion on a mixed question of Jaw and fact. Jn other words, though the conclusion of the Tribunal is no doubt based upon primary cvidcntiary facts, its ultimate form is deter- 111incd by the application of the relevant legal principle of Hindu Law which has been discussed in the course of this judgment. In d~;ding with findings on questions of mixeu law ~nd fact the High

(I) 11960] I S.C.R.320.

12) 60 l.T.R. 428.

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v. D. DHANWATEY V. C.l.T. (Hegde, !.)

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Court must no doubt accept the findings of the Tribunal on the primary questions of fact; but it is OJ?<!n to the High Court. to ex.amine whether the Tribunal had apphed Jhe relevant legal pnn ciples correctly or not in reaching its final conclusio~; _and 1_n that sense. the scope of enquiry and the ex.tent. of the 1unsd1~t10n of the High Court in dealing with such pomts is. the same as m deal~ ing with pure points of law. For example, m G. Venkataswanu Naidu & Co. v. C.l.T. (') it was pointed out by this Court that where the question is whether a transaction is in the nature of trade. everi 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 has necessariiy to address itself to the legal requirements ass~ciated with the concept of trade or business. The final conclus10n of the Tribunal can, therefore, be challenged on the ground that the relevant legal principles have been mis-applied by the Tribunal in reaching its decision on ·the point; and such a challenge is open under s. 66 ( 1) because it is a challenge on a ground of law.

D

For the reasons expressed we hold that the High Court rightly answered the question of law against the assessee and these appeals. must be dismissed with costs--one set. IJf. hearing fees.·

Hegde, J.

I regret that it has not been possible for me

to

agree with the majority decision.

The question for decision in these appeals is "whether on the facts and circumstances of the case, the. sum of Rs. 18,000 was rightly included in the total income of the assessee family for the assessment years 1954-55 and 1955-56."

fhe facts as found by the tribu"nal are these : The assessee is a Hindu undivided family of which Shri V. D. Dhanwatey (who will be hereinafter referred to as Dhanwatey) is the karta. He is one of the partners in a firm engaged in lithography and printing bu.siness. The .partnership came into existence in August 1939. But that very business was being carried on by Dhanwatey's family before its partition in 1939. After partition in the bigger family, several members of the quondam family formed a partner in question. ship and that partnership took over the business Dhanwatey was attending to that business ever since 1930 and he was being remunerated for the same. Dhanwatey joined the firm as one of its partners but his share of the capital was subs cribed by his joint family. Under the deed of partnership he was designated as the general manager and his remuneration was fixed at Rs. 1,500 per month. The Hi~h Court found that he was get tmg the same remuneration even before the partnership came foto existence.

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(I) 35 l.T.R. S9'.

76

SUPREME COURT REPORTS

[1968] 2 S.C.R.

The relevant findings of the tribunal are found in paragraph

5 of it~ 0rder.

It reads as follows : -

.. Even after the partition and the formation of the firm Shri Y. D. Dhanwatey was get!ing a salary for managing the said business. These facts are not dis~ puted by the <lepartmcnt. We think. therefore, that the assessee has proved that Shn Y. D. DhJnwatcy has been rendering services to the firm. and that as he was getting the salary even before he became ··a partner ( subse quently representing his H U.F.) it cannot be said that the salary now paid to Shri V. B. Dhanwatey is because of any detriment to the joint family."

Even after coming to that conclusion, the tribunal repelled the contention of the assessee that the salary received by Dhanwatey was his individual income on the sole ground, to C!Uote its own words:

"Dhanwatey is a partner in the said firm representir.g his H.U.F. Jn law he alone is a partner of the firm and not the H.U.F. Shri Y. D. Dhanwatey cannot, there fore. be an employee of the partnership and the alleged salary received hy Shri V. D. Dhanwatey must be held to be only an adjustment of the share of the H.U.F. in the partnership. As in this case no salary can be said to have been paid to Shri V. D. Dhanwatey, but what is paid can be said to be only an increased share in the profits of the firm paid to him as representing his H.U.F., and the share in the partnership being undoubtc<,lly the income of the H.U.F., it is clear that the whole of the payment made to Shri V. D. Dhanwatey, viz .• the share in the profits of the firm and the alleged salary, all this is income of the H.U.F. and in our opipion was rightly taxed as such in the hands of Shri V. D. Dhanwatey as the karta of the H.U.f."

Jn support of the conclusion that no partner of a .fim1 can get remuneration for taking part in partnership business. the tribunal purported to rely on the decision of the Bombay High Court in S. Magnus v. Commissioner of Income tax, Bombay City(').

From the above findings of fact reached by the tribunal which were bindin~ on the High Court and are binding on :his Court, it is established (I) that Dhanwatey was attendini: to the business in question even before the partnership came into. existence and that he was getting remuneration for the work dot'\: by him. (2) after the partnership came into existence, he. one out of the

11) 33 l.T.R. ll8.

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several parmers, was designated as the general manager and for that work he was given a monthly remuneration of Rs .. 1,500, and (3) the said remuneration was received by him without any detri ment to his family. We have now to see whether on the basis of these findings the remuneration received by Dhanwatey can be considered as an accretion to his family income. In my opinion the High Court went wrong in thinking that the finding of the tribunal that the remuneration received by Dhanwatey was with- out detriment to his family is not a finding of fact but a legal in ferenct. drawn by the tribunal from the facts proved. The tribunal reached that finding on the basis of the facts placed before it and it has given cogent reasons in support of that finding. The con I respectfully clusion reached by the tribunal is a finding of fact. disagree with the majority that a finding of this character can be co11.sidered as a mixed question of law and fact as no legal princi ple was required to be applied in arriving at that conclusion.

The appellate tribunal .as well as the Bombay High Court were wrong in thinking that a partner of a firm can under no circum- D. stance be givrn remun,ration for taking part in the conduct of the partnership business. In reaching that conclusion the tribunal as well as the High Court ignored s. 13 (a) of the Partnership Act, which says that subject to the contract between the partners, a partner is not entitled to receive remuneration for taking part in the conduct of the business. From that provision it follows that by agreement one of the partners in a partnership firm can be remu.nerated for attending to partnership work.

E

that

The tribunal as well as the High Court erred in thinking that the Bombay High Court in the case of S. Magnus had laid down that ·a partner of a partnership firm cannot be given any remu neration for taking part in partnership business. All that decision has laid down is that a pa'rtne{ cannot be an employee of the partnership. That is not the· same thing as saying that a µartner cannot be remunerated for taking part in the conduct of the partnership business. . On, the facts found by it there was no basis for the conclusion reached by the tribunal that the remune ration received by Dhanwatey was only "an increased share in the profits of the firm paid to him as representing his HUF''. It may further be noted that the remuneration recefved by Dhan watey had no relationship with the share capital subscribed by It. is in no manner linked with the share capital subscribed him. by him.

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On the material on record it is not possible to hold nor did the tribunal hold that Dhanwatey was a!Jpointed. as the general -·manager merely because he was a partner,. The partnership deed In law does not say so either expressly or even by implication. he alor.e is the partner. Therefore it would not be correct to say

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SUPREME COURT REPORTS

('968] 2 S.C.R

that C\CI) right Dhanwatey acquired under the parlnership deed was acquired on heh al[ of the fomily. Under cl. ( 16) of the panncrship Dhanwatcy as the general manager of the firm was given a remuneration of Rs. 1.500 per month~ It cannot be said that Dhanwatey"s joint family was the general manager of the family, nor could it be said that for any act or omission of hi' as the general manager of the firm his family could be held res ponsible.

Dhanwatey evidently had great deai of experience in the busi ness in question. To repeat, even before the partnership came into existence, he was attending to that very business and he was drawing a salary of Rs. 1,500 per month. For the capital sup plied by his joint family, it was getting dividends. It may be, the fact that he was a partner of the firm was a circumstance that had induced the other partners to appoint him as the general manager. , But that could not have been ·the determinative circumstance. There were other parlners who had subscribed more capital than lie had done. It must be remembered that investment in a busi ness is but one of its facets. The know-how and intelligent direc tion is no less important. Business concerns do not cam profits merely ,bcrn~c capital is invested in them. Much depends upon the' persons who arc in charge of the business. Captains of indus tries and business managers should possess business knowledge. tact, capability, drive and numerous other -:inlities. The ex' perience of Dhanwatey in that particular business must have greatly weighed with the partners in appointing him; as the general manager and entrusting to him the supervision of the business. Therefore it can be reasonahl; concluded that remuneration paid to him was a quid pro quo for the -special services rendered b,· · him.

So far as the partnership is concerned, it was Dhanwatcy and not his joint family that was the partner. The partnership had nothing to do with his joint fami'.y. But the. capital invested by ')hanwatey being that of his joint family, Dhanwatey had to hold l.iat capital and the accretions thereto as joint family property. But he need not m:' kc over to his family his personal earninj!s. Before an acquisition made by a coparcencr of a Hindu family can be comidered as family acquisition. as observed in the majo rity .iud~mcnt. there must be real and sufficient connection between the family investment and the acquisition. On the facts of this case it cannot be said that the management of Dhanwatey involv ed anv risk to his family as such. Nor can it be said-exceot in a verV remote sen-'c-that ho took the aid of the family funds in making the acquisition.

As laid down bv the Hindu law 'texts, whatever is acquired by a coparcener himself without detriment to the father's estate. does

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V. D. DBANWATEY V, C.I.T. (Hegde, J.)

79

not appertain to the co-heirs. The tribunal, the final fact finding authority, has found that the payment of remuneration to Ohan" watey did not entail any detriment to the family assets. Nor could it be said that he made that acquisition with the aid of the family assets. The aid contemplated by law must be a real and sub stantial one and not any remote connection between the income earned and the family funds. That position is made clear by the decision of this Court in Piyare Lal v. Commissioner of Income tax(') and the decision of this very Bench in Palaniappa Chettiai· v. Commissioner of Income Tax, Madras(').

In Sardar Bahadur I:1dra Singh v.

.Commissioner of Income tax Bihar and Orissa("), the income realized by the karta of Hindu undivided family as the governing director of a private company of which he was a partner as representing_ his family, was held to be his personal income. A similar view was taken in Commis sioner of Income tax, Bilwr and Orissa· v. Darsanram and In Commissioner of Income-tax, Madras v. S. N. N. others('). Sankaralinga Iyer('), a division bench of the Madras High Court consisting of Satyanarayana Rao and Viswanatha Sastri, JJ. held that the remuneration deceived by Sankaralinga Iyer as the manag ing director of a bank was his individual income though he h'.ld acquired the shares in the bank which qualified him to be a. direc tor from out of the funds of his family of which he was the karta. It held that the remuneration received by him as• the managing director's remuneration and director's sitting fee was earned by him in consideration of the services which he rendered to the bank, and as there was no detriment to the family property in earning that remuneration, his income as the man(lging director of the bank was his personal income and not the income of the Hindu undivided family of which he was che karta.

Then came the decision of this Court in Commissioner of In come-tax, West Bengal v. Kalu Babu Lal Chand('). On the facts of that case, this Court held that the remuneration earned' by Rohatgi as the managing director of a firm was the income of his HUF. The facts of that case were somewhat ·peculiar. They are set, out at p. 331 of the report. It would be best to quote the passage in question which reads :-·

"Here was the Hindu undivided family of which B. K. Rohatgi was the karta. It became interested in the concern then carried on by Milkhi Ram and others under the name of India Electric Works. The karta was one of the promoters- of the Company which he floated with a view to take oyer the India Electric Works

(l) [1960] 3 S.C.R. 669. (3) ll l.T.R. 16. (S) 18 l.T.R. 194.

(2) [1968] 2 S.C.R. 55. (4) 13 T.T.R. 419. (6) [1960] 1 S.C.R. 320

so

SUPREME. COURT REPORTS

(1968} 2 S.C.R.

as a going concern. In. anticipation of the incorpora tion of that Company the karta of the family to0k over the concern, carried it on and supplied the finance at all stages out of the joint family funds and the finding is that he never contributed anything out of his. se_parate property, if he had any. The Articles of Associatwn of the Company prorided for the appointme1:t a.< managing the karta of the director of the rery person who, a.I" (Emphasis sup family, had promoted the Company plied). The acquisition of the business, the floatation of the Company and appointment of tho. managing director appear to us to be inseparably linked together. The joint family assets were used for acquiring the con cern and for financing it and in lieu of all that detrimem to the joint family properties the joint family got not only the shares standing in the names of two members of the family but also, as part and parcel of the same scheme, the managing direcll>rship of the company. It is also significant that right up to when incorporated. the accounting year relevant to the assessment year l 943-44 the income was treated as •he income of the It is tru1t that there is no Hindu undivided family. question of res j11dicata but the fact that the ~cmunera­ tion was credited to the family is certa;nly a fact to be taken into consideration:·

It may be noted that it is on the basis of those facts' that this Coun came to the conclusion that the remuneration received by Rohatgi was the income of his HUF.

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\Vhile dealinµ- with the decisions irr Sardar Bahodur

Indra Singh(') and Darsanrant"s(') cases referred to earlier, this Court observed in Ka/11 Babu's(') case:

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~The case of Sardar Bahadur Indra Si11glt v. Com minioner of lncometax, Bihar and Oris.rn is clearly dis tinguishable in that it was expressly provided the Articles of Association of the Company in that" case that the remuneration of the managing director would be his personal income. In Commissioner of /~come­ tax, Bihar and Orissa v. Darsanram, the finding of fact was that the joint family property had no: been spent in earning the managing director's remuneration which was, therefore, held to be the personal earnings of the karta who had been appointed ns the managing director." (ll 111.T.R.16.

(2) 13 I. T. R. 419c

(J) Il9601 I S.C.R. 320.

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v. D. DHANWATEY I'. G.J.T. (Hegde, !.}

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From these observations it follows that this Court did not dissent from the view taken in Darsanram's(') case. The facts found by the tribunal in the present case are identical to those found in Darsanram's(') case.

Dealing with Sa.,karlinga Iyer(") case, this Court observed

in the aforementioned Ka/u Babu's(') case :

'The C<Ise of Commissioner of Income tax, Madras v. S. N. N. Sankarali11ga Iyer does not help the respon In that dent because of the facts found in that case. case it was found that the remuneration of the manag ing director was earned by him in consideration of the services which he rendered to the bank and no part of the family fund; had been spent or utilised for acquiring that remuneration except that the necessary shares to acquire the qualification of a managing director werr purchased out of the joint family funds. It was said that there was no detriment to the family property in any manner or to any extent, as admitteOlv the shares earned dividends which were included in ihe income of the family."

1 f this Court had observed nothing further about Sankaralingcr /yer's(') case, the rule laid dq_wn in that case could have been relied on by the assessee in this case as the facts found in the two• cases are in pari materia. But unfortunately in Kalu Babu's(')· case this Court went further and observed :

"With great respect to the learned judges, it appears to us that they o.verlooked the principles laid down by the Judicial Committee in Goku/ Chand v. Hukum Chand Nath Mal ( 48 I.A. 162) where it was pointed out that there would be no valid distinction between the direct use of the joint family fund and the use which qualified the member to make the gains on his own efforts. The member of the joint family entered into the Indian Civil Service no doubt by reason of his intel ligence and other attainments. He certainly entered into a personal agreement with the Secretary of State in Council and he received his salary for rendering his personal service. But all that was made possible by the use of the joint family funds which enabled him to acqu;re the necessary qualifications and that fact ·made _his earnings ,Part of the joint family properties. That apart, those decisions do not clearly govern the case now before us."

(I) 13. I. T. R. 419.

(2) 18 I. T. R. 194.-

(3) [1960J l S..C.R.320.

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SUPREME COuRT REPORTS

[ 1968) 2 SC.R

The above observations, which are purely obiter dicta have led to a great deal of misunderstanding about the true legal posi It is well known that the decision in Goku/ Chand's( 1 tion. ) -case gave rise to great deal of public dissatisfaction and the legis lature was constrained to step in and enact the Hindu Gains of Learning Act 1930 (Act 30 of 1930) which nuilified th! effect of that decision. The observation in Gokul Chand's( 1 that there is no valid distinction between the direct use of the joint family fund and the use which qualified the member to make the gains on his own efforts, if I may say so with respect, is an unduly wide statement of the law. It does not flow from the relevant text referred to earlier. Further the said observatk.1 is wholly out of .tune wit\1 our present day socio-economic conditions. Hence that decision' should not be allowed to influence our judgment. In Piyare La/'s(') case this Court ignored the rule laid down by the Judicial Committee in Gokui Cha11d's(') case and this very Bench did not allow itself to be influenced by that rule in Palaniappa Chettiar's(") case.

) case

Dealing with Sankara/inga l,yer's(') case this Bench observed

.thus in Pa/aniappa Chettiar's(3) case :

"We consider it also ne:essary to state that the deci sion of Madras High Court in C.l.T., Madras v. S. N. N. Sankaralinga Iyer(') was not impliedly overruled by this Court in C.l.T.. -West Bengal v. Ka/u Babu Lal Chand("). It was merely pointed out that the mate rial facts of that case were different from those of Kalu Babu Lal Chand's( 0 ) case. It was, for instance. found in C.l.T., Madras v. S. N. N. Sankaralinga Iyer( 1 ) that the remuneration of the managing director was earne~. by rendering services to the bank and no part of the family funds we•e utilised except that the nec~ssary shares to acquire the qualification of a managing direc tor were purchased out ofjoint family funds. It was held that there was no detriment to the family property in any manner or to any extent. In view of this finding it follows that the remuneration of the managing director · could not be treated as an accretion to the income of the joint family and taxe\l in its hands. The process of reasoning of the Madras High Court in C.l.T .. Madras v. S. N. N. Sankara/inga lyer( 3 ) may not be wholly sound but, in our opinion, the actual decision in that case is correct and is supported by the principle that there is no detriment to the family property and no part of the family funds had been spent or utilised for ac quiring the remuneration of the managing director.n

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(I) 481. A. 162. ,(4) 18 I. T. R. 194.

(2) [1960] 3 S. C.R. 669.

(J) (1968] 2 S. C.R. 55. (5) jl960J IS. C.R. 320.

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V. D. DHANWATEY V. C.I.T. (Hegde, J.)

83

From these observations, it follows that this Court has accepted the correctness of the rule laid down in.Sankaralinga lyer's case. I am unable to discover any real basis to distinguish the facts of the present case from those found in Sankara/inga lyeis case. Hence, in my judgment the ratio of that decision fully applies to the facts of this case.

This takes me. to the decision of this Court in Mathura Prasad v. Commissioner of Income tax, U.P. (' ). The facts found in that case are more or less similar to those found in the Kalu Babu's case. Those facts as conceded before the tribunal are : Mathura Prasad, the manager of his HUF had et~tered into a partnership as r~!'resenting his family of which he was the karta and for the benefit of the family. There was also no dispute that in the fi.nn of Badri Prasad J agan Prasad, the assets of the assessee family were ·invested. The tribunal found that Mathura Prasad, the manager, became a partner in the firm with the help of joint family funds and as partner he was entrusted with the manage ment of the Agarwal Iron Works. On the basis of those facts. it was held that the allowance received by Mathura. Prasad was therefore directly related to the investment of the family funds in In the course of the judgment, it was

· the partnership business.

observed :

"It was suggested that Mathura Prasad ea'rned the allowance sought to be brought to tax because of the special aptitude he possessed for managing the Agarwal Iron Works ancl the allowance claimed by him was not earned by the use of the joint family fund·s. But no such contention was raised before the High Court. We have been taken through the petition filed in the High Court under section 66(2) of the Act, and there is no aver ment to the effect that Mathura Prasad had any special aotitude for management of the Agarwal Iron Works, and what was a!!reed to be paid to him was as remune ration for performing services because of such apti tude."

From these observations it is clear that in that case this Court was not considering a case wherein the facts found were similar I do not think that the rule laid to those before us in this case. down by this Court either in Kalu Babu's(') case or in Mathura Prasad's(") case is applicable to the facts of the present case.

It is unnecessary to go into the decisions rendered by the High Courts after the decision of this Court in Kalu Babu's(') case. Most of them, we were told, are pending in this Court in appeal. Further. they were decided on their own facts. Some of them

!H

(I) 611.T.R. 428.

(2) !96J I S.C.R. 320'.

(3J 60 l.T.R. 428.

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SUPREMF. C'OVRT REPORTS

(1968] 2 S.CR.

appear to have been greatly influenced by the observations Kokulchand's( 1 ) case quoted with approval case.

in in Kalu Hab11°s(')

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The con!ention that if a coparcener of a Hindu joint fan1ily takes any a1cl from his family funds iri making an acquisition. however, slender that aid might be. the acquisition in question should be considered as a family acquisition. stands repelled by the decision of this Court in P.yare Lai A dis/111-ar La/'s(") case. Therein, one Sheel Chandra who was the karta of his HUF consisting of himself and his younger brother. furnished as secu rity his family properties for being appointed the treasurer of a . bank. He would not have been appointed treasurer of the bank In that case also. it was contended on but for the security given. behalf of C.l.T. that the salary earned by Sheel Chandra was a family income and is liable to be taxed as such. That contention was negatived by this Court. From that decision it follows that it is not any and every kind of aid received from family funds which taints an income as family income. Before an income earned by the exertions of a co-parcener can be con.sidered as a family income. a dir•ct and substantial nexus bet,vecn the income in dispute and the family funds should be established. The ratio of the decision of this Bench in Paianiappa Chettiars case also leads to the same conclusion. Palaniappa Chettiar would not have become the director of the finn Trichy-Sri Ranga Trans port Company Ltd. but for .the shares acquired by him from out of the funds of his joint family. But yet this Bench held that the remuneration received by him as the managing direotor of the company was his individual income. I see no real distinction between the relevant facts found in Pa/aniappa Che11iar's case and Jn my opinion, both these casts those found in the present case. stand on the same footing.

Law is a social mechanism to be used for the advancement of It should not be allowed to be a dead weight on the the society. society. While interpreting ancient texts, <he courts must give them a liberal constructi.on to further .the interests of the society. Our gr~at commentators in the past hridged the gulf between law as enunciated in the Hindu law texts and the advancing society by wisely interpreting the original texts in such a way as to bring them in harmony with the prevailing conditions. To an extent, that function has now to be discharged hy our superior courts. That task is undoubtedly a delicate one. In discharging that function our courts have shown a great deal of circumspection. l!nder modern conditions legislative modification of laws is '><Jund to be confined to major changes. Gradual and orderly develop ment of law can only be accomplished by judicial interpretation.

(t) 48 t. A. 162.

(2) J1960) t S. C.R. 320.

(3) 11960) 3 S.C.R. 669.

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v. D. DHANWATEY v. C.l.T. (Ramaswami, J.)

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The Supreme Court's role in that i~gard is recognised by Art. 141 of our Constitution.

On the facts found in this case, it is clear that Dhanwatey was treating the remuneration received by him as his individual income with the consent of his iamily. As pointed out earlier, he w~ getting the same remuneration when his quondam joint family was .running the business. He could not have received the ·~ame on behalf of the family. There was no point in the family giving remuneration to him in one hand and taking it back in the other. Therefpre, the remuneration drawn by him prior to 1939 must be held to be his individual income. That remuneration quite clearly must have been paid to him with the consent of the members of the family. Factually there was no change in the position after the partnership came in to existence. Dhanwatey In has always been treating that income as his individual income. these cases it is the family which is contending that the income in question is Dhanwatey's individual ;ncome. From these facts it is reasonable to infer that his family had agreed to his receiving that income as his individual income. If that is so, the assessee's case falls within the rule laid down by this Court in Juga/ Kishore Ba/deo Sahi v. Commissioner of Income tax, U.P. ('). It is true that at no stage the assessee ,had put forward ihe contention that Dhanwatey was getting the remuneration in question as his indi vidual income with the consent of the members.of his family, but that conclusion clearly flows from the facts found by the tribunal and such a conclusion is not outside the scope of the question referred to the High Court.

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For the reasOllij. mentioned above, I allow these appeals and answer the question referred under s. 66(1) of the Income Tax Act 1922 in favour of the assessee, i.e .. on the facts and circum .stances of the case the sum of Rs. 18,000 received by Dhanwatey as his remuneration was 110£ rightly included in 1he total income of the assessee for the assessment years 195'1-55 and 1955-56.

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ORDER

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.In accordance with the opinion of the majority the appeals are

dismissed with costs. One hearing fee.

C.A. 1371 of 1966. Ramaswami, J. This appeal

is brought, by· certificate on behalf of the assessee from the judgment of the Bombay Hich Court dated July 23, 1963 in Income Tax Reference No. 5 'of 1962.

The app.~llant (hereinafter called the "assessee') is a Hindn ~ndivided family of which Shri M. D. Dhanwatey is the Karla. The

(I) [1967] IS .C.R 416.

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86

SUPREME COURT REPORTS

[ 1968] 2 S.C.R.

the partnership

assessment year involved in this appeal is 1954-55 the correspond ing. accounting year being the year ended Septeiuber 30, 1953. Shri M. D. Dhanwatey was a partner in firm c_arrymg on. business under the name and style of M's. Shivraj Fine Art Lltho Works. The share capital of Shri M. D. Dhan watey was entirely contributed by the assessee Hindu undivided family. Th~ rights of the partners were governed at the relevant time by a partnership agreement dated April I, 1951. According 10 the agreement,. the partnership was of lithography and art pr;nt mg and was earned on by meaps of a press under the name and style of "Shivraj Fin.e Art Litho Works'. C1ause· ( 4) of the partner ship deed enumerated various capital contribution5 of the partners. The share contribution of Shri .M. D. Dhanwatey was shown as Rs. 1,96,875/-. It is admitted that this amount belonged to the Hindu undivided family. Ciau5e (5) provid.~d for payment of interest at a certain rate io the partners on the share contribution. Clause ( 7) provided that general management and supervision of the partnership business shall be in the hands of Shri V. D. Dhan watey. Clause ( 8) stated that Shri M. D. Dli:!nwatey shall be the manager in charge of the works and both he and Shri V. D. Dhanwatey shall have power to make contracts, and arrange terms with constituents or customers. Clause ( 10) empowered three partners. viz .. V. D. Dha•·'vatey, M. D. Dhanwatey and Shamrao Dhanwatcy 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 p1 oper. Clause (15) provided that the various adult members of the 11annership shall devote their whole time and al!en·ion to the partnership in the >phere of their respective duties. Clause ( 16) is Jle material clause and it provides for various amounts to be paid by way of r.~muncration to the partners. The remuneration provided to be paid to Shri M. D. Dhanwatey under cl. ( 16) is Rs. 1,250 per ·111onth. For the relevani accounting year Shri M. D. Dhanwatey was paid Rs. 7 .500 as remuneration. For the assessment year 1954-55 the assessee showed the sa•d amount in Section D of It was contended that the salary received by Shri the return. M. D. Dhanwatcy, the karta of the as~~ssec family was received ·by him in h's individual capaci:y and that it was not taxable in the hands of the asscssee. The Income-tax Officer, Spe=ia! Investi gation Circle 'B'. Nagpur, by his assessment order dated May 28 . . • 1955 neeatived the contention of the assessee. The assessee took thc'ma!ter (o the Appellate Assistant Commiss;oner but the appeal was dismissed. The asscssee preferred a further appeal to the Appellate Tribunal which rejected the contention of the asses.see that the amount of Rs. 7,500 was earned by Shri M. D. Dhan watey in his individual capacity and that it should not have been included in the taxable income of the assessee. As directed by the High Court. the Appellate Tribunal stated a case on the following

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v. D. Dl!ANWATEY v: c:I.T. (Hegdl!, J.).

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question of 1aw under s. 66 (2) of the Indian Income-tax Act, 1922:

"Wheiher on the facts and circumstances of the case, the payment of Rs. 7,500 (Rupees seven thousand five hundred) paid to Shri M. D. Dhanwatey for rendering services to the firm, could be total income of the assess.ee. family?".

included

the

in

The High Court answered the reference in favour of the Income· tax Dep!lrtment and against the assessee. The High Court observed that Shri M. D: Dhanwatey was one of the partners in the partnership as representing th-~ Hindu undivided family con- sisting 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 tQ him in the ·fo-mi of remuneration was only for the purpose of adjustment of the rights inter 8e be.tween the partners. The remuneration paid to karta was therefore 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 wi'.hout any detriment to the joint family property. It was also found that the share capital contributed l>y Shri M. D. Dhanwatey came from the joint family assets.

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The material fac.ts of the present case are almost identical with those in Shri V. D. Dhanwatey v. Commissioner of Income Tax, E M.P. Nagpur(') 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 pres.en! case is governed by the decisions of this Court in The C.l.T. West Bengal v .. Kalu Babu Lal Chand(') and in Mathura Prasad v. C.l.T. U.P.(').

F

We are accordingly of the opinion thai the question referred to the High Court was rightly answered against the assessee and this appeal must be dismissed with costs.

Hegde, 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 G of Income Tax, M.P., Nagpur) I am unable to subscribe to the observation in the majority judgment that the hlaterial facts of the present case are almost identical with those in Shri V. D. Dhan watey v. Commissinner of Income Tax, M.P .. Nagpur.

R.K.P.S.

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Appeal dismissed.

{I) Civil Appc1ls Nos. 1372 & 1373 ofl96&. (2l (3) 6 J I. T. R. 428.

[196 ] I S. C.R. 32ll.

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