1982 (1) TMI 59 - HC - Income Tax

Summary

Issues:
1. Allowability of salary paid to the karta of a Hindu undivided family as a deduction for the assessment year 1969-70.

Analysis:
The case involved the question of whether the salary paid to the karta of a Hindu undivided family (HUF) was an allowable deduction for the assessment year 1969-70. The HUF consisted of the karta, his wife, and two minor children. An agreement was entered into between the karta and his wife, wherein the karta was to be paid a monthly salary for looking after the family's interests. The family derived income from investments in partnership firms and interest on loans. The HUF claimed a deduction of the salary paid to the karta as revenue expenditure, which was disallowed by the Income Tax Officer (ITO). The matter was taken to appeal, but the disallowance was upheld by the Tribunal.

The Tribunal's decision was based on the fact that the karta, as a partner representing the family in various businesses, was supposed to look after the family's interests without the need for specific services beyond the normal functions of a partner. The Tribunal found that the agreement for the salary was not dictated by commercial expediency and was not valid as it did not represent the minor members of the family. The Tribunal emphasized that the karta did not have to frequently visit out-station places to manage the family's business interests, as most firms were located in Kanpur. Therefore, the Tribunal concluded that the salary paid to the karta was not a valid deduction.

The counsel for the assessee challenged the findings, arguing that the karta did not have to render specific services to earn income for the family, mainly derived from investments and loans. The Tribunal highlighted that the karta's role was limited to receiving share income from partnership firms and overseeing loan interests. The Tribunal's decision was supported by the Supreme Court's ruling in Jugal Kishore Baldeo Sahai v. CIT, emphasizing that remuneration to the karta should be under a valid and bona fide agreement for the benefit of the family. In this case, the agreement for the salary was found to lack commercial expediency and was considered excessive, leading to the disallowance of the deduction.

The court distinguished this case from Shankarlal H. Dave v. CIT, where the karta's services were deemed to be in the interest of the family and dictated by commercial expediency. As a result, the court ruled against the assessee, holding that the salary paid to the karta was not a valid deduction. The judgment was delivered in favor of the revenue and against the assessee, with costs awarded to the Commissioner.