2000 (7) TMI 35 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the agreement between the karta of the Hindu undivided family and his wife.
2. Right of the Income-tax Officer to challenge the validity of the agreement.
3. Deductibility of the salary paid to the karta by the Hindu undivided family as a business expenditure.

Issue-wise Detailed Analysis:

1. Validity of the Agreement:
The Tribunal held that the agreement between the karta of the Hindu undivided family and his wife was invalid. The Income-tax Officer disallowed the salary paid to the karta, asserting it was his normal obligation to manage the family's interest without additional remuneration. The Tribunal agreed, stating that the agreement did not consider the interests of the minor members of the family. However, the High Court clarified that under Hindu law, such agreements are voidable, not void. The agreement was made for the benefit of the family, and the remuneration was for services rendered to the family, not the firm. The High Court concluded that the agreement was valid and the salary payment was justified.

2. Right of the Income-tax Officer to Challenge the Agreement:
The High Court emphasized that an alienation by the karta of a Hindu undivided family, even without legal necessity, is voidable and not void. Therefore, a third party, including the Income-tax Officer, cannot repudiate it. The High Court referenced the Supreme Court's decision in Raghubanchmani Prasad Narain Singh v. Ambica Prasad Singh and CIT v. Gangadhar Sikaria Family Trust, affirming that the Income-tax Officer and the Tribunal had no authority to invalidate the agreement. Consequently, the High Court ruled that the Income-tax Officer had no right to challenge the agreement's validity, and the Tribunal was unjustified in doing so.

3. Deductibility of Salary as Business Expenditure:
The High Court referred to the Supreme Court's decision in Jugal Kishore Baldeo Sahai v. CIT, which established that remuneration paid to a karta for managing the family's business is deductible as a business expenditure under section 37 of the Income-tax Act, 1961. The High Court noted that the karta's services were rendered for the family's benefit, and the salary was a legitimate business expense. The High Court concluded that the Tribunal's view that the karta was not entitled to remuneration was incorrect. Therefore, the salary paid to the karta was allowable as a deductible expenditure.

Conclusion:
The High Court answered question No. 1 in the negative, favoring the assessee and against the Revenue, affirming the validity of the agreement. Question No. 2 was also answered in the negative, stating that the Income-tax Officer had no right to challenge the agreement. Question No. 3 was deemed unnecessary to answer due to the negative answers to questions Nos. 1 and 2. The reference was disposed of with no order as to costs.