SECOND INCOME TAX OFFICER v. A. S. RAJESH
[Citation -1984-LL-1217-6]

Citation 1984-LL-1217-6
Appellant Name SECOND INCOME TAX OFFICER
Respondent Name A. S. RAJESH
Court ITAT
Relevant Act Income-tax
Date of Order 17/12/1984
Judgment View Judgment
Keyword Tags application for adjournment • individual capacity • business interest • individual income • share of profit • share income • karta
Bot Summary: In the instant case, salary was paid by firm to the Karta of the assessee-family who represented the family as a partner in the said firm. The further submission made is that once the AAC found that the payment of Rs. 13,099 as salary was excessive, he should have held that the entire salary income was assessable in the hands of the assessee-family and that he had no authority to exclude a sum of Rs. 8,000 from the assessment of the assessee-family as reasonable. The Court found that the Karta was not required to do any work or job in connection with the business; that the agreement to pay such salary to the Karta was not commercially expedient and that it was not bona fide. Unless a finding is recorded that salary was paid to the Karta because the assets of the family were utilised by the firm, the salary paid to the Karta by the firm for services rendered by him to the firm cannot be assessed as income of the family. In the absences of such real and sufficient connection between the investment of the joint family funds and the salary to the Karta, it cannot be said that the salary was earned on account of any determent to the joint family assets If the salary is shown to be in substance though not in form, one of the modes of return made to the family because of the investment of the family funds in the business, then it would be the income of the family. The further objection of the Revenue in this case is that the AAC having held that salary of Rs. 13,099 was unreasonable, the entire salary income should have been to be assessable in the hands of the assessee-family. Undoubtedly in the light of the principles laid down by the Supreme Court in the above cases, the salary in question becomes the individual income of the Karta for the services rendered to the extent that it could be said to have no real and sufficient connection with the family funds invested in the firm.


S. NARAYANAN, A.M.: When this appeal was taken up for hearing none was present for assessee. application for adjournment was received, which however was rejected on ground of vagueness. appeal was herd ex parte for disposal on merits. Departmental Representative, Shri V. S. Kandaswany took me through facts of case. assessee is HUF. It is partner in firm of M/s National Litho Press. Its Karta, Shri A. S. Rajesh represented family in partnership. He was paid salary of Rs. 13,099 for this year by firm for services rendered by him as individual. assessee-family therefore did not include in its return salary income for this year. ITO however taxed salary along with share of profits in assessment of assessee. In doing so, ITO purported to follow decision of Tribunal in Janagarajan. AAC deleted inclusion for following reasons briefly: (i) Janagarajan s case had no application. That was case where salary was paid by HUF to its Karta to look after its interest in firm in which it was partner. In instant case, salary was paid by firm to Karta of assessee-family who represented family as partner in said firm. (ii) Rajesh, Karta, was in charge of booking of orders. He has 8 years experience in this line of business. He devotes his full time to business of firm. (iii) account of assessee-family in books of firm shows credit balance. This implies that investment of family funds were not adversely affected. salary of Rajesh was credited to separate account in his name. Amounts were also withdrawn from firm periodically. There was thus no direct relation between income earned by assessee and salary paid to Karta. (iv) Though, in principle salary payable to Karta as in this case, is assessable as his individual income, there were other factors also to be considered. In this case, major portion of share income was diverted as salary of Karta. This was method to reduce tax incidence of assessee-family. basic requirement in law is that assessee-family should be compensated reasonably for investing funds in business. Karta cannot get salary which appears excessive on facts of it. (The share of profit including salary income of Rs. 13,099 brought to tax by ITO was Rs. 16,461). (v) No doubt, Karta is working in firm. But remuneration payable to him should be reasonable with reference to his personal exertion. claim of Rs. 13,099 as salary referable as such personal exertion apart from his duties as partner was clearly excessive. On facts of this case, Rs. 8,000 would be reasonable as remuneration for services rendered. ITO should therefore exclude Rs. 8,000 from share income of assessee-family assessed by him. Revenue is in appeal. Shri V. S. Kandaswamy, Departmental Representative supported order of ITO. He submitted that in light of decision of Supreme Court in V . D. Dhanwatey vs. CIT (1968) 68 ITR 365 (SC) where income had been earned by Karta primarily by utilising joint family funds; that mere fact that in process of gaining advantage, there is element of personal services or skill of labour would not alter character of income. He also referred to decision of Allahabad High Court in Gopinath Seth vs. CIT (1983) 35 CTR (All) 334: (1982) 135 ITR 365 (All). further submission made is that once AAC found that payment of Rs. 13,099 as salary was excessive, he should have held that entire salary income was assessable in hands of assessee-family and that he had no authority to exclude sum of Rs. 8,000 from assessment of assessee-family as reasonable. I would first of all dispose of Gopinath Seth (supra). That is not relevant decision at all. That was case where joint family paid salary to its Karta for looking after its business interest and claimed it as deduction from its business income. Court found that Karta was not required to do any work or job in connection with business; that agreement to pay such salary to Karta was not commercially expedient and that it was not bona fide. In this view, it upheld that disallowance. facts in instant case are quite different. question here is to be decide whether salary income is to be assessed in hands of Karta as salary paid for individual services to firm or to be assessed as income of assessee-family as return in reality for its investment in firm. In Prem Nath vs. CIT (1970) 78 ITR 319 (SC) similar question came up before Supreme Court. In recording its conclusion, there Court considered four earlier decisions also of Supreme Court. These were: (i) CIT vs. Gurunath V. Dhakappa (1969) 72 ITR 192 (SC) (ii) CIT vs. D. C. Shah (1969) 73 ITR 692 (SC) (iii) V. D. Dhanwatey, vs. CIT (1968) 68 ITR 365 (SC) (iv) Raj Kumar Singh Hukam Chandji vs. CIT (1970) 78 ITR 33 (SC). Briefly, following principles were laid down by Supreme Court in Prem Nath: (i) There must be evidence brought on record to show that salary in question was not for services rendered to partnership by Karta as individual. Unless finding is recorded that salary was paid to Karta because assets of family were utilised by firm, salary paid to Karta by firm for services rendered by him to firm cannot be assessed as income of family. In other words, there must be real and sufficient connection shown between joint family funds and salary paid by firm to Karta of firm in which he is partner. In absences of such real and sufficient connection between investment of joint family funds and salary to Karta, it cannot be said that salary was earned on account of any determent to joint family assets (ii) If salary is shown to be in substance though not in form, one of modes of return made to family because of investment of family funds in business, then it would be income of family. If however, it is seen to be compensation made for services rendered by individual to be compensation made for services rendered by individual coparcener, then it would be income of individual coparcener. No doubt, if salary income was essentially earned as result of funds invested, fact that coparcener had rendered some services would not change character of receipt. If on other hand, it was essentially remuneration for services rendered by coparcener, circumstance that his services were availed of because of reason that he was member of family which had invested funds in business would not make receipt income of family. In light of above principles approved by Supreme Court, it is seen that ITO failed to make out case for inclusion of salary income in principle in hands of assessee-family here. He failed to bring on record evidence to show that salary agreed to be paid was not for services rendered to partnership. He gave no finding that salary in question was paid to Karta because assets of family were utilised by firm. There was no real and sufficient connection shown between joint family funds and remuneration received by Karta. In absence of such connection being shown, it cannot be said that salary income was earned on account of any determent to joint family assets. AAC s factual finding indicate contrary position i.e., services were rendered by Rajesh in his individual capacity to firm. further objection of Revenue in this case is that AAC having held that salary of Rs. 13,099 was unreasonable, entire salary income should have been to be assessable in hands of assessee-family (so far as assessee is concerned it has accepted decision of AAC in this regard). I am unable to agree with this argument raised for Department. Undoubtedly in light of principles laid down by Supreme Court in above cases, salary in question becomes individual income of Karta for services rendered to extent that it could be said to have no real and sufficient connection with family funds invested in firm. AAC recorded finding of facts in this connection. He noted actual return to assessee-family as share of profit and salary income received by Karta as individual and then held that to extent of 8,000 only there was no such real and sufficient connection between family funds invested in firm and salary paid by firm to Karta. He does not use these very words but has merely put this conclusion in somewhat different language. He has held that only Rs. 5,099 out of salary paid to Karta from firm has real and sufficient connection with assessee-family funds invested in firm. To this extern therefore, he confirmed inclusion made by ITO. I am unable to see such inclusion as bad in law. I decline to interfere. appeal is dismissed. *** SECOND INCOME TAX OFFICER v. A. S. RAJESH
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