Jitmal Bhuramal vs Commissioner Of Income-Tax, Bihar

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: supreme-court

Case Number: Not extracted

Decision Date: 2 February 1962

Coram: J. C. Shah, M. Hidayatullah

In this matter, the Supreme Court noted that the appeal was filed by special leave from a judgment of the Patna High Court concerning a reference under section 66(2) of the Income‑Tax Act. The appellant was the assessee, identified as Messrs Jitmal Bhuramal, a Hindu undivided family composed of the four sons and grandsons of Bhuramal. The four brothers, Hiralal, Gulzarilal, Kunjlal and Madanlal, together with Gobhardanlal, the son of Gulzarilal, were the members whose affairs were under consideration. The family conducted a grain and kirana business at Madhupur under the firm names Jitmal Bhuramal and Bhuramal Hiralal. In addition, the family, through its karta, held a partnership interest in another firm called Hiralal Gulzarilal, in which the karta possessed a twelve‑anna share while a non‑family individual, Rameshwar Lal, held the remaining four annas. The assessment year in dispute was 1953‑54. During that year the karta, Hiralal, entered into two separate agreements with the junior members of the family. Under those agreements the junior members consented to render services to the Hindu undivided family for fixed monthly remuneration: Rs 200 to Gulzarilal, Rs 150 each to Kunjlal and Madanlal, and Rs 100 to Gobhardanlal. The first agreement stipulated that Gulzarilal and Madanlal would look after the interests of the Hindu undivided family in the partnership, whereas the second agreement required Kunjlal and Gobhardanlal to manage the business of the Hindu undivided family itself. In the accounts for the assessment year, a total of Rs 6,600 was paid as remuneration to the four junior members—Rs 3,850 to Gulzarilal and Madanlal for services rendered to the partnership and Rs 2,750 to Kunjlal and Gobhardanlal for services rendered to the family. The Income‑Tax Officer of Santhal Parganas, by an assessment order dated 31 December 1953, allowed as a deductible expense only a payment of Rs 50 per month to Gobhardanlal, disallowing the remaining claim of Rs 6,000 made under section 10(2)(xv) of the Act. That order was affirmed by the Appellate Assistant Commissioner, but on appeal the Income‑Tax Appellate Tribunal permitted deduction of the full remuneration paid to Gobhardanlal and Kunjlal while refusing deduction of the Rs 3,850 paid to Gulzarilal and Madanlal. Consequently, the assessee filed an application under section 66(1) of the Act seeking a declaration as to whether, in the facts and circumstances of the case, the Hindu undivided family, which was a partner in the partnership business of Hiralal Gulzarilal, was entitled to deduct Rs 3,850 from its income‑tax assessment for the relevant year under section 10(2)(xv). The High Court answered the question against the assessee, but, as the Supreme Court observed, the High Court erred in its interpretation of the factual findings recorded by the Tribunal.

The appeal before the Court focused on the finding recorded by the Income‑Tax Tribunal and on the observations made by the High Court. In its judgment the High Court quoted a passage from the report of the Tribunal, stating: “We, therefore, proceed upon the footing that the finding of fact of the income‑tax authorities in this case is that neither Gulzarilal nor Madanlal has rendered any service to the partnership business nor contributed to the earning of profits to the Hindu undivided family from the share of the partnership business?” The High Court citation appeared as [[1959] 37 I.T.R. 528, 532.]. The Tribunal’s own order, dated 28 September 1955 and reproduced as annexure “B”, was also referred to. That order held that salaries paid to persons who actually worked for the Hindu undivided family were allowable deductions, but that the payment of Rs 3,850 made to Gulzarilal and Madanlal could not be allowed. The Tribunal explained that the two members did not render any service to the Hindu undivided family’s business; instead they served the firm, which was a separate legal entity, and the liability for those services rested on the firm itself. Accordingly, the Tribunal permitted the deduction of salaries paid to Gobhardanlal and Kunjlal, while it disallowed the deduction of the amounts paid to Gulzarilal and Madanlal. The High Court, relying on that finding, questioned whether either Gulzarilal or Madanlal had contributed to the profits earned by the Hindu undivided family from its share in the partnership, and concluded that the deduction claimed for Rs 3,850 could not be sustained.

In the Court’s view, the Tribunal’s finding, which the assessee relied upon, actually weakened the assessee’s position. The law allowed a Hindu undivided family to deduct salaries paid to its members only when such payments were made for commercial or business reasons and when the services rendered were to the family itself. The Court referred to its earlier decision in Dulichand Laxminarayan v. Commissioner of Income‑tax, which explained that a “partnership” is a relationship among persons who agree to share profits of a business carried on by all or any of them acting for all, and that the term “person” includes only natural or artificial legal persons. Consequently, neither a firm nor a Hindu undivided family could be regarded as a “person” for the purpose of section 10(2)(xv). The Court also noted the recent rulings in Charandas Haridas v. Commissioner of Income‑tax and Commissioner of Income‑tax v. Nandlal GandalaP. Those decisions emphasized that when a Hindu undivided family becomes a partner through its karta, the coparcenary has no participatory role in the partnership; only the karta represents the family, and under both Hindu law and partnership law the family as such cannot exercise control or management over the partnership’s business. The cited cases therefore demonstrated that if the junior members of the coparcenary performed services for the partnership, those services were rendered to an entity distinct from the Hindu undivided family. Because the family itself did not receive those services, the payments could not be characterised as salaries for the family and therefore did not attract the deduction permitted by section 10(2)(xv).

The Court observed that the services in question could not be characterized as being performed wholly and exclusively for the Hindu undivided family. In its assessment, the Court concluded that the High Court had correctly answered the principal question by rejecting the proposition that the services were solely for the Hindu undivided family, even though the High Court’s decision was based on the reasons that the present judgment had already outlined. Accordingly, the Court held that there was no merit in the appeal filed against the High Court’s order. Consequently, the appeal was dismissed and the appellant was ordered to bear the costs of the proceedings. The final direction of the Court was that the appeal stand dismissed.