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PETITIONER: JUGAL KISHORE BALDEO SARAI

       Vs.

RESPONDENT: COMMISSIONER OF INCOME-TAX, U.P., LUCKNOW

DATE OF JUDGMENT: 20/09/1966

BENCH: BHARGAVA, VISHISHTHA BENCH: BHARGAVA, VISHISHTHA SHAH, J.C.

CITATION:  1967 AIR  495            1967 SCR  (1) 416  CITATOR INFO :  R          1968 SC 683  (32)  R          1992 SC  66  (17)  R          1992 SC 197  (17)

ACT: Income tax Act (11 of 1922), s. 10(2) (xv)-Assessee, a Hindu joint  family  firm-Payment  of remuneration  to  karta  for managing business-If a deductible item of expenditure.

HEADNOTE: The  assessee  was a Hindu undivided family  carrying  on  a joint family business and was also deriving some income from partnerships,  in which its karta representing  the  family, was  a  partner.  The family consisted of two  brothers  and their  minor sons.  One of the brothers, who was the  karta. asked  the other for a salary of Rs. 1,000 per month,  since he  was managing the business.  The other brother agreed  to it,  and the payments were made.  The see claimed  that  the sum  of  Rs. 12,000 per year, paid as  remuneration  to  the karta should be deducted as an item of expenditure under  s. 10(2)(xv)  of  the  Income-tax Act,  1922.   The  claim  was rejected by the Department, the Tribunal and the High Court. In appeal to this Court, HELD : As the remuneration was paid under a valid  agreement which  was bona fide and in the interest of,  and  expedient for, the business of the family, and the payment was genuine and  not excessive and was not a device to,  escape  income- tax, the remuneration must be held to be an expenditure laid out  wholly and exclusively for the purpose of the  business of  the family and must be, allowed as an expenditure  under the section. [421 B-C,D] The karta of a family can be paid remuneration for  carrying on  family  business,  provided  it  is  under  some   valid agreement.   The test of the validity of such an  agreement, when entered into on behalf of a minor, is that it should be for the benefit of the minor.  The agreement in the, instant case was entered into between the two adult members.   Their minor sons were represented by them or by the karta and  the agreement was not prejudicial to the minors’ interests.   In fact,  it  was acquiesced in by those minors who  had  later become majors.  If the agreement was in the interests of the family  it would not be invalid, when executed on behalf  of

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the minors by the person authorised to act on their  behalf, simply  hecause the minors were represented by a person  who received  some  benefit under the agreement.   Further,  the remuneration was not intended to cover any service  rendered by  the karta to the partnership firms, but Was for  looking after  the interests of the family in-those  businesses  and for managing the affairs of the family. [419 H; 420 B-C,  D- 14; 421 D-E, 422 E-F] Jitmal  Bhuramal  v. Commissioner of Income-tax,  Bihar  and Orissa, (1962) 44 I.T.R. 887 (S.C.), explained and followed.

JUDGMENT: CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 594 to  600 of 1965. Appeals  by special leave from the judgment and order  dated March  28, 1962 of the Allahabad High Court in I.  T.  Misc. Case No. 424 of 1959. 417 A.  K.  Sen, T. A. Ramachandran, J. B. Dadachanji,  for  the appellants (in all the appeals). S.  T.  Desai,  Gopal  Singh and R.  N.  Sachthey,  for  the respondent (in all the appeals). The Judgment of the Court was delivered by Bhargava,  J.  These appeals by special leave  are  directed against  the judgment of the Allahabad High Court  returning an  answer to the following question referred to it  by  the Income-tax Appellate Tribunal:               "Whether on the facts and circumstances of the               case the salary paid or credited to a Karta of               the  family  for looking  after  the  family’s               business was a permissible deduction under  s.               10(2)(xv)  in  computing  the  income  of  the               family business." The  assessee  was a Hindu undivided family  carrying  on  a joint  family business of commission agency in  cloth  under the name of Jugal Kishore Baldeo Sahai and was, in addition, deriving income from some property and from some partnership business  in  which  the  karta  Babu  Ram  was  a   partner representing  the  interest of the Hindu  undivided  family. The  family consisted of Babu Ram, his brother  Gobardhandas and  their sons.  In June, 1946, the karta Babu Ram wrote  a letter  to his brother Gobardhandas, who was the only  other adult  member  of  the family, stating that,  since  he  was managing  all the business, he ought to get a salary of  Rs. 1,000  per  month.   Gobardhandas promptly  agreed  to  this proposal and consequently in the account books of the family for the year in question a sum of Rs. 12,000 was debited  in the expense account of the Hindu undivided family  business, viz., of Jugal Kishore Baldeo Sahai and the same amount  was credited  in  the name of Babu Ram as  an  individual.   The first  such credit was made in the account year relevant  to the assessment year 1946-47 and similar credits continued to be  made  in  subsequent  accounting  years  upto  the  year relevant  to the assessment year 1952-53.  Thus,  the  debit against the Hindu family business at the rate of Rs.  12,000 per year and similar credit in the name of Babu Ram was made in  the  accounts for seven years.  In each of  these  seven years  the  Hindu undivided family as the  assessee  claimed that this sum of Rs.12,000 every year should be deducted  as an  expenditure under s. 10 (2) (xv) oft he Income-tax  Act. The Income-tax Officer rejected the claimand that order  was upheld by the Appellate Assistant Commissioner as well as by the  Tribunal.   Thereupon; at the request of  the  assessee

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appellant, the question reproduced by us was referred by the Tribunal for the opinion of the High Court.  The High  Court answered the question against the 418 appellant   and   upheld   the   view   of   the   Tribunal. Consequently, these appeals have been brought up before -us. The High Court has taken the view that under the Hindu  Law, a karta is bound by reason of his being the karta to  manage all the business of the family without being entitled to any remuneration  for the service of management.  It went on  to comment  that indeed, when under the law a karta  represents the  family,  it would be anomalous to think of a  karta  as being   an  employee  of  himself  or  being   entitled   to remuneration  for acting as such and receiving payment  from his  ownself.  This view was expressed by the High Court  on the  basis of its opinion about the rights and duties  of  a karta of a Hindu undivided family under the Hindu Law and to arrive  at  this  view, the Court relied  on  a  comment  in Gopalchandra  Sarkar  Sastri’s Hindu Law, 1940 Edn.,  N.  E. Raghavachariar’s Hindu Law, 4th Edn., and Mayne’s Hindu Law, II  th  Edn., and in addition, on a decision of  the  Madras High   Court   in   Krishnswami   Ayyangar   v.   Rajagopala Ayyangar.(1)  It was on the basis of these comments  in  the books  of Hindu Law that the Allahabad High Court  held  the view  that Babu Ram, being the karta of the family, was  not entitled  to  draw  any remuneration  for  carrying  on  the business of the Hindu undivided family. The  decision  of  the  Madras  High  Court  and  the  views expressed by these commentators do not show that a Karta  of a  Hindu  undivided  family is not entitled  to  charge  for services   rendered  to  the  family  business   under   any circumstances at all.  The right to receive remuneration  is negatived  with some qualifications.  Either- it  is  stated that  no  remuneration  is  payable  except  under   special arrangement, or a scope for payment is recognised by  saying that  the manager or karta is not "ordinarily"  entitled  to remuneration.   The  Madras  High  Court  in  the  case   of Krishnaswami  Ayyangar v. Rajagopala Ayyangar(1)  held  that "the  managing  coparcener  was  not  entitled  to   special remuneration  in the absence of a valid special  agreement". We  are unable to understand the meaning of  the  expression "valid special agreement".  It is, of course, necessary that before  a karta receives remuneration, it should be under  a valid  agreement.   In  judging what is a  valid  or  proper agreement  which would justify the payment  of  remuneration paid  to a karta of the Hindu undivided family for  managing the   business  of  the  family  to  be  deductible  as   an expenditure under s. 10 (2) (xv) of the Income-tax Act,  the test,  we  think, which should be applied,  is  whether  the agreement  has been made by or on behalf of all the  members of  the  Hindu undivided family and whether it  was  in  the interest of the business of the family, so that it could  be justified on grounds of commercial expediency.  That is  the test which has always to be applied when considering whether a particular (1) I.L.R. 18 Mad. 73 419 expenditure  claimed as a deduction under s. 10 (2) (xv)  of the Income-tax Act has been incurred wholly and  exclusively for the purpose of the business. This Court in Jitmal Bhuramal v. Commissioner of  Income-tax Bihar  and  Orissa  (1)  has  already  held  that  "a  Hindu undivided  family can be allowed to deduct salary paid to  a member of the family, if the payment is made as a matter  of commercial  or  business  expediency".   Mr.  S.  T.  Desai,

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learned  counsel  appearing  for  the  department  tried  to distinguish  that case on the ground that in that  case  the salaries  which  were  held to be deductible  were  paid  to junior member of the family and not to the karta.  The  view expressed  by  this Court was in general terms and  did  not make  any distinction between a junior member of the  family or  a  karta.   The principle was laid down  by  this  Court without any such distinction even though the Court was  then concerned  with  salaries  which had  been  paid  to  junior members of the family. We do not consider that the decision given by this Court  in that case needs to be given a narrow interpretation so as to confine  the right of deducting the remuneration paid  by  a Hindu undivided family to junior members only.  There  seems to  be no reason at all why if a karta is paid  remuneration he should be in a position different from that of any junior member.   It is true that a karta has a right to manage  the property of the Hindu undivided family on behalf of all  the coparceners  but  there is no obligation or duty on  him  to carry  on a particular business of the family.  It is  well- established  that  any member of a  Hindu  undivided  family including  a  karta can have a separate personal  source  of income  if that income is earned independently of the  Hindu undivided  family  assets or business.  It is  primarily  on this basis that it has been held that salary or remuneration paid  to  the  junior  member of  the  family  for  services rendered to the family business becomes his separate  income and  consequently  a deductible expenditure under  s.  10(2) (xv) of the Act when computing the income of the family.  In similar circumstances, if a karta offers his services to the family instead of choosing an independent career to earn his separate  income and receives remuneration from the  family, there  is  no  reason why the remuneration so  paid  to  him cannot  be  treated as an expenditure  for-carrying  on  the business of the family and consequently "expended wholly and exclusively  for the purpose of the business and  deductible under s. 10 (2) (xv) of the Act. As  we  have  already  indicated  above,  the  general  view expressed by commentators on Hindu Law as well as in decided cases  is  that  even  the karta of a  family  can  be  paid remuneration for carrying on family business, provided it is under  some agreement.  There seems to be no reason why,  if all persons competent in a Hindu (1) 44 I.T.R. 887. 420 undivided  family to enter into an agreement on  its  behalf consider  it  appropriate  that the  karta  should  be  paid remuneration and enter into an agreement to pay remuneration to  him,  that  remuneration should not be  held  to  be  an expenditure  incurred  in the interest of  the  family,  and consequently an expenditure deductible under s. 10 (2)  (xv) of  the  Act.   In  the  present  case,  Babu  Ram  received remuneration  when  he and his brother  Gobardhandas  agreed that such remuneration should be payable.  The other members of  the Hindu undivided family were minor sons of  Babu  Ram himself  or  of Gobardhandas.  Babu  Ram  and  Gobardhandas, being the only two members of the family competent to act on behalf of the family including the minors, entered into this agreement,  obviously  because  it  was  considered  in  the interest  of  the family that Babu Ram should  receive  this payment.  We are not at all impressed by the argument  urged on  behalf  of  the  department  that,  since  some  of  the coparceners were minors, no valid agreement at all on  their behalf  could  have  been  entered  into  by  Babu  Ram   or Gobardhandas  so as to allow payment of remuneration to  the

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karta, Babu Ram.  The minor sons of Babu Ram could certainly be represented by himself and the minor sons of Gobardhandas could  either be represented by him, being his sons, or,  in the alternative, Babu Ram could represent them in the agree- ment as the karta of the family to which they belonged.   It is  true  that under the agreement, some payment was  to  be made  out of the income of the family to Babu Ram so  as  to become  his separate property.  But that circumstance  would not, in our opinion, invalidate the agreement merely because Babu Ram represented some of the minors on whose behalf  the agreement  was made.  If the agreement is held to be in  the interest   of  the  family,  the  agreement  would  not   be invalidated  when  executed on behalf of the minors  by  the person authorised to act on their behalf simply because  the minors  happened to be represented by a person who  receives some benefit under the agreement.  The test of the  validity of  an agreement on behalf of a minor is that it  should  be for the benefit of the minor, and in this case, there is  no finding  that  the agreement entered into on behalf  of  the Hindu undivided family including the minors by Babu Ram  and Gobardhandas was in any way prejudicial to the interests  of the minor members.  On the other hand, the facts found  show that  some of the minors subsequently attained majority  and none  of them challenged the validity of this  agreement  on the  ground that it had been executed during their  minority and  that  it was against their interest.  In fact,  it  was found  that  subsequently, when there was  a  partition  ill which  even  the  sons of Babu Ram separated  from  him  the amount to the credit of Babu Ram in the accounts was treated as his separate asset and was not included in the assets  of the Hindu undivided family without any objection from any of the  members  of the family who were minors at  the  earlier stage when the agreement 421 was  entered into  Consequently, we are unable to hold  that the   agreement,  by  which  Babu  Ram  was   allowed   this remuneration  of  Rs. 1,000 p.m., was in any  way  vitiated, and,  as  we have already held above, it  was  an  agreement executed in the interest of the family. in  our view, if a remuneration is paid to the karta of  the family under a valid agreement which is bonafide and in  the interest  of, and expedient for, the business of the  family and   the  payment  is  genuine  and  not  excessive,   such remuneration  must  be held to be an  expenditure  laid  out wholly  And exclusively for the purpose of the  business  of the  family and must be allowed as an expenditure  under  s. 10(2) (xv) of the Act. In this connection, we may take notice of a decision in  the Patna case, Commissioner of Income-tax, Bihar and Orissa  v. Jainarain  Jagannath,(1)  wherein also it was held  that  "a member of a joint Hindu family might conceivably do business in his individual capacity and in that capacity might render services  to the joint family trading firm in  consideration of  which  the firm might pay him such  remuneration  as  it would  pay  to  an outsider.  If such  remuneration  is  not excessive  and is reasonable and is not a device  to  escape income-tax,  then  it  will be  a  legitimate  deduction  in computing  the, profits of the business.  If, on  the  other hand,   the   amount   paid   is   unreasonably   high   and disproportionate  to the services rendered by him,  then  it may  be  treated  as  part  of  the  profits  of  the   firm distributed  in a particular manner.  In the  present  case, there  is no indication of any finding that.the  payment  to Babu  Ram was at all high, or was not commensurate with  the services rendered by him.

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An  alternative ground, on which Mr. Desai on behalf of  the department  challenged this deduction under s.  10(2)  (xv), was  that  the remuneration was being paid to Babu  Ram  not only to marriage the Hindu undivided family business carried on  under the name of Jugal Kishore Baldeo Sahai,  but  also for  other  businesses, including those of  the  partnership firms  in  which  Babu Ram was a partner in  his  own  name, though representing the Hindu undivided family.  In  support of this proposition, learned counsel relied on the  decision of   the   Calcutta  High  Court  in  Jitmal   Bhuramal   v. Commissioner   of  Income-Tax,  Bihar  &  Orissa,(2)   which judgment  was affirmed by this Court as reported  in  Jitmal Bhuramal v. Commissioner of Income-tax, Bihar &  Orissa.(3). In  that case, there was a finding of fact that  two  junior members  of  the  Hindu  undivided  family,  Gulzarilal  and Madanlal, were employed in the partnership business in which the  Karta  of  the family was a partner  and  had  rendered services  to that business.  This Court,  while  recognising the principle that (1) 13 I.T.R. 410. (3) 44 I.T.R. 887. (2) 37 I.T.R. 528. 422 "a Hindu undivided family is allowed to deduct salaries paid to members of the family, if the payment is made as a matter of  commercial  or  business  expediency",  laid  down   the exception that the services rendered must be to the  family. It  was held that, since the services had been rendered  not to the family, but to the partnership firm, the remuneration paid to those members was not a legitimate deduction  -under s. 10(2)(xv) from the income of the Hindu undivided  family, and  that it could be a valid deduction only when  computing the income of the partnership business. It  is true that in the case before us the statement of  the case mentions that the agreement for payment of remuneration to  Babu Ram was to the effect that he was to get Rs.  1,000 p.m. for looking after the businesses of the Hindu undivided family.   It is because of the use of the word  "businesses" in   the  plural  that  learned  counsel  urged   that   the remuneration  given to Babu Ram was not merely  for  looking after  the  Hindu undivided family business,  but  also  for rendering  services to the partnership firms in  which  Babu Ram  was a partner.  We do not consider that this  interpre- tation of the agreement is correct.  The agreement does  not envisage  any payment to Babu Ram for services  rendered  to the partnership firms.  The language used was that Babu  Ram should  receive  the  remuneration  for  managing  all   the businesses  of  the Hindu undivided family, which  can  only mean  that  he  was  to manage  the  affairs  of  the  Hindu undivided  family firm and also to look after the  interests of  the Hindu undivided family in other  businesses.   Thus, the  remuneration  was not intended to  cover  any  services rendered by him to the partnership firms apart from whatever he  was required to do in the capacity of looking after  and managing  the  affairs of the Hindu undivided  family.   The principle  laid  down  in the case  of  Jitmal  Bhuramal  v. Commissioner  of  Income-tax,  Bihar  and  Orissa  (1)   is, therefore, not applicable to the case before us. The  appeals are consequently allowed.  The judgment of  the High  Court  is set aside and the question referred  by  the Income-tax   Appellate   Tribunal   is   answered   in   the affirmative.  The appellant will be entitled to its costs in this Court as well as in the High Court. V.P.S.                              Appeals dismissed. (1) 44 I.T.R. 887.

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