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Commissioner Of Income-Tax, U.P v. Messrs. Jugal Kishore Baldeo Sahai.
Judgment Summary: Reference under section 66(1) of the Income-tax Act — Brijlal Gupta, J.
Factual and Procedural Background
This is an income-tax reference under section 66(1) of the Income-tax Act. The referred question asked whether, on the facts and circumstances of the case, the salary paid or credited to the 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.
The assessee was a Hindu undivided family (HUF) carrying on an ancestral commission agency business in cloth under the name Jugal Kishore Baldeo Sahai; the family also had income from property and share of profits from firms in which the family (through its karta) was a partner. The karta, Babu Ram, managed all the family businesses; his brother Gobardhandas did not participate in management.
In June 1946 Babu Ram wrote to Gobardhandas asserting he ought to receive a salary of Rs. 1,000 per month; Gobardhandas agreed. From assessment year 1946–47 to 1952–53 (seven years) the family books reflected an annual debit of Rs. 12,000 to shop expenses and corresponding credits to Babu Ram's personal account; Babu Ram did not withdraw these credited sums. The HUF claimed deduction of Rs. 12,000 per year as business expenditure.
The Income-tax Officer disallowed the deduction as an appropriation of profits, on the ground that the karta was bound by his status to manage the family affairs and the payment represented an appropriation, not an allowable business deduction. The Appellate Assistant Commissioner upheld the disallowance giving several points (set out below). The Income-tax Appellate Tribunal allowed the appeal, treating the payment as agreed compensation for personal work by the karta and an allowable business expenditure. The Commissioner of Income-tax referred the question to the court under section 66(1).
Legal Issues Presented
- Whether, on the facts and circumstances of the case, the salary paid or credited to the 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?
- Whether the payments could be justified as made under a “special arrangement” (i.e., whether the letters of agreement between Babu Ram and Gobardhandas constituted a valid agreement binding the entire coparcenary, including minors)?
Arguments of the Parties
Assessee's Arguments
- The HUF contended that the annual credit of Rs. 12,000 to Babu Ram represented a salary paid to the karta for managing the family businesses and that this amount was a business expense deductible under the Income-tax Act (section 10(2)(xv) was relied upon in the pleadings).
- The arrangement between Babu Ram and Gobardhandas was said to be an agreed compensation for personal work of management and thus allowable as an expenditure of the business (this view was accepted by the Income-tax Appellate Tribunal).
Revenue's Arguments (Income-tax Officer and Appellate Assistant Commissioner)
- The Income-tax Officer: The karta, by virtue of his status, has a duty to manage family affairs; an allowance taken by the karta for performing his natural duty is merely an appropriation of profits, not a business expenditure. The credited sums were not withdrawn and therefore represented appropriation.
- The Appellate Assistant Commissioner upheld the assessment officer and made specific points:
- From accountancy the salary was debited only against the ancestral trading business, not against all family heads of income.
- The karta's position is that of the head of the HUF and he cannot be an employee of his own family; thus he is not entitled to salary for performing duties imposed by his status.
- Only Gobardhandas consented; there was no evidence of consent on behalf of minor coparceners, and consent alone cannot convert the payment into an expenditure “wholly and exclusively” for business.
- At partition, the accumulated credited amounts in the karta's account were treated as his self-acquired money; this does not alter the legal position that a karta cannot be a salaried servant of the joint family.
- The post-partition arrangement (Babu Ram given Rs. 300 per month to manage partnership) suggested the earlier credits might have been given in lieu of a share in the business rather than genuine remuneration for management.
Tribunal's Reasoning (as summarized in the opinion)
- The Tribunal observed that the status of karta is not acquired by contract and that being a senior member should not deny ordinary rights. It treated the payment as agreed compensation by all coparceners for the personal work of the karta in looking after family businesses and held it to be an allowable business expenditure.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Sirdar Bahadur Indra Singh v. Commissioner of Income-tax [1943] 11 I.T.R. 16 | One of several cases concerning fees/allowances paid to directors who were kartas of HUFs. | The court observed this and similar director-cases are distinguishable because companies are separate legal entities and director duties depend on corporate documents; they do not control the present family-management context. |
| Commissioner of Income-tax v. Darsanram | Listed among company-director cases involving kartas (no full citation in text). | Treated as not directly applicable for the same reason: duties as director arise from corporate position, not karta status. |
| Commissioner of Income-tax v. S.N.N. Sankaralinga Iyer [1950] 18 I.T.R. 194 | Another case concerning director's fees where the director was also a karta. | Distinguished on the ground that companies and their directors differ legally from HUF management; not helpful to decide the present issue. |
| Murugappa Chetty and Sons v. Commissioner of Income-tax [1952] 21 I.T.R. 311 | Also concerned fees/allowances to directors who were kartas. | Held to be distinguishable for the same reasons as the other company-director cases cited. |
| Knightsdale Estates v. Commissioner of Income-tax [1955] 28 I.T.R. 650 | Partnership of three HUFs where remuneration was paid to the karta managing a partnership; addressed whether remuneration was separate income. | Found inapplicable because the karta in that case was not bound to manage except under the partnership contract; court therefore did not treat it as influencing the HUF-management context here. |
| Commissioner of Income-tax v. Jainarain Jagannath [1945] 13 I.T.R. 410 | Case involving salary paid to junior members of a Hindu undivided family. | Held not helpful to current dispute because junior members are not bound by status as the karta is; remuneration to juniors may be allowable when referable to service, but karta's position differs. |
| Jitmal Bhuramal v. Commissioner of Income-tax [1959] 37 I.T.R. 538 | Another case of salary to junior members of HUFs. | Also treated as not applicable for the reasons given in relation to junior-member cases vs. the karta's unique duties. |
| Krishnasami Ayyangar v. Rajagopala Ayyangar (Madras decision) | Authority stating that in absence of a valid special agreement the managing coparcener of a joint Hindu family is not entitled to special remuneration. | Cited by the court and relied upon as a supporting authority for the principle that a karta is not ordinarily entitled to remuneration unless there is a valid special agreement. |
| Ramachandrappa v. Narayanappa | Authority stating that a manager of a joint Hindu family business, or a co-owner, would not ordinarily be entitled to remuneration. | Used to support the proposition that the position of karta, akin in some respects to a partner or co-owner, does not ordinarily carry a right to separate remuneration. |
Court's Reasoning and Analysis
The court treated the precise point as res integra — not directly decided by the cited authorities — and proceeded to decide the matter on general principles of Hindu law and equitable reasoning gleaned from authorities and textbooks.
- The court reviewed the reported cases cited at the Bar and concluded that several of them (those involving directors of companies who were kartas) were distinguishable because companies are legal entities separate from families and the duties of directors arise from corporate instruments rather than the status of karta.
- The Knightsdale partnership decision was likewise not helpful because the karta there was contractually obliged to manage the partnership; that context differed from an HUF's internal management.
- Cases concerning remuneration to junior members were found inapplicable because a karta alone is bound by status to manage the family business; juniors who are not so bound may legitimately be paid for services.
- The court turned to authoritative statements in Hindu law texts (Golapchandra Sarkar Sastri; N.R. Raghavachariar; Mayne) and supporting case law (Krishnasami Ayyangar; Ramachandrappa v. Narayanappa) which reflect the longstanding principle that a managing coparcener (karta) is not ordinarily entitled to special remuneration for managing joint family property unless there is a valid special arrangement to that effect.
- Applying that principle, the court examined whether a special arrangement existed here. The only pleaded agreement consisted of exchange of letters between Babu Ram and Gobardhandas. The court noted the coparcenary also included minor sons of both Babu Ram and Gobardhandas and there was nothing to show the minors were represented or that any agreement was arrived at on their behalf.
- The court also observed that the Appellate Assistant Commissioner doubted the genuineness of the annual Rs. 12,000 payments and suspected they were in lieu of a share of the business (noting that post-partition Babu Ram received only Rs. 300 a month for managing the partnership). The Tribunal had not addressed these factual-sufficiency concerns. The court considered this aspect material.
- On the basis of these legal and factual conclusions, the court held that the payments could not be treated as allowable business expenditure: absent a valid special agreement binding the entire coparcenary, a karta is not entitled to such remuneration, and the facts did not establish a valid special arrangement covering all coparceners (including minors) or the genuineness of the payments as business expenditure.
Holding and Implications
Question answered in the negative.
Holding (core ruling): The court answered the referred question in the negative — the salary credited or paid to the karta (Babu Ram) for looking after the family's business was not a permissible deduction under section 10(2)(xv) for the years in question.
Implications:
- The direct effect is that the assessee's claim to deduct Rs. 12,000 annually as a business expenditure for the karta's alleged salary was disallowed for the assessment years under reference.
- The court found no valid special agreement binding the entire coparcenary (including minors) to justify treating the credits as an allowable business expense, and it noted factual concerns about the genuineness of the payments which the Tribunal had not addressed.
- The Commissioner of Income-tax was awarded costs of the reference in the sum of Rs. 200.
- No broader change in precedent beyond applying established Hindu-law principles regarding the karta's entitlement to remuneration was articulated in the opinion; the decision operated to deny the deduction on the facts before the court.
Note: This summary is strictly confined to the material contained in the provided opinion. No additional facts or inferences beyond the text have been introduced.
Brijlal Gupta, J.:— This is an income-tax reference under section 66(1) of the Income-tax Act. The question which has been referred to us for opinion is:
“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?”
2. The assessee was a Hindu undivided family carrying on an ancestral business in the name of Jugal Kishore Baldeo Sahai. The business was of commission agency in cloth. The family also derived income from property and was a partner through its karta (Babu Ram) in several firms. The share of profit from these firms also formed part of the income of the assessee.
3. The assessee family consisted of Babu Ram (karta) and his brother, Gobardhandas, and their sons. Babu Ram looked after all the businesses through which the family derived its income; Gobardhandas did not take part in the management. In June 1946, Babu Ram wrote a letter to Gobardhandas stating that since he was managing all the businesses, he ought to get a salary of Rs. 1,000 per month. This was promptly agreed to by Gobardhandas. Accordingly, in the account books of the family, viz., of Jugal Kishore Baldeo Sahai, a sum of Rs. 12,000 was debited to the shop expenses account each year from the assessment year 1946–47, till the assessment year 1952–53. We are concerned with these seven years in this reference. Corresponding entries were made in the personal account of Babu Ram and each year a sum of Rs. 12,000 was credited to it. Babu Ram never withdrew any amount out of the amount so credited. In the assessment years in question the assessee claimed a right to deduct the sum of Rs. 12,000 from the income of each year on account of business expenditure. The Income-tax Officer rejected the claim observing:
“He (Babu Ram) is the karta of the family and by virtue of the status, it is his duty to manage the affairs of the family. The allowance taken by the karta of the family for doing his natural duty of looking after its affairs is nothing but appropriation of profits. This allowance is simply credited to this ‘allowance account’. He has not withdrawn any part of it.”
4. The assessee went up in appeal to the Appellate Assistant Commissioner of Income-tax, who upheld the Income-tax Officer and made the following points:
(i) From the accountancy point of view the salary claimed by the karta was a debit not against all the heads of income of the family, but only against the profits and gains of the ancestral business.
(ii) A karta is the head of a Hindu undivided family. In a trading family it is his duty to manage the business of the family. His position is almost that of an overlord and, for all practical purposes, he is the Hindu undivided family. His powers are wider than those of the other members of the family. He cannot be an employee of his own family. The expenditure of Rs. 12,000 per annum cannot be said to be for the benefit of the family.
(iii) Only Gobardhandas consented to the payment of the salary to the karta and not the other members of the coparcenary, namely, the minor sons of the karta and of Gobardhandas. And, in any case, the consent by itself cannot convert the payment into an expenditure laid out or expended wholly and exclusively for the purpose of the business.
(iv) The fact that at the time of the partition which took place consequently the accumulated amount in the personal account of the karta (made up of the credits of Rs. 12,000 annually) was not brought into the common pool for division and was treated as his self-acquired money could not negative the legal position that a karta cannot be a salaried servant of the joint family represented by himself.
(v) In the partnership formed out of the ancestral business of the family after the partition of the family Babu Ram did not have any share and was merely given a salary of Rs. 300 per month for managing the business of the partnership; this might mean that the accumulated amount lying in his account was given to him in lieu of a share in the business.
5. In the result the Appellate Assistant Commissioner came to the conclusion that there was no expenditure of Rs. 12,000 incurred annually for the purposes of the business of the Hindu undivided family and that in fact there was an appropriation of this amount from the profits of the business for the purpose of evading income-tax.
6. Thereafter the assessee went up in appeal to the Income-tax Appellate Tribunal, and the Tribunal, in a cryptic order, allowed the appeal, observing:
“The status of karta is not a position which is acquired by contract or otherwise but it is only a position unfortunately thrust upon the karta because he happens, by birth, to be a senior member of the family. Simply because a member of the family happens to be a senior member, it does not stand to justice to deny him the ordinary rights. The karta should not labour under disability or disadvantage merely by reason of his being the senior member of the family. In the instant case the salary paid to the karta is not an income earned by the use of the family property but it is only the return of compensation in terms of money agreed by all coparceners to be paid for personal work by the karta in looking after all the family businesses and it is, therefore, an allowable business expenditure.”
7. The Commissioner of Income-tax asked for a reference of the case to this court under section 66(1) and the case has accordingly been referred to us for the decision of the question stated in the beginning of this judgment.
8. Several cases were cited at the Bar, but none of them appears to be of much assistance as none of them deals with the specific point which has arisen in this case. Four cases, namely, Sirdar Bahadur Indra Singh v. Commissioner of Income-tax [1943] 11 I.T.R 16., Commissioner of Income-tax v. Darsanram, Commissioner of Income-tax v. S.N.N Sankaralinga Iyer [1950] 18 I.T.R 194., and Murugappa Chetty and Sons v. Commissioner of Income-tax [1952] 21 I.T.R 311. are cases in which the question was of the fees and allowances paid to directors of companies who happened to be kartas of Hindu undivided families which were interested in the business of the companies as shareholders. These cases are clearly distinguishable as the companies in which the kartas were directors were legal entities quite distinct from the families and the position of the kartas as directors of the companies was quite different from their position as heads of their families. The duties of the directors were not duties enjoined upon them by reason of their status but depended upon provisions in the memoranda and articles of association. The kartas were under no obligation as heads of their families to serve as directors merely by reason of the fact that their families were interested in the companies as shareholders. Further it was a question in each case whether the karta was a director of the company in his individual capacity or as representing the Hindu undivided family and it depended upon the facts of each case.
9. Another case which was cited is Knightsdale Estates v. Commissioner of Income-tax [1955] 28 I.T.R 650.. Here three Hindu undivided families constituted themselves into a partnership and a certain remuneration was paid to the karta of one of them for managing the partnership. It was held that the remuneration received by the karta was his separate income and was not the income of his family. This case also is not of any help because the karta was not bound to carry out the management of the partnership except under the contract of partnership.
10. The last two cases, namely, Commissioner of Income-tax v. Jainarain Jagannath [1945] 13 I.T.R 410. and Jitmal Bhuramal v. Commissioner of Income-tax [1959] 37 I.T.R 538., were cases of salary paid to junior members of Hindu undivided families. These cases also are of no help. In a Hindu undivided family it is only the karta who is bound by reason of his status to carry out the business of his family and not any other member of the family. If, therefore, a remuneration is paid to a junior member for doing something which he is not bound to do, the remuneration, pros vided it is referable to service, might be allowable as a deduction.
11. The question must, therefore, be answered on general principles as it is res integra. It is stated in Golapchandra Sarkar Sastri's Hindu Law, 1940 edition, at page 286:
“The managing coparcener of joint Hindu family is not entitled to any special remuneration, as the property which he manages is one, of which he is a joint co-owner and, therefore, in order to look after his own undivided coparcenary interest in the joint property, he cannot but look after the whole of it, that is to say, the management of the whole is inseparable from that of his own interest, and does not require any additional time or trouble for which compensation in money may be claimed, while on the other hand he is amply compensated by the enjoyment of the power exercised and involved in the management as well as in the control over the expenditure of the income of the property.”
12. This is based on the authority of a Madras decision in Krishnasami Ayyangar v. Rajagopala Ayyangar, where it was observed:
“In the absence ox a valid special agreement, the managing coparcener of a joint Hindu family is clearly entitled to no special remuneration as the property which be manages is one of which he is a joint owner.”
13. We find the following statement in N.R Raghavachariar's Hindu Law, fourth edition, page 276, based on the same case:
“A manager is in loco parentis to the other members of the family and his position which is unique is the result of both necessity and ancient privilege. His position is purely honorary, though in case of onerous services by the manager, he may be allowed by the family, under a special arrangement, to charge for the same.”
14. We also find in Mayne's Hindu Law, 11th edition, at page 379, the following statement:
“In the case of a family trade or business, as in respect of other family properties, it is only the managing member that can ordinarily act on behalf of the family and bind by his acts his coparceners.”
15. One of the authorities mentioned there in support of the statement is Ramachandrappa v. Narayanappa, which at page 350 of the report lays down as under:
“Either as a manager of a joint Hindu family business or even as managing partner or as a co-owner looking after the common business or property, (he) would not ordinarily be entitled to remuneration at all.”
16. It is stated immediately after the above quotation that Lindley on Partnership and Freeman on Co-tenancy are of the view that partners or co-owners are not ordinarily entitled to any remuneration. The position of a karta of a Hindu undivided family in some respects partakes of the nature of a partner and a co-tenant or a joint-owner. It, therefore, appears to us that apart from any question of a special agreement, a karta is bound merely by reason of his being the karta to manage all the businesses of the family without being entitled to any remuneration for the service of management. Indeed, when under the law a karta represents the family, it would be anomalous to think of a karta as being an employee of himself or being entitled to a remuneration for acting as such and receiving payment from his own self.
17. There is just one more aspect of the matter to which we might advert. Can it be said that the payment made to Babu Ram was made under a special arrangement and that it could be justified on the basis of that arrangement? The only agreement pleaded is the exchange of letters between himself and Gobardhandas. These two were not the only members of the coparcenary; it consisted also of the minor sons of both Babu Ram and Gobardhandas. There is nothing to show that any agreement for the payment of this amount was arrived at on behalf of the minor sons.
18. It also appears that the Appellate Assistant Commissioner was not quite satisfied that the annual payment of Rs. 12,000 was in fact made, or was made genuinely for managing the business. His view appears to be that the payment was merely in lieu of a share in the business which he gave up at the subsequent partition. He accepted managership of the post-partition business on a salary of Rs. 300 per month only. The payment of Rs. 1,000 per month for managing the same business, while he had a share in it, could not have been genuine and must have been made, if made at all, for the purpose of evading income-tax. The Tribunal does not appear to have paid any attention to this aspect of the matter.
19. For the reasons stated above, we find that the question referred to us should be answered in the negative and we do so. The Commissioner of Income-tax shall be entitled to the costs of this reference which we assess at Rs. 200.
20. Question answered in the negative.
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