Madras High Court
Sivasankari Chandrasekaran And Others vs Commissioner Of Income-Tax on 30 January, 1991
Equivalent citations: [1991]189ITR51(MAD)
JUDGMENT Somasundaram, J.
1. In these tax cases at the instances of the assessees, the following question of law has been referred to this court for its opinion under section 256(2) of the Income-tax Act, 1961, hereinafter called "the Act" :
"Whether, in the assessment of Srimathi Sivasankari Chandrasekaran and Srimathi Brinda Jayaraman for the assessment year 1974-75, the sums received by their respective husbands from the firm for services rendered to the firm is liable to be assessed by invoking section 64 of the Income-tax Act, 1961 ?"
2. The two assessees are the wives of two brothers, Chandrasekaran and Jayaraman, respectively. The joint family consisting of Jayaraman, Chandrasekaran and their father was carrying on the business of manufacture and sale of RCC pipes. Subsequently, there was a partition in the said family, whereunder the father and the two sons continued the business but as partners under the name and style "Messrs. Spun Pipe Co.". The father and the two sons were partners in the said firm in their capacities as the kartas of their respective joint families. On July 31, 1973, there was a reconstitution of the aforesaid firm. The father left the firm and the two assessees, Smt. Neelambal (mother-in-law of the two assessees) and Smt. Bhama Ramachandran, a sister of the husband of the two assessees, were taken as partners, namely, the two assessees herein, their husbands, Smt. Neelambal and Smt. Bhama Ramachnadran. A deed of partnership was entered into on that day. Clause 8 of the said deed provided that the husbands of the two assessees shall be entitled to a monthly allowance of Rs. 1,000. Up to and inclusive of the assessment year 1971-72, the salary paid to the husbands of the two assessees was being assessed as income of their respective Hindu undivided families. But, for the assessment years 1972-73 and 1973-74, the two undivided families preferred revision petitions to the Commissioner of Income-tax, contending that the salary should be considered as income of the kartas in their individual capacities and should not be included in their assessments. The Commissioner of Income-tax, Tamil Nadu II, by his order dated March 3, 1975, accepted the above contention and held that the salary payable to Shri Jayaraman and Chandrasekaran should be assessed in their respective hands in their individual capacities.
For the assessment year 1974-75, the two assessees filed returns disclosing incomes of Rs. 35,663 and Rs. 20,883, respectively. The Income-tax Officer, by his order dated October 20, 1974, completed the assessments determining the total income as Rs. 35,660 and Rs. 20,000 respectively.
3. The Commissioner of Income-tax, Tamil Nadu III, on a scrutiny of the records, was of the view that the salary paid to Jayaraman and Chandrasekaran was to be included in the assessments of the assessees herein under section 64(1)(i) of the Income-tax Act, 1961. Accordingly, he initiated action under section 263 of the Income-tax Act, 1961, and, after hearing the objections of the assessees, by his orders dated October 7, 1976, set aside the assessments and directed the Income-tax Officer to make fresh assessments by including the salary paid to Jayaraman and Chandrasekaran. Thereupon, the assessees preferred the above appeals to the Tribunal against the order dated October 7, 1976.
It was contended before the Tribunal on behalf of the assessees that Jayaraman and Chandrasekaran were not partners in the firm of Messrs. Spun Pipe Co., and that salary received by them from the firm could not be considered as income arising directly or indirectly from their membership of the firm and, consequently, there was no scope for the application of the provisions of section 64(1)(i) of the Income-tax Act, 1961.
4. The Tribunal held that a joint family as such could not be a partner in a firm, but that it might enter into a valid partnership through its karta and that, in such a case, it was the karta alone who would be a partner. It, therefore, concluded that Jayaraman and Chandrasekaran were partners in the firm, Messrs.Spun Pipe Co. The Tribunal further held that the salary received by Jayaraman and Chandrasekaran from the above firm was income arising directly from their membership of the firm of which the assessees were also partners. In view of the above findings, the Tribunal upheld the orders of the Commissioner of Income-tax and dismissed the appeals.
5. The assessees, not satisfied with the order of the Tribunal, obtained references under section 256(2) of the Act to this court on the question of law referred to above.
6. Mr. S. V. Subramaniam, learned counsel for the assessees, would contend that the salary was paid to the partners Chandrasekaran and Jayaraman, the husbands of the assessees respectively, on account of their certain special skill and experience. Such payment of remuneration or salary for making available to the business of the firm the special skill and experience of the partners, Chandrasekaran and Jayaraman, the husbands of the respective assessees, would really be in the nature of compensation of the respective assessees, would really be in the nature of compensation for the services rendered; such salary paid to the husbands of the assessees cannot be considered as income arising directly or indirectly from the membership of the assessees and the salary received by the husbands of the assessees for the services rendered is not liable to the included by invoking section 64(1) of the Act. In support of his contention, the assessees rely on the decision in CIT v. Shri Surendra Manilal Mehta [1985] 154 ITR 264 (Mad). We are quite unable to accept the cotention of learned counsel for the assessees. The said decision is clearly distinguishable on facts. In that case, the Tribunal has rendered a specific finding that the payment of salary to the partners was only in respect of the special skill exercised by the partners, the position is different in the present case. There is nothing to indicate in the present case that the husbands of the assessee possessed any special skill and that the salary was paid to the husbands of the assessees for making available to the business of the firm such special skill and experience. Clause (8) of the partnership deed merely says that the husbands of the assessees shall be entitled to a monthly allowance of Rs. 1,000 each besides travelling and other expenses. Therefore, the principles laid down in the decision in CIT v. Shri Surendra Manilal Mehta [1985] 154 ITR 264 (Mad) will not apply to the present case.
7. Section 64(1) of the Act runs as follows :
"In computing the total income of any individual, there shall be included all such income as arises directly or indirectly. -
(i) to the spouse of such individual from the membership of the spouse in a firm carrying on a business in which such individual is a partner".
The following two conditions have to be satisfied before section 64(1)(i) of the Act can be made applicable.
(i) The spouse of the individual must also be a partner in the firm in which the individual is a partner; and
(ii) the income should have arisen to the spouse either directly or indirectly from the membership of such spouse in the said firm.
It is the well-settled position of law that when the karta of a Hindu undivided family enters into a partnership with others, he does so in his individual capacity and the karta alone becomes the partner but not the individual members of the family (vide CIT v. Kalu Babu Lal Chand , CIT v. Nandlal Ganda Lal and Charandas Haridas v. CIT . In the present case, though the funds invested by the partners, Chandrasekaran and Jayaraman, husbands of the assessees, respectively, as capital in the firm belonged to their respective joint families, when they became partners as kartas of their respective Hindu undivided families with others, they became partners only in their individual capacity. Therefore, there is no difficulty in holding that Chandrasekaran and Jayaraman, the husbands of the assessees, respectively, are partners in the firm in which the assessees are also partners.
8. The next question we have to examine is whether the salary received by the husbands of the assessees in pursuance of clause (8) of the deed of partnership can be considered as income arising directly or indirectly from their membership of the firm. In R. M. Chidambaram Pillai v. CIT [1970] 77 ITR 494 (Mad) [FB], a Full Bench of this court, while considering the nature and character of salary paid to a partner, held that the salary received by a partner of a firm for services rendered by him to it is only a mode of adjustment in his share of the firm's income and continues to bear, for the purposes of charge at his hands, the same character as part of the total income of the firm, which has to be shared between its partners. The Supreme Court, in the decision in CIT v. R. M. Chidambaram Pillai [1977] 106 ITR 292 (SC), while confirming the decision of the Full Bench of this court in R. M. Chidambaram Pillai v. CIT [1970] 77 ITR 494 [FB], held that, in strict law, there cannot be any contract of service between the firm and one of its partners and, consequently, there can be no question of a partner of a firm being an employee thereof and that the salary paid to a partner represents the special share of the profits and retains the same character of the income of the firm. The Supreme Court in the abovementioned decision further held as follows (p.296) :
"The anatomy of the provision is obvious, even if the explanation or motivation for it may be more than one. It is implicit that the share income of the partner takes in his salary. The telling test is that where a firm suffers loss the salaried partner's share in it goes to depress his share of income. Surely, therefore, salary is a different label for profits, in the context of a partner's remuneration... Salaries are profits known by a different name and must be treated as such for taxation purposes..."
9. In view of the above position of law as laid down by the Supreme Court, it has to be held that the salary received by the husbands of the two assessees form part of their share income and, conseqeuntly, it is income arising to them directly from their membership of the firm. I these circumstances, the Tribunal rightly held that the salary paid to the husbands of the two assessees by the firm in pursuance of clause (8) of the deed of partnership should also be included in the assessments of the two assessees for the assessment year 1974-75. We, therefore, answer the question referred to us in the affirmative and against the assessees. The Revenue will be entitled to costs of these references. Counsel's fee is Rs. 500.