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 familys 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 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.
The assessee family consisted of Babu (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 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 to 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 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 He has not withdrawn any part of it.'
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.
In the result of 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.
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 the 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 business and it is, therefore, an allowable business expenditure.'
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.
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, Commissioner of Income-tax v. Darsanram, Commissioner of Income-tax v. S.N.N. Sankaralinga Iyer, and Murugappa Chetty and Sons v. Commissioner of Income-tax are cases 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 share-holders. These cases are clearly distinguishable as the companies in which 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.
Another case which was cited is Knightsdale Estates v. Commissioner of Income-tax. 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 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.
The last two cases, namely, Commissioner of Income-tax v. Jainarain Jagannath and Jitmal Bhuramal v. Commissioner of Income-tax, 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 union member for doing something which he is not bound to do, the remuneration, provided it is referable to service, might be allowable as a deduction.
The question must, therefore, be answered no general principles as it is res integra. It is stated in Golapchandra Sarkar Sastris 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 took 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 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.'
This is based on the authority of a Madras decision in Krishnasami Ayyangar v. Rajagopala Ayyangar, where it was observed :
'In the absence of a valid special agreement, the managing coparcener of a joint Hindu family is clearly entitled to no special remuneration as the property which he manages is one of which he is a joint owner.'
We find the following statement in N.R. Raghavachariars 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.'
We also find in Maynes 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.'
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.'
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 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 business 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 received payment from his own self.
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.
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 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 any attention to this aspect of the matter.
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 assessee at Rs. 200.
Question answered in the negative.