1984 (2) TMI 72 - HC - Income Tax

Summary

Issues:
Interpretation of agreement for payment to karta under section 37 of the Income-tax Act of 1961.

Analysis:
The case involved an application under section 256(2) of the Income Tax Act, 1961, where the Tribunal was directed to refer a question of law to the High Court regarding the admissibility of payment to the karta under section 37 of the Act. The agreement in question authorized a payment of Rs. 750 as salary to the karta for managing the firm's business. The Tribunal was tasked with determining whether the payment was for the work done by the karta for the family or for the joint family business relating to the partnership firm.

The Tribunal concluded that the remuneration to the karta was provided for work done by him for the family business relating to the partnership firms, not for the family as such. The Tribunal observed that the agreement seemed to be an attempt at legal avoidance by diverting part of the income assessable in the hands of the Hindu Undivided Family (HUF) representing share income from the firms.

Citing the Supreme Court decision in Jugal Kishore Baldeo Sakai v. CIT, it was noted that if remuneration is paid to the karta under a valid agreement, bona fide and in the interest of the family business, it must be considered an expenditure for the business of the family. The Court found nothing to suggest the agreement in question was invalid, supporting the admissibility of the payment to the karta.

Referring to the decision of the Gujarat High Court in Shankerlal H. Dave v. CIT, it was established that Hindu Undivided Families can engage in business activities through representatives entering into partnerships. The Court emphasized that as long as the remuneration claimed is bona fide, not excessive, and justified by commercial expediency, it should be allowed as a genuine business expenditure.

Based on these principles and the facts of the case, the Court held that the deduction of salary paid to the karta was admissible under section 37 of the Income Tax Act. However, the Tribunal was granted the discretion to assess the actual amount deductible based on the circumstances of the case. No costs were awarded in the judgment.