'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the assessee-family was not entitled to deduction of the remuneration paid to Mahendra Sunderlal ?'
2. A few relevant facts need be stated in order to appreciate the question which has been referred to us.
3. The assessment year under reference is 1970-71, the previous year being S. Y. 2025, which ended on November 9, 1969. The assessee is a HUF and its Karta is one Sunderlal Nanalal, who was a partner in the firms of M/s. Nanalal Mansukhram and M/s. Mansukhram Bhagwandas. It appears that on account of old age and indifferent health of the said Sunderlal, he was not in a position to attend and devote full time to the business of the said firms. The karta, Sunderlal Nanalal, therefore, engaged Mahendra Sunderlal, one of the coparceners of the assessee-family, to help him in the management of the business of the said firms. Mahendra Sunderlal had to act as representative of the karta and it was agreed between said Sunderlal Nanalal and Mahendra Sunderlal that the latter was to be paid a monthly remuneration of Rs. 250 for the said services. The terms of the agreement were reduced to writing on November 16, 1968. In the course of the assessment proceedings for the assessment year under reference, the assessee-family claimed deduction of the remuneration of Rs. 3,000 paid to Mahendra Sunderlal in the year of account relevant to the assessment year in question. The claim did not find favour with the ITO who rejected it on the ground that no such claim was made in the past and that the payment of the salary was not expenditure (incurred) for earning income from the aforesaid firms.
4. The assessee-family, therefore, carried the matter in appeal before the AAC, Ahmedabad, who by his order of November 26, 1973, held that the claim made by the assessee was admissible in the light of the two decisions of the Supreme Court in Jugal Kishore Baldeo Sahai v. CIT : 63ITR238(SC) and Jitmal Bhuramal v. CIT : 44ITR887(SC) . He, therefore, reduced the income of the family by Rs. 3,000.
5. The Revenue, therefore, carried the matter in appeal before the Tribunal which, following its earlier decision in ITO v. Kamdar (Income-tax Appeals Nos. 348 and 349 of 1973-74, decided on December 5, 1974), held that the assessee-family was not entitled to claim deduction of remuneration paid to Mahendra Sunderlal. The assessee, therefore, prayed for a reference of the question as set out above to us for our opinion which was granted.
6. A short point which arises in this reference is, whether the services agreed to be rendered by Mahendra Sunderlal under the agreement of November 16, 1968, were in effect and substance to the two firms, namely, M/s. Nanalal Mansukhram and M/s. Mansukhram Bhagwandas, or were really to HUF of Sunderlal Nanalal which Sunderlal represented as a partner in the said two firms. It is trite position in law that a HUF is allowed to deduct salary paid to the members of the family if the payment is made as a matter of commercial or business expediency provided the service is a service rendered to the family (vide Jitmal Bhuramal's case : 44ITR887(SC) and Jugal Kishore Baldeo Sahai's case : 63ITR238(SC) . In our opinion, the Tribunal has not addressed itself to the question which precisely arises in the case before us. In order to answer that question, the Tribunal must address itself to the construction of the agreement of November 16, 1968. What the Tribunal has done is that it has merely followed its earlier decision in Kamdar's case, and, with respect, cryptically concluded that Mahendra Sunderlal was rendering the services to the partnership firms. It is no doubt true that ultimately the question of admissibility of a particular item of expense, namely, remuneration of Rs. 3,000 in the present case, would depend upon the answer as to who was the beneficiary of the services of Mahendra Sunderlal. But in order to reach that answer, one has got to examine the agreement and to find out what is its effect on its true construction. In the ultimate analysis, it is the construction of the agreement which will know light on the intention of the parties. It will be too difficult if not impossible to find the two agreements similar in all material respects so as to enable the Tribunal or the court to conclude about the one by reference to its decision in respect of another agreement. Before we address ourselves to the construction of the agreement in the present case before us, we must shortly refer to the legal position as clearly established by the decision of this court in Shankerlal H. Dave v. CIT : 124ITR733(Guj) . The Division Bench of this court was concerned with a similar claim for remuneration paid to one Shri Shankerlal Dave who happened to be the karta of his HUF comprising of himself, his wife and their one son and two daughters-all the children being minors. The said HUF was a partner through its karta, Shankerlal Dave, in four firms in the first two years under reference and in five firms for the subsequent years covered by the other reference. There was no other income of the joint family except relating to dividends, interest, etc. The claim for remuneration was founded on an agreement of October 30, 1965. The claim was rejected by the ITO by relying on the decision of the Supreme Court in Jitmal Bhuramal's case : 44ITR887(SC) on the short ground that there was no other independent business of the HUF in question. The AAC, however, allowed the appeal following the subsequent decision of the Supreme Court in Jugal Kishore Baldeo Sahai's case : 63ITR238(SC) . In appeal, the Tribunal upheld the Revenue's stand on the ground that it was settled principle that a HUF may be allowed to deduct salary paid to a member of the family if the payment was made as a matter of commercial expediency provided the services are rendered for the HUF business and such payments are genuine and not excessive. The Tribunal read the agreement and particularly in view of the provisions contained in clause 4 thereof concluded that the remuneration or salary paid to Shankerlal Dave was clearly in respect of the services rendered to the partnership concerns in which the HUF was a partner through him. The assessee-family, therefore, sought reference of the question as to whether the Tribunal was right in law in disallowing the remuneration paid by the HUF to its karta. The Division Bench, speaking through J. B. Mehta J. (as he then was), considered both the decisions of the Supreme Court in Jitmal Bhuramal's case : 44ITR887(SC) and Jugal Kishore Baldeo Sahai's case : 63ITR288(SC) . The Division Bench first referred to the facts of Jitmal Bhuramal's case and pointed out that the assessee's case as well as the finding of the Tribunal were in respect of the claim of remuneration paid to the two junior members for rendering services to the partnership firms and, therefore, the claim had been disallowed. The Division Bench, therefore, observed that the ratio of Jitmal's case was on these special facts as the services were not rendered to the HUF by its family members but to the partnership firms only. The Division Bench thereafter referred to Jugal Kishore's case : 63ITR238(SC) , where the Supreme Court held that it was necessary that the remuneration which the karta received should be under a valid agreement and the test which should be applied for finding out the propriety or validity of the agreement was whether the agreement had been made by or on behalf of the members of the HUF and whether it was in the interest of the business of the family so that it should be justified on the ground of commercial expediency and that was precisely the test which has always to be applied while considering whether a particular expenditure claimed as a deduction under s. 10(2)(xv) had been incurred wholly and exclusively for the purpose of the business. The Division Bench also noted that the principle laid down in Jitmal's case : 44ITR887(SC) was without any distinction between the salary paid to the karta and (salary paid) to the junior members of the family and there was no warrant to give a narrow interpretation so as to confine the right to deduct the remuneration paid by the HUF to junior members only. The Division Bench thereafter succinctly stated the legal position as under (p. 745 of 124 ITR) :
'If the remuneration to the karta under the agreement in question is not for the services to the partnership firms but it is for looking after the interests of the HUF, even in the partnership business, that would be a distinct legal category of services rendered to the HUF, because it was for managing the affairs of the HUF by looking after the interests of the HUF in those other partnership businesses. Therefore, the ratio of their Lordships does not depend upon the fact that in Jugal Kishore's case : 63ITR238(SC) , the HUF had also some independent HUF business as well. The ratio evolved by their Lordships is to make a distinction between two different categories of services (i) to the partnership businesses, and (ii) services to the HUF of looking after its interest even in the partnership businesses and that is how the earlier decision in Jitmal's case : 44ITR887(SC) was distinguished because of the specific term of the agreement in Jugal Kishore's case : 63ITR238(SC) , where the karta was to be paid remuneration not for attending to the partnership businesses but for looking after the HUF interests in the partnership businesses.'
7. The Division Bench also referred to the decision of the Allahabad High Court in CIT v. Raghunandan Saran : 108ITR818(All) , where the HUF consisted of the karta, his wife and the minor children and had no other business. The assessee family, there, claimed deduction from its income of a certain sum of money paid to its karta who was managing its business by being partner in five firms in a representative capacity. The fact that the HUF was claiming the amount of salary paid to the karta was itself held by the Allahabad High Court to be indicative of the fact that under the agreement such remuneration should be paid to him.
8. In view of the above settled legal position, we have to consider whether the services rendered by Mahendra Sunderlal was to the firms or to the HUF of Sunderlal Nanalal. It is common ground that the remuneration was paid by the HUF and, therefore, it is indicative, as held by the Allahabad High Court, of the fact that it would be for some services rendered to the HUF. Indeed, this fact of payment cannot be conclusive on the question as to whether the services were in fact rendered to the family or not. We have, therefore, to consider what was the agreement to the family or not. We have, therefore, to consider what was the agreement in that behalf. The said agreement is in Gujarati and entered into between Sunderlal Nanalal on the one hand and Mahendra Sunderlal on the other. Sunderlal Nanalal has been described in his dual capacity, namely, in his capacity as karta of the HUF of Sunderlal Nanalal and in his capacity as partner of the two firms of M/s. Nanalal Mansukhram and M/s. Manusukhram Bhagwandas. The translation of the said agreement has been placed in the paper book. Since there was some difference between the learned advocates for the parties before us as to the exact translation of the said agreement, we have corrected the said translation with the assistance of the learned advocates of both the parties. The agreement recites as under :
'Whereas the party of the one part is a partner in M/s. Nanalal Mansukhram and M/s. Mansukhram Bhagwandas having business in cotton and money-lending at Mansukhram, Ahmedabad;
And whereas the party of the one part, due to his age and health, is not in a position to devote full time and give proper attention and therefore employed the party of the other part, Shri Mahendra Sunderlal, in services on and from October 22, 1968, corresponding to Kartik Sud 1 S.Y. 2025 as their representative at their cost and risk to assist in the management of the said firms, the details whereof are as under :
1. Shri Mahendra Sunderlal has been appointed as a representative of the party of the first part to assist and manage the business of M/s. Nanalal Mansukhram and M/s. Mansukhram Bhagwandas and that he will act according to the instructions of the partners.
2. Shri Mahendra Sunderlal shall carry on all the work by being faithfully to the party of the one part through him to the firm and he has to take full care that no affairs of the firms leak out.
3. That the party of the one part shall pay Rs. 250 (Rupees two hundred fifty only) per month as remuneration to the party of the other part, viz., Mahendra Sunderlal, for assisting him in the management of the said firms. He will not be entitled to bonus exceeding three months' salary.
4. The other partners of the partnership firms of M/s. Nanalal Mansukhram and M/s. Mansukhram Bhagwandas shall have no connection with this agreement.
5. In case of any difference between the parties in regard to the terms of this agreement, it shall be settled through arbitration.
The agreement has been entered into today the 16th November, 1968, on above terms and which will be binding on both the parties and their heirs.'
9. We are of the opinion that on reading the agreement as a whole, the purport of the agreement is that Mahendra Sunderlal had agreed to assist and help Sunderlal Nanalal who was a partner in the said firms in his capacity as karta of HUF of Sunderlal Nanalal. The description of the party of the first part as Sunderlal Nanalal in his dual capacity is indicative of the fact that the assistance which Mahendra Sunderlal had to render was for the benefit of the HUF of Sunderlal Nanalal. Sunderlal Nanalal was no doubt managing the business of the two firms and the agreement was required to be entered into on account of the health and old age of Sunderlal Nanalal who, at the relevant time of the agreement, was 67 years of age. That Mahendra Sunderlal had to render assistance as a representative of the HUF of Sunderlal Nanalal is obvious from the first clause in the recital part of the agreement. Mahendra had to act as a representative of Sunderlal Nanalal who was a partner in his capacity as karta. This view is fortified by the very significant words employed in the first part of the recital where it has been stated to the effect that, 'employ Mahendra Sunderlal on and from October 22, 1968 corresponding to Kartik Sud 1 S.Y. 2025 as their representative at their cost and risk'. These words clearly established that Mahendra Sunderlal had to act as a representative of the HUF and for the consequences ensuring from such acts, the joint family would be responsible since the agreement clearly postulates that whatever Mahendra Sunderlal does in course of his assistance to Sunderlal Nanalal, the same will be at the cost and risk of the joint family. It could not be urged successfully as was sought to be done on behalf of the Revenue that these words only meant that for the consequence of the acts of Mahendra Sunderlal, the responsibility will be of Sunderlal Nanalal and it would not mean that the consequence would be at the cost and risk of the joint family since Sunderlal Nanalal has been described also in the capacity of partner. We are afraid this does not appear to be the real intention of the parties since this would mean that Sunderlal Nanalal has appointed Mahendra Sunderlal as his representative to act for and on his behalf in the affairs of the firms. This contention urged on behalf of the Revenue would have justification provided Sunderlal Nanalal had withdrawn from the management of the firms on account of his old age and health. It is common ground that Sunderlal Nanalal continued to manage the affairs of the firms but since he was finding it difficult to assist the same in his capacity as karta, one of the members of the HUF, namely, Mahendra Sunderlal, was appointed to assist him in the affairs of the business for which he was to be paid from the income of the family. Clause 4 of the agreement also supports the view which we are inclined to take. The other partners of the partnership firms were in no way connected and, therefore, the responsibility for the consequences ensuing from the acts of Mahendra Sunderlal was as representative of Sunderlal Nanalal, as karta of the HUF. The recital which we have set out above clearly indicates that the parties to the agreement intended that all the consequences ensuing from the acts of Mahendra Sunderlal in his capacity as karta of the joint family and for that matter, therefore, the responsibility would be of the HUF itself. Clause 2 of the operative part of the agreement also in so far as it required Mahendra Sunderlal to act in a faithful manner to Sunderlal Nanalal and through him to the firms clearly indicates that Mahendra Sunderlal was to act for and on behalf of the family. We are, therefore, of the opinion that having regard to this agreement as a whole, Mahendra Sunderlal was to act as a representative of the HUF so as to render assistance to Sunderlal Nanalal in the management of the affairs of the firms because Sunderlal Nanalal was finding it difficult on account of his old age and health to attend to the business of the firms so as to act consistently in the interest of the family. This intention of the parties to the agreement coupled with the fact of payment of the remuneration from the income of the family establishes clearly that the agreement in question had been entered into by Sunderlal Nanalal as karta on behalf of the members of the HUF, and that it was in the interest of the business of the family. The learned counsel for the Revenue invited our attention to the three important circumstances which in his opinion justified the finding reached by the Tribunal that the remuneration to be paid to Mahendra Sunderlal was in effect and substance for rendering services to the firms. The three circumstances which were enumerated by the learned counsel are :
'1. Description of the party of the first part in the dual capacity;
2. The purpose of the remuneration is for assistance in the management of the firms; and
3. Obligation to act as per the directions of the partners.'
10. The above three statements in the submission of the learned counsel for the Revenue are sufficient to warrant the conclusion that the remuneration was to be paid for rendering the services to the firms. We are afraid that the learned counsel is reading more in these three innocuous circumstances than what is permissible. The description of the party of the first part in the dual capacity was necessary because the arrangement sought to be effected by the agreement in question was to procure the services of Mahendra Sunderlal for assisting Sunderlal Nanalal in the management of the affairs of the firms but these services are to be obtained as observed by us above for the benefit of and in the interest of the family since Sunderlal as a karta was finding it difficult to attend to the business of the firms so as to take proper care of the interest of the HUF of which he was a karta. No doubt Mahendra was to assist Sunderlal in the management of the firms but that by itself does not render the services of Mahendra Sunderlal as the services to the firms. The assistance is to be rendered to Sunderlal who was hitherto managing the affairs of the firms as a partner but was also looking after the interest and the well being of the family and on account of his old age and health when he found himself incapable of carrying out this dual role consistently in the interest of the firms as well as the family, he decided to appoint one of the members of the family to assist him. That circumstance, therefore, in our opinion, either individually or coupled with the other two circumstances which have been pointed out, did not warrant the conclusion reached by the Tribunal. The third circumstance of the obligation of Mahendra to act as per the directions of the partners is also a perfectly innocuous circumstance because Mahendra cannot act as a representative of Sunderlal, as karta of HUF, in a manner which may not be consistent with the interest of the partnership firms. If, therefore, it was thought fit to provide for such an obligation, we do not think that that would substantially affect the nature of the services agreed to be rendered by Mahendra Sunderlal. We do not think, therefore, that the learned counsel was justified in relying on these three circumstances so as to support and substantiate the conclusion reached by the Tribunal. In our opinion, therefore, the arrangement which was agreed to between the parties to the said agreement clearly established that Mahendra agreed to undertake to assist Sunderlal Nanalal for and on behalf of the family so that the interest of the family can be properly taken care of. The two tests which have been laid down by the Division Bench of this court in Shankerlal Dave's case : 124ITR733(Guj) , are thus satisfied and we are of the opinion that the Tribunal has committed an error in law in concluding as it did.
11. The learned counsel for the Revenue, therefore, attempted of persuade us that since this is a finding of fact, this court would not have power or jurisdiction to exercise its advisory jurisdiction. We are afraid that this contention is not open having regard to the decision of the Division Bench of this court in Shankerlal Dave's case : 124ITR733(Guj) on similar contention being urged before it.
12. The result is that this reference should be accepted and we answer the question referred to us in the negative, that is, in favour of the assessee and against the Revenue. The Commissioner shall pay costs of this reference to the assessee.