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Income Derived From Funds of HUF -Whether Individual Income Or Family Income

Often it is seen that family funds are invested in a business and the Karta is actively engaged in the business and during the course of such active involvement earns some income by way of remuneration, fees etc. A question which arises is. whether such income which is earned by the Karta or any other member of a HUF is the individual income of Karta or is the family income. In the case of P.N. Krishna Iyer vs CIT. (1969) 1 SCR 9431= (1969) 73 ITR 5391 the Apex Court was confronted with a similar situation and after deliberations, the Apex Court held as follows in Para 13:

13. Income received by a member of a Hindu undivided family from a firm or a company in which the funds of the Hindu undivided family are invested, even though the income may be partially traceable to personal exertion of the member, is taxable as the income of the Hindu undivided family, if it is earned by detriment to the family funds or with the aid or assistance of those funds; otherwise it is taxable as the member’s separate income. .

Further, the Hon’ble Apex Court in the aforesaid judgement held as follows:-

But this Court in VSD. Dhanwatey case has held that the question whether the income was the income of the Hindu undivided family or the individual income was a finding on a mixed question of law and fact, and the final conclusion drawn from the primary evidentiary facts was open to challenge on the plea that the relevant principle had been misapplied by the Tribunal.

The case of VSD.Dhanwatey was a constitution bench judgement reported at (1968) 68 ITR 365 w.herein the Apex Court took the view that the question was a mixed question of law and fact. While deciding the case, the Hon’ble Apex Court referred to the following doctrine of Hindu Law.

The general doctrine of Hindu law is that property acquired by a karta or a coparcener with the aid or assistance of joint family assets is impressed with the character of joint family property. To put it differently, it is an essential feature of self-acquired property that it should have been acquired without assistance or aid of the joint famiy. property. The test of self-acquisition by the karta or coparcener is that it should be without detriment to the ancestral estate. It is therefore clear that before an acquisition can be claimed to be a separate property, it must be shown that it was made without any aid or assistance from the ancestral or joint family property. The principle is based on the original text of Yajnavalkya who while dealing with property not liable to partition, states:

“Whatever else is acquired by the coparcener himself, without detriment to the father’s estate, as a present from a friend or a gift at nuptials, does not appertain to co-heirs. Nor shall he, who receives hereditary property which had been taken away, give it up to coparceners; nor what has been gained by science.” (Yajnavalkya 2, verses 119-120).

In the aforesaid case, though the Hon’ble Apex Court ruled against the assessee, but one of Judges (Justice Hegde) gave a dissenting and separate judgement by taking cognizance of the fact that business concerns do not earn profits merely because capital is invested in them. Much depends upon th persons who are in charge of business. Captains of industries and business managers should possess business knowledge, tact, capability, drive and numerous other qualilies.
Similar view was taken in the case of CIT vs D.C. Shah, (1969) 1 SCC 550 1= (1969) 73 ITR 692], wherein the Apex Court had followed the decision in the case of P.N. Krishna Iyer vs CIT,(1969) 1 SCR 943 (supra) and held as follows:

Upon the particular facts of this case, it is manifest that there was no real or sufficient connection between the investment of the joint family funds and the remuneration paid by the partnership to Shri D.C. Shah. It follows that the remuneration of Shri D.C. Shah was not earned on account of any detriment to the joint family assets and the amounts of remuneration received by Shri D.C. Shah as the Managing partner of the two partnerships were not assessable as income of the Hindu Undivided Family.

Again in the case of CIT WB vs Kalu Babu Lal Chand reported at (1959) 37 ITR 123, the Apex Court was confronted with a situation where the Karta was appointed as Managing Director of a Company which was promoted by the Karta and shares were issued in the name of Karta and other members of the family from the funds provided by HUF. In the light of these facts, the Apex Court ruled that the remuneration which was given to the Karta in his capacity as Managing Director was to be assessed as HUF income. The Apex Court distinguished the judgements cited in the case of Sardar bahadur Indra Singh vs CIT(1943) 11 ITR 16 on the ground that there was an express provision in the Articles of Association in that case that the remuneration of the Managing Director would be his personal Income. Further, the case of CIT vs Darsanram (1945) 13 ITR 419 was also distinguished as the joint family property having not been spent for earning the Managing Directors’ remuneration. The apex Court in this case held that the acquisition of business, flotation of the company and the appointment of the managing director were inseparably linked together. The Apex Court relied on the Bombay High Court case of Haridas Purusottam case reported in (1947) 15 ITR 124.

HUF -  Deduction from HUF Business Income
Gift by HUF to its Member

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