1977 (7) TMI 6 - HC - Income Tax

Summary

Issues Involved:
1. Whether the remuneration paid by the HUF to its karta was allowable as a deduction for the assessment years in question.

Issue-wise Detailed Analysis:

1. Allowability of Remuneration Paid by HUF to its Karta:

The primary issue in this case was whether the remuneration paid by the HUF to its karta for managing the affairs and interests of the HUF in various partnership firms was allowable as a deduction under the Income Tax Act for the assessment years in question. The Tribunal initially disallowed the remuneration, relying on the principle established in Jitmal Bhuramal v. CIT [1962] 44 ITR 887 (SC), which stated that an HUF cannot claim a deduction for salary paid to a member for services rendered to a partnership firm in which the HUF is a partner through its karta.

Facts and Agreement Analysis:

The HUF, through its karta, was a partner in several firms. The remuneration agreement dated October 30, 1965, specified that the karta, Shankerlal H. Dave, was to be paid Rs. 24,000 per annum for managing and looking after the affairs and interests of the HUF in these partnership businesses. Clause 4 of the agreement explicitly stated that the remuneration was not intended to cover services rendered to the partnership businesses but was for managing the HUF's interests in those businesses.

Tribunal's Findings:

The Tribunal disallowed the remuneration, arguing that the services rendered by the karta were to the partnership firms and not to the HUF. It emphasized that the HUF had no place in the partnership firms, and therefore, the services rendered by the karta could not be considered as services to the HUF.

Legal Precedents:

1. Jitmal Bhuramal v. CIT [1962] 44 ITR 887 (SC): The Supreme Court held that an HUF could deduct salaries paid to its members if the payment was made as a matter of commercial expediency for services rendered to the family business. However, services rendered to a partnership firm in which the HUF is a partner cannot be considered as services to the HUF.

2. Jugal Kishore Baldeo Sahai v. CIT [1967] 63 ITR 238 (SC): The Supreme Court clarified that remuneration paid to a karta for managing the family business, including looking after the HUF's interests in partnership firms, was a permissible deduction. The agreement must be valid and made in the interest of the family business.

Court's Analysis and Conclusion:

The court found that the Tribunal had misunderstood the legal distinction between services rendered to a partnership firm and services rendered to the HUF for managing its interests in those firms. The agreement in question was similar to the one in Jugal Kishore's case, where the remuneration was for managing the HUF's interests in partnership businesses, not for services to the partnership firms themselves.

The court held that the remuneration paid to the karta was for services rendered to the HUF by managing its interests in the partnership businesses. The agreement was valid, and the remuneration was not excessive or unreasonable. Therefore, the remuneration was an allowable deduction under section 37(1) of the Income Tax Act.

Final Judgment:

The court answered the reference in the negative, in favor of the assessee, and against the revenue. The remuneration paid by the HUF to its karta for managing the HUF's interests in partnership businesses was allowable as a deduction for the assessment years in question. The revenue was directed to pay the costs of the assessee in each reference.