BRIJ MOHAN VS COMMISSIONER OF INCOME-TAX, 1994 PTD-SUPREME-COURT-INDIA 14 (1993)

(Appeal by special leave from the judgment and order, dated July 16, 1980, of the Delhi High Court in I.T.R. No. 101 of 1972).

Income-tax---

Hindu Undivided Family---Karta, partner in firm representing Hindu undivided family---Salary paid to Karta assessed as individual income--Increase in salary---Whether can be assessed as income of family.--[Brij Mohan (HUF) v: C.LT. (1986) 158 ITR 14 (Appendix) reversed]

In a firm formed in 1947, there were many changes. The appellant, who was paid a working allowance of Rs. 250 per month during his minority became a full-fledged partner in 1952 when his allowance was raised to Rs. 300 per month. In 1955, his allowance was increased to Rs. 400 per month. In September, 1957, R, the working partner left the firm and there was reallocation of shares between the parties, viz., the appellant, his mother, and his younger brother. In 1965, the appellant's working allowance was, increased to Rs. 1,400 per month. Up to the assessment year 1966-67, the appellant filed his income-tax returns on the basis that both his share in the profits and his allowance were his individual income. After a son was born to him in November, 1966 for the two assessment years 1967-68 and 1968-69, he filed the returns in the status of a Hindu undivided family in respect of both the share of profits and the allowance. For the assessment year 1969-70, the appellant claimed the allowance to be his individual income and share of profits to be the income of the Hindu undivided family. The Appellate Tribunal held that the progress of the firm's business remained steady and there was no necessity or justification for the increase of the appellant's allowance from Rs.400 to Rs.1,400, apportioned the allowance and treated Rs. 400 per month as his individual income and added she balance of Rs. 1,000 per month to the income of the Hindu undivided family. The High Court, on a reference, affirmed the decision of the Tribunal. On appeal to the Supreme Court:

Held, reversing the decision of the High Court, on the facts, that the assessed income of the firm had gone up from Rs. 68,222 for the assessment year 1964-65 to Rs. 1,61,100 for the assessment year 1969-70. Though this might be on account of inflation, there was certainly an increase in the turnover and income of the firm. Further, even when there was R as a working partner, the allowance of Rs.400 to the appellant was thought to be justified and after R lef the firm, the entire business was managed by the appellant and his brother. The decision of the partners to raise the appellant's allowance from Rs.400 to Rs.1,400 could not be said to be an unreasonable decisi6n or one actuated by motives other than business interest. It was not a decision taken to the detriment of the investment or interest of the Hindu undivided family represented by the appellant. The Appellate Tribunal was not justified in holding that the appellant's allowance should be frozen at Rs. 400 per month throughout and that the balance should be added to the income of the Hindu undivided family.

Raj Kumar Singh Hukam Chandi v. C.I.T. (1970) 78 ITR 33 (SC) applied.

Brij Mohan (HUF) v. C.I.T. (1986) 158 ITR 14 (Appendix) reversed.

P.N. Monga and Ashok Grover, Advocate for 4ppellant.

Dr. S. Narayanan, C. Ramesh and P. Parameswaran, Advocate for Respondent.

JUDGMENT

B.P. JEEVAN REDDY, J: --This appeal is preferred by the assessee against the judgment of the Delhi High Court (see (1986) 158 ITR 14) in an income-tax reference made at his instance. The question referred to the High Court reads (at page 15):

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the salary received by Shri Brij Mohan was to the extent of Rs.12,000 assessable in the hands of the assessee family?"

?The question was answered in the' affirmative, i.e. in favour of the Revenue and against the assessee by the High Court.

Two brothers, Parmanand and Sadanand, constituted a partnership sometime prior to 1947. Sadanand died on June 28, 1947. On his death, his widow, Smt. Raj Kumari, was inducted as a partner in place of her husband. This new partnership was evidenced by a deed of partnership, dated November 6, 1947. Sadanand had left behind two sons, Brij Mohan and Man Mohan, who were minors on the date of his death. On June 28, 1948, the firm was reconstituted by admitting a working partner, Ram Lubhaya. He was given two annas shares and the remaining fourteen annas shares was equally divided between Parmananad and the widow of Sadanand. The share of Sadanand was in turn sub-divided among his wife and two minor sons, each enjoying a share of 2/4th. Parmanand was provided a working allowance of Rs.700 per month and Brij Mohan, who was 16 years of age at that time was provided an allowance of Rs. 250 per month. In the year, 1952, a fresh deed of partnership was executed admitting Brij Mohan as a full-fledged partner. The profit sharing ratio, however, remained the same. So far as the allowances paid were concerned, while the allowance paid to Parmanand remained at Rs.700 per month, the allowance paid to Brij Mohan was raised from Rs.250 per month to Rs.300 per month with effect from November, 1952.

On November 1, 1955; there was yet another change in the partnership, occasioned by Man Mohan attaining majority. On this occasion, Parmanand (who had no sons) retired from the partnership. The fourteen annas share was exclusively divided between the widow and the two sons of Sadanand, in the ratio of 4 (wife), 67 (Brij Mohan) and 4 (Man Mohan). Brij Mohan's allowance was raised to Rs.400 per month and Man Mohan was given an allowance of Rs. 250 per month.

On September 7, 1957, Ram Lubhaya, the working partner went out of the partnership firm. The partnership now consisted of the widow and the two sons of Sadanand, their shares being 25 percent., 44 percent., and 31 percent., respectively. The allowance payable to Brij Mohan and Man Mohan remained at Rs. 400 and Rs.250 per month, respectively.

On April 1, 1965, the allowances payable to Brij Mohan and Man Mohan were raised from Rs.400 and Rs.250 per month to Rs.1,400 and Rs.1,200 per month, respectively.

Till the assessment year 1966-67, Brij Mohan was filing his return of income as an individual disclosing therein both the share income from the partnership and the allowance received by him from the partnership. A son was born to him on November 14, 1966. Evidently, he thought that the birth of a son gives rise to a Hindu undivided family. Be that as it may, for the assessment years 1967-68 and 1968-69, he filed returns in the status of Hindu undivided family disclosing therein both the partnership share income and the allowance received by him. However, in the return filed for the assessment year 1969-70, he took a different stand, which has given rise to the present controversy. In this return, he claimed that the allowance of Rs. 1,400 per month paid to him by the partnership represents his individual income and should be assessed as such and should not be clubbed with the partnership share income belonging to the Hindu undivided family. The Income Tax Officer rejected the same. Both the Appellate Assistant Commissioner and the Tribunal affirmed the same.

The basic facts found by the Tribunal are the following: (1) The income return by the partnership firm for the assessment year 1964-65 was R9s.51,488 and the income assessed Rs. 68,622. The income returned each year thereafter has been going up with the result that, by the year 1969-70, the income returned was Rs. 1,29,921 and the income assessed Rs.1,61,100. (2) There is nothing to show that the quality and quantity of the services rendered by Brij Mohan to -the firm substantially increased subsequent to 1965; the progress of the firm's business remained steady. On the above basis, the Tribunal concluded that there is no material to hold that any increase in the salary of Brij Mohan was necessary or justified. Accordingly, the Tribunal apportioned the allowance of Rs.1,400 per month into two components: Rs.400 per month was treated as allowance to be treated as individual income of Brij Mohan and the balance of Rs.1,000 was added to the income of the Hindu undivided family: It was this finding of the Tribunal that the assessee questioned, by way of a reference.. The question referred, it may be mentioned, calls into question the correctness of the conclusion arrived at by the Tribunal. The High Court answered the reference against the assessee mainly on the basis that, on the facts found by the Tribunal, there was no justification for the increase in the allowance/salary of Brij Mohan. The sudden jump, it observed, was not warranted by the requirements of business. The correctness of the view taken by the High Court is questioned in this appeal.

Two broad facts need be noticed in this case. The assessed income of the partnership has gone up from Rs.68,622 for the assessment year 1964-65 to Rs.1,61,100 for the year 1969-70. May be this is on account of inflation, but there is certainly an increase in the turnover and in the income of the partnership firm. The second and more relevant circumstance is that, even when there was a working partner, the allowance of Rs.400 per month to Brij Mohan was thought to be justified and was treated as his allowance/salary. Ram Lubhaya, the working partner, left on September 7, 1957. Thereafter, the entire partnership business was being managed by Brij Mohan and by his younger brother. The question that arises is whether, in the said circumstances, if the partners take a business decision that the allowance payable to them should be raised from Rs.400 to Rs.1,400 per month in the case of Brij Mohan, was it not a bona fide business decision and whether the increase in the allowance was really a front for diverting the income from the Hindu undivided family represented by Brij Mohan? We do not think that the Tribunal was justified in holding that the salary/allowance of Brij Mohan should be frozen at Rs.400 per month throughout and that the balance amount of allowance should be added to the income of the Hindu undivided family. Since the turnover and income of the firm have increased, a corresponding increase in the allowance, may be a little more or less, cannot be described as an unreasonable decision or a decision actuated by motives other than business interest. It was not a decision taken to the detriment of the investment or interest of the Hindu undivided family represented by Brij Mohan. We are of the opinion that the view taken by the High Court appears to be rather too narrow.

We may say that the principles in this behalf are well-settled by the decision of this Court in Raj Kumar Singh Hukam Chandji v. C.I.T. (1970) 78 ITR 33. Such a question is always a mixed question of law and fact. The test is (at page 43): "whether the remuneration received by the co-parcener in substance though not in form was but one of the modes of return made to the family because of the investment of the family funds in the business or whether it was a compensation made for the services rendered by the individual coparcener? If it is the former, it is the income of the Hindu undivided family but if it is the latter, then it is the income of the individual coparcenter." Applying the said test, it must be held that the sum of Rs.1,400 per month as an allowance to Brij Mohan was for the services rendered by him and that no part of it can reasonably be said to be related to the investment of the family.

In the above circumstances, the appeal is allowed and the question referred shall be answered in the negative, i.e., in favour of the assessee and against the Revenue. No costs.

M.BA./2466/T ??????????????????????????????????????????????????????????????????????????????????? Appeal allowed.