Chandrakanth, S.P. vs Commissioner of Income-tax.

Jagannatha Shetty, J.-The common question referred under Section 256(2) of the Income-tax Act 1961 by the Income tax Appellate Tribunal, Bangalore Bench is as follows:

"Whether, on the facts and in the circumstances of the case, there existed an agreement between the Kartha of the assessee H.U.F. and the other members thereof for payment of remuneration for services rendered by the Kartha to the family?"

In both the cases, the assessee is a Hindu Undivided Family (''HUF'') consisting of Kartha, his wife and minor children. The ''HUF'' is a partner through the Kartha in certain other firms. In the assessment proceedings for the year 1975-76, it has claimed deduction of a sum paid to the Kartha as remuneration for services rendered. In I.T.R.C. No. 127/80, the deduction claimed was Rs. 12,000/- and in I.T.R.C. No. 128/80, a sum of Rs. 6,000/- was claimed. In the previous assessment years such deductions were claimed to the extent of Rs. 4,800/- and also allowed by the assessing officer. But, for the assessment year 1975-76, the I.T.O. disallowed the claim on the ground that there was no agreement between the ''HUF'' and the Kartha for payment of remuneration to the latter.

The view expressed by the assessing officer was shared by the A.A.C. but slightly on different grounds. The Tribunal while rejecting the assessee''s appeal has stated that the claim must be founded on a Valid agreement and there was no such agreement express or implied as between the Kartha and the other members of the ''HUF''. Mr. Sreenivasa Rao, learned counsel for the assessee, did not dispute that there shall be an agreement to pay remuneration to the Kartha for services rendered and without such agreement it cannot claim deduction under S. 37(1) of the Act. No. however, urged that such an agreement need not be express and it may be implied from the course of conduct of the parties.

The contention urged, in our opinion, is sound and deserves to be accepted.

In Jugal Kishore Baldeo Sahai v. Commissioner of Income Tax, U.P. (63 ITR 238), the Supreme Court has observed that remuneration could be paid to the Kartha provided there is a valid agreement which is expedient in the interest of the business of the family and the payment being genuine and not excessive. The principle stated by the Supreme Court in the earlier decision in Jitmal Bhuramal v. Commissioner of Income Tax, Bihar and Orissa, (44 ITR 887) allowing deduction of the salaries paid to junior members of the family as a matter of commercial or business expediency was extended to the Kartha of the ''HUF'' in Jugal Kishore Baldeo Sahai''s case. There can therefore, be no doubt dispute that for claiming deduction under S. 37(1) of the Act in respect of the remuneration paid to the Kartha for services rendered, there shall be an agreement between the parties for payment of such remuneration.

But such an agreement need not be written. It may be inferred from the course of conduct of the parties.

Mr. Raghavendra Rao for the Revenue urged that the Tribunal has recorded a finding that there was no proof of any consultation between the husband and the wife in regard to payment of remuneration for services rendered by the former and, therefore, we cannot infer anything to the contrary in this advisory jurisdiction. It is true that there is no evidence of consultation between the husband and the wife as to the payment of remuneration for services rendered. But that is not the only thing which is needed to be looked into in a case like this. There are other circumstances which are of equal importance between the husband and the wife. The fact remains that there was no other male member except the Kartha to do the business of the ''HUF''. The wife ordinarily to the exclusion of her husband would not attend the business in another firm where the ''HUF'' is a partner. The children are all minors. The Kartha, therefore, is the only person who is charged with the duty to look-after the business of the ''HUF''. In the previous accounting years, the Kartha was paid remuneration for services rendered. Such a payment was conceded to by the other members of the ''HUF'' and deduction was claimed under S. 37(1) of the Act. The fact that the ''HUF'' claimed deduction of the remuneration paid to the Kartha in the previous assessment years is itself a clear indication that there was an implied understanding or agreement between the parties for payment of such remuneration.

The Department has also allowed such deduction of Rs. 4,800 paid to the Kartha successively for two years. There is no circumstance on record to indicate that there was a revocation of that agreement in the subsequent year. The conduct of the parties, in our opinion, clearly establishes that there was an agreement between the Kartha and the ''HUF'' for payment of remuneration for services rendered. The inference to the contrary drawn by the Tribunal on these proved facts is unjustified.

In Commissioner of Income Tax v. Raghunandan Saran (108 ITR 818), the Allahabad High Court also took a similar view on the facts which lie in close parallel with the present cases.

That, however, is not to state that all that has been claimed by the ''HUF'' should be allowed. In the previous years, the ''HUF'' paid only Rs. 4,800 to the Kartha towards his remuneration. In the years concerned in these two cases, the ''HUF'' has claimed Rs. 12,000 and Rs. 6,000 as remuneration paid to the Kartha. The Tribunal has observed that the remuneration paid was excessive and that would be detrimental to the interests of the family because the ''HUF'' would thereby be deprived of the income which would have gone to it. It has also observed that no commercial expediency for enhancing the remuneration was made out. If the claim for remuneration is found to be excessive, it is always open to the Tribunal to work out a reasonable remuneration with due regard to the past payment, the increase in the volume of business of the ''HUF'' and the profit earned therefrom.

In the result and for the reasons stated above, we answer the question in the affirmative and against the Department. In the circumstances of the case, we make no order as to costs.