1966 (9) TMI 39 - SC - Income Tax

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 section 10(2)(xv) in computing the income of the family business? Held that - If a remuneration is paid to the karta of the family under a valid agreement which is bona fide 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 section 10(2)(xv) of the Act.

Summary

Issues Involved:
1. Whether the salary paid or credited to a karta of the family for managing the family's business is a permissible deduction under section 10(2)(xv) of the Income-tax Act.
2. The validity of the agreement for payment of remuneration to the karta.
3. The applicability of remuneration paid to the karta for managing other businesses including partnership firms.

Issue-wise Detailed Analysis:

1. Permissibility of Salary Deduction under Section 10(2)(xv):
The primary issue was whether the salary paid to the karta for managing the family business could be deducted under section 10(2)(xv) of the Income-tax Act. The High Court initially held that a karta is bound to manage the family business without remuneration under Hindu law. The Supreme Court, however, disagreed, stating that the right to receive remuneration is not entirely negated but is subject to qualifications. The Court emphasized that the test for a valid deduction under section 10(2)(xv) is whether the expenditure was incurred wholly and exclusively for the purpose of the business and justified on grounds of commercial expediency.

2. Validity of the Agreement for Payment of Remuneration:
The Supreme Court examined whether the agreement to pay remuneration to the karta was valid. It was noted that the agreement was made by Babu Ram and his brother Gobardhandas, the only two adult members of the Hindu undivided family, and was in the interest of the family. The Court rejected the argument that the agreement was invalid because some coparceners were minors, stating that minors could be represented by their guardians. The agreement was considered bona fide, in the interest of the family, and thus valid.

3. Applicability of Remuneration for Managing Other Businesses:
The department contended that the remuneration was for managing not only the Hindu undivided family business but also other businesses, including partnership firms. The Supreme Court clarified that the remuneration was intended for managing the affairs of the Hindu undivided family and looking after its interests in other businesses, not for services rendered to the partnership firms. Therefore, the principle from the case of Jitmal Bhuramal v. Commissioner of Income-tax, where remuneration paid for services to partnership firms was not deductible, did not apply here.

Conclusion:
The Supreme Court allowed the appeals, setting aside the High Court's judgment and answering the referred question in the affirmative. It held that remuneration paid to the karta under a valid agreement, which is bona fide, in the interest of the family, and not excessive, is a deductible expenditure under section 10(2)(xv) of the Income-tax Act. The appellant was entitled to costs in both the Supreme Court and the High Court.