Written in : April 1999

There is a recent Supreme Court judgment which re-emphasises two interesting issues which are relevant to all.

Often, joint families - known in tax parlance as HUFs, become partners in firms or make investments in companies, by their kartas representing them. At times, the karta is also paid remuneration. A question that is often encountered is whether the remuneration so received by the karta is his income individually or that of the HUF whom he represents.

This issue has been before various courts often. The Supreme Court has now dealt with it in a recent case of a family which was residing first in Andhra Pradesh and afterwards in Tamilnadu.

The family had made investments in a company. The company paid remuneration and commission to the karta. The tax department treated it as the income of the HUF. When the matter went up to the Tribunal in appeal, the Tribunal held that the remuneration and commission were received by the karta on account of his personal qualifications and exertions and not on account of the investment of the family funds in the company. The Tribunal held that the remuneration could not be treated as income of the HUF.

The matter went up to the Madras High Court. The court held that there was absolutely no evidence to say that the development of the business was due to any peculiar qualification or experience of the karta.

In some earlier years, the same matter had gone up to the Andhra Pradesh High Court which held that the income was of the karta and not that of the family.

The Madras High Court ignored the judgment of the Andhra Pradesh High Court in the same person's case and held that the income was of the family.

The karta took the matter to the Supreme Court. The Supreme Court affirmed the legal position as follows.

When remuneration is received by the karta (or any coparcener), the issue to consider is whether it is in substance one of the modes of return on the investments made by the family or whether it is compensation made for services rendered by the individual. If the remuneration is essentially a manner of giving returns on investments made, then it would be the income of the family. If, however, it was paid for services rendered, it would be income of the individual receiving it. This was an important issue settled by the court and could be put to use in several situations.

The Supreme Court observed that the Madras High Court had analysed the law correctly. However, the Madras High Court had overturned the findings of the Tribunal that the payments were made for services rendered and replaced them with its own findings that there was no peculiar qualification or experience of the karta which could have helped in development of the company's business.

The Supreme Court said that the Madras High Court had no business doing so. In tax laws, the Tribunal was the final fact finding authority. That is, the facts found by the Tribunal would be final and no authority, not even the Supreme Court, had authority to change them. The only grounds on which the findings on fact of the Tribunal could be challenged would be that they were perverse considering the evidence, or that the Tribunal had missed out essential evidence. These are rarities.

Normally, therefore, the facts found by the Tribunal remain final. The High Court and Supreme Court would get involved only on questions of law – not facts.

The Supreme Court, in this case, said that the Tribunal had found that the payment was received for services rendered and this finding had become final. How then could the Madras High Court say that they were not? The court said that the High Court had erred in replacing the findings of the Tribunal by its own findings for no good reason.

It then reversed the judgment of the Madras High Court and upheld that of the Tribunal.

For taxpayers, it is important to understand the importance of the Tribunal. You cannot agitate issues of fact beyond the Tribunal, which is the second tier in the appellate proceedings. You have to live with the facts found by the Tribunal and can only agitate matters of law before higher courts. So, the Tribunal becomes an extremely important body.

You have to take immense care in garnering all evidence in your favour early on and put them up before the assessing officer rightly. Having done so, you have to ensure that the Tribunal is persuaded to record the correct findings. If the Tribunal errs in law, you can take it up to the courts. If it errs on issues of facts, it is difficult (not impossible) to get the findings reversed.

The Supreme Court's affirmation of the authority of the Tribunal, in this case, resulted in reversing the judgment of the Madras High Court.