SECOND INCOME TAX OFFICER v. N. R. GOPALAKRISHNAN
[Citation -1984-LL-1129-10]

Citation 1984-LL-1129-10
Appellant Name SECOND INCOME TAX OFFICER
Respondent Name N. R. GOPALAKRISHNAN
Court ITAT
Relevant Act Income-tax
Date of Order 29/11/1984
Assessment Year 1979-80, 1980-81
Judgment View Judgment
Keyword Tags separate legal entity • individual capacity • agricultural income • income liable • karta
Bot Summary: On appeal, the AAC did not agree with the ITO. He observed that Shri N.R. Gopalakrishnan was an experienced jeweler, that he contributed his personal skill to the promotion of the businesses of the firms in which he was a partners, and as such, the salary received by him for the services rendered by him to the firms belonged to him in his individual capacity, and not to his HUF. He excluded the aforesaid amounts of Rs. 3,910 and Rs. 3,770 from the income of the assessee HUF for the asst. The only question for consideration is whether the salary received by a partner for the services rendered by him to the firm is includible in the income of the HUF whom he represents. The payment of remuneration for making available to the business of the firm special skill would really be in the nature of compensation for services rendered by the exercise of such special skill, and so, the receipt of salary by a partner for the services rendered by him to the firm would not partake the character of income of the HUF for the purpose of tax treatment. Again, the Full Bench of the Patna High Court has held in CIT vs. Atma Ram Budhia 39 CTR 345 : 146 ITR 240 that if it is established that the remuneration received by the Karta of an HUF from a firm in which he is a partner is for services rendered by him and there is not real and sufficient connection between the investment of the joint family funds in the firm and the remuneration paid to him, the remuneration received by the Karta could not be treated as income of the family. New, in the present case, it is not disputed that Shri N. R. Gopalakrishnan was an experienced jeweler and he contributed his personal skill to the promotion of the business of the firms in which he was a partner. There is no material on record to establish a direct nexus between the salary received by Shri N. R. Gopalakrishnan and the investment of the funds of his HUF or to show that the payment of salary was to the detriment of the family funds invested in the firms. Representative of the Department urges that a contract of employment requires two distinct persons, i.e., the employer and the employee, that there could not be a contract of service, under strict law, between a firm and one of is partners and as such, the payment of salary to a partner represents a special share in the profits.


M.R. SIKKA, V.P. Order These two appeals, filed by Department, involve common question for consideration. They are, therefore, disposed of by common order. 2. Shri N. R. Gopalakrishnan is Karta of assessee HUF. During accounting periods relevant to asst. yrs. 1979-80 and 1980-81, he was partner in firms of M/s EASSN Somasundaram Chettiar & Co., and M/s Madurai Mercantile Mart representing his HUF and received following amounts as salary for services rendered by him to them : Salary Salary Sl. Name of received in received in No. firm asst. yr. 1979- asst. yr. 1980- 80 81 M/s EASSN (i) Somasundaram Rs. 3,000 Rs. 3,000 Chettiar & Co. M/s Madura . Rs. 910 Rs. 770 Mercantile Mart . Total : Rs. 3,910 Rs. 3,770 3. ITO was of view that firm has no separate legal entity from its partners and that salary received by partner was, in reality, only mode of division of profits of firm. He, therefore, held that aforesaid amounts were includible in income of assessee HUF. 4. However, on appeal, AAC did not agree with ITO. He observed that Shri N.R. Gopalakrishnan was experienced jeweler, that he contributed his personal skill to promotion of businesses of firms in which he was partners, and as such, salary received by him for services rendered by him to firms belonged to him in his individual capacity, and not to his HUF. He, therefore, excluded aforesaid amounts of Rs. 3,910 and Rs. 3,770 from income of assessee HUF for asst. yr. 1979-80 and 1980-81 respectively. Aggrieved by consolidated order of AAC, Department has filed present appeals. 5. After going through record and hearing ld. Representatives of t he parties, I do not find any substance in these appeals. 6. only question for consideration is whether salary received by partner for services rendered by him to firm is includible in income of HUF whom he represents. On this point Supreme Court has held in Raj Kumar Singh Hukam Chandji vs. CIT (1970) 78 ITR 33 (SC) as follows : "In determining whether remuneration received by individual is income of individual to whom it is purported to have been given or that of HUF of which he is co-parcener, test is whether remuneration received by coparcener in substance though not in form was but one of modes of return made to family because of investment of family funds in business or whether it was compensation made for services rendered by individual coparcener. If it is former, it is income of HUF but if it i latter then it is income of individual coparcener. If income was essentially earned as result of funds invested, fact th at coparcener has rendered some service would not change character of receipt. But, if on other hand, it is essentially remuneration for services rendered by coparcener, circumstance that hi services were availed of because of reason that he was member of family which had invested funds in that business or that he had obtained qualification shares fro out of family funds would not make receipt, income of HUF." 7 . Similar view has been taken by Madras High Court in case of CIT, Madras vs. Surendra Manilal (1984) 42 CTR (Mad) 310 : 1984 Tax LR 371. According to this authority, remuneration paid to Karta or coparcener of family by firm in which family is partner, cannot be assessed as income of family, unless there is direct nexus between investment of funds of family in firm and payment of salary. In other words, unless such payment is to detriment of family funds invested in firm, it cannot be treated as income of family. payment of remuneration for making available to business of firm special skill would really be in nature of compensation for services rendered by exercise of such special skill, and so, receipt of salary by partner for services rendered by him to firm would not partake character of income of HUF for purpose of tax treatment. 8. Again, Full Bench of Patna High Court has held in CIT vs. Atma Ram Budhia (1984) 39 CTR (Pat) 345 (FB) : (1984) 146 ITR 240 (Pat) (FB) that if it is established that remuneration received by Karta of HUF from firm in which he is partner is for services rendered by him and there is not real and sufficient connection between investment of joint family funds in firm and remuneration paid to him, remuneration received by Karta could not be treated as income of family. 9 . New, in present case, it is not disputed that Shri N. R. Gopalakrishnan was experienced jeweler and he contributed his personal skill to promotion of business of firms in which he was partner. Obviously, therefore, he received salaries in question from firms for services rendered by him. There is no material on record to establish direct nexus between salary received by Shri N. R. Gopalakrishnan and investment of funds of his HUF or to show that payment of salary was to detriment of family funds invested in firms. In such situation, I am of opinion that AAC has rightly held that amounts in question are not includible in income of assessee HUF. 1 0 . ld. Representative of Department urges that contract of employment requires two distinct persons, i.e., employer and employee, that there could not be contract of service, under strict law, between firm and one of is partners and as such, payment of salary to partner represents special share in profits. In support of his argument, he relies on decision of Supreme Court in case of CIT vs. R. M. Chidambaram Pillai 1977 CTR (SC) 71 : (1977) 106 ITR 292 (SC). It may be mentioned that this authority of Supreme Court has been distinguished by Full Bench of Patna High Court in case of CIT vs Atma Ram Budhia (1984) 39 CTR (Pat) 345 (FB) : (1984) 146 ITR 240 (Pat), on ground that question involved in that case was whether any portion of salary drawn for services rendered by partner of firm was agricultural income liable to tax and not whether income received by partner was includible in his personal assessment or in income of HUF. Patna High Court has further held that decision of Supreme Court in Raj Kumar Singh Kukam Chandji vs. CIT (1970) 78 ITR 33 (SC) would apply to case when we have to determine whether salary received by partner from firm for services rendered by him is includible in his personal assessment or in income of HUF. 11. In view of above discussion, impugned order of AAC is sound, and calls for no interference. same is, accordingly, confirmed. 12. appeals are dismissed. *** SECOND INCOME TAX OFFICER v. N. R. GOPALAKRISHNAN
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