A.K. Thiagarajan and Others vs Commissioner of Income Tax

R. Jayasimha Babu, J.—The question raised is common in all these tax cases, though the petitioners are different. The question that has been

referred to us by the Tribunal is :

Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the increase in the salary by Rs.

15,000 received from the firm, R. M. Appavu Chettiar Sons, Madurai, by the respective kartas for their individual services rendered to the said

firm, was assessable in the hands of the assessee-Hindu undivided family ?

The admitted facts, as set out in the statement of the cases are : The assessees are six Hindu undivided families whose kartas are partners in a

firm R. M. Appavoo Chettiar Sons, Madurai. The firm paid remuneration to the kartas as there was provision for such payment being made in the

partnership deed. There was one other partner in the firm who was not paid any remuneration. Up to the assessment year 1980-81, the salary paid

to them was at the rate of Rs. 9,000 per year. That was increased to Rs. 24,000 per year from the assessment year 1981-82 by a supplementary

deed executed by the parties. The payment of salary at the rate of Rs. 9,000 per year for the years prior to 1981-82 had been the subject-matter

of appeal before the Tribunal and it was held by the Tribunal that the said payment was not hit by Section 40(b) of the Income tax Act as the

payment was for services rendered by the partners who possess special skill and knowledge and the partnership deed permitted the payment of

such salary.

For the assessment year 1981-82, the payment of salary at the rate of Rs. 24,000 per year was regarded by the Assessing Officer as merely a

device to distribute the profits of the firm to the Hindu undivided families and, therefore, he disallowed the entire amount. On appeal, it was held

that the payment of salary in excess of Rs. 9,000 per annum was unreasonable. The appellate authority also observed that the execution of the

supplementary deed was only to divert the income from the Hindu undivided family in the form of salary paid to the kartas of the Hindu undivided

families. On further appeal at the instance of the assessee, the Tribunal after setting out the history of the case confined its discussion to the

reasonableness of the figures of salary in paragraph 6 of its order. The Tribunal observed as under :

But, there has been a substantial increase in the remuneration in the year 1981-82 and no particular evidence has been produced to show that

there has been a qualitative or quantitative enhancement in the service rendered by the kartas to the firm as compared to the earlier years. It is true

that the turnover has increased considerably since the first year in which the remuneration has been given by the firm to the kartas at Rs. 9,000 but

it cannot be said that such increase in the turnover justified the increase in the remuneration paid to the kartas.

In the order of assessment, the increase in the turnover has been set out from the years 1975-76 to 1981-82, the turnover was Rs. 3.9 lakhs in

1975-76 much less than the figure in the years 1976-77 to 1978-79. It increased to Rs. 10.5 lakhs in 1979-80 and was Rs. 14.8 lakhs in the

years 1980-81 and 1981-82.

The Tribunal has not referred to these figures. It however, has noticed that the remuneration at Rs. 9,000 per annum was fixed in the initial year

and apparently there had been no increase in the salary for about seven years.

Learned senior counsel for the assessee contended that the Tribunal has erred in holding that the increase in salary was unreasonable. He has

also pointed out that there was no finding in the order of the Tribunal that the amount so paid was in reality distribution of the profits of the firm and

had not been paid out as salary. Counsel submitted that for the amount paid out as salary, it is not for the authorities to sit in any judgment on

reasonableness thereof, unless there is a finding that what was paid as salary was in fact, a part of the scheme of distribution of profit and was

sought to be diverted by labelling it as salary.

The question referred to us as it now reads proceeds on the assumption that what was paid in fact, was salary and the issue is only as to

whether the increase in the salary is to be assessed in the hands of the Hindu undivided family or in the hands of the individuals who are partners in

the firm. This question, does not really bring out the real controversy. The statement of the case submitted by the Tribunal shows that the Income

Tax Officer regarded this amount as distribution of the profits to the partners and therefore, to be included in the total income of the Hindu

undivided family, whose kartas were the partners. The Tribunal, though it referred to that order of the Income Tax Officer, in the course of its

order did not record any finding that this was an attempt to divert the profits of the firm.

Having regard to these facts we consider it just in the circumstances to send the matter back to the Tribunal to hear the parties afresh and record

clear findings as to whether the increase in the salary was a genuine increase or the amount by which the salary was increased, in reality formed

part of the distributed profits, includible in the assessment of the Hindu undivided families. Learned counsel for the assessee placed reliance on the

decision of the Supreme Court in Rashiklal and Co. Vs. Commissioner of Income Tax, Orissa, , to contend that the salary paid to a partner cannot

be treated as income of the Hindu undivided family. As we are remanding the matter back to the Tribunal. We do not consider it necessary to

consider that contention. It is open to the petitioners to urge all their contentions before the Tribunal. The Tribunal is directed to rehear the appeal

after giving due opportunity to the parties and thereafter, dispose of the same in accordance with law expeditiously.