Commissioner of Income Tax vs Jatanlal

V.K. Singhal, J.—The Income Tax Appellate Tribunal has referred the following question of law arising out of its order dated May 12, 1982, u/s 256(1) of the Income Tax Act, 1961 :

"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in allowing the payment of salary of Rs. 9,000 to its karta by the assessee-Hindu undivided family ?"

The brief facts of the case are that the firm, Masuria Saree Centre, comprised four partners, namely, Bhanwarilal, Kanwarlal, Shantilal and Jatanlal. While submitting the return of the Hindu undivided family, a salary of Rs. 9,000 was claimed to have been paid to Sri Jatan Lal in his individual capacity in the return of income of the Hindu undivided family. The Income Tax Officer held that whatever amount has been received from the firm that will be the income of the Hindu undivided family and the said amount of Rs. 9,000 cannot be allowed as deduction.

In appeal before the Appellate Assistant Commissioner of Income Tax, the matter was agitated and it was submitted that there was an agreement dated November 15, 1977, between the Hindu undivided family and Sri Jatan Lal by which the said salary was payable. The Appellate Assistant Commissioner came to the conclusion that the assessee failed to produce the copy of the above agreement to the Income Tax Officer and, therefore, it is not admissible. Besides this, it was observed that there was no major coparcener of the Hindu undivided family other than Jatan Lal, who was the karta of the Hindu undivided family and, therefore, he could not have acted to the detriment or interest of the Hindu undivided family or other coparceners. No justification was found for making payment of salary of Rs. 9,000 by the Hindu undivided family to its karta in his individual capacity, in view of the fact that the business of the firm was being looked after by the said karta without any salary since the last 7 to 8 years and, therefore, the appeal was dismissed.

In the second appeal before the Income Tax Appellate Tribunal, it was found that the Hindu undivided family''s investment in the Kota firm was to an extent of Rs. 85,000 and it has 30 per cent. share in the firm''s profits/losses. The share income received from the said firm was substantial, namely, around Rs. 20,000. It was also found that the assessee''s wife had also become a partner in another firm in 1974 and the Hindu undivided family has paid the amount of salary to safeguard the interest in the Kota firm. The Tribunal observed that the genuineness of the payment is not disputed nor was it suggested that the agreement is a fake document and the arrangement was to safeguard the interest of the Hindu undivided family and, therefore, looking to the substantial share of income, the monthly salary at Rs. 750 could not be said to be unreasonable.

The submission of learned counsel for the Revenue, is that the assessee failed to produce the copy of the agreement before the Income Tax Officer and the Appellate Assistant Commissioner has disbelieved the existence of the said document by observing that "I am, therefore, not inclined to accept this new piece of evidence". The other factors which were taken by the Appellate Assistant Commissioner was that Sri Jatan Lal is the only major coparcener of the Hindu undivided family and that the Hindu undivided family has not paid any salary during the last 7/8 years and there being no change of circumstances, the necessity to make any payment by way of salary to its karta is not justified. The Tribunal has proceeded only on the assumption that the genuineness of the agreement has not been doubted. It is submitted that once a document is not produced either before the assessing authority or the first appellate authority has not accepted the same as a piece of evidence, there was no question of considering the genuineness of the document or payment made thereunder on the basis of such document which was not found admissible and on the merits the appellate authority came to the conclusion that there was no change of circumstances since the last eight years and the payment of salary in this very year is without justifiable necessity and is only a device to reduce the liability to tax in the hands of the Hindu undivided family. In Gopinath Seth Vs. Commissioner of Income Tax, it was held by the Allahabad High Court that where no specific service is required to be done by the karta except the normal function of a partner, it cannot be said that the agreement was based on commercial expediency. The agreement was held not bona fide. In order to be entitled to salary, there must be a valid agreement and for the purpose of examining the validity, it must be (1) a bona fide agreement, (2) in the interest of and expedient for the business of the family, and (3) the payment must be genuine and not excessive. It is the commercial and business expediency which has to be seen for the service which is rendered by the karta in consideration of a remuneration. For remuneration another factor which is to be examined is that a Hindu undivided family is entitled to deduct the salary paid to the karta or to any other member of the family if such payment is under a valid agreement and is expedient in the interest of the business of the family and the payment is genuine and is not excessive or unreasonable. The agreement could be in writing or an oral agreement. The karta was looking after the interest of the family business since the last 7 to 8 years and no payment was made in the past. It is also not brought on record as to what additional services were rendered by the karta during the relevant previous year. It has been observed by the Tribunal that in the agreement it has been mentioned that the karta would devote his full time. Firstly, the agreement itself was not produced by the assessee before the Income Tax Appellate Tribunal and the Appellate Assistant Commissioner has not placed much reliance and observed that it would be most unfair to accept the said agreement. The agreement was found detrimental to the interest of the Hindu undivided family. A document has to be admitted in evidence in accordance with law and, secondly, it has not been brought on record as to whether the karta was devoting full time to the business of the Hindu undivided family in the past or not and has devoted full time during the year in dispute and whether any extra services were rendered. The Income Tax Appellate Tribunal has not taken into consideration the services and the verbal agreement of the parties vis-a-vis the services rendered by the karta during the year. From the fact which are available on the record, it is not proved what was the expediency for making the payment and as such we are of the view that the Income Tax Appellate Tribunal was not right in allowing the payment of salary of Rs. 9,000 to its karta. The reference is answered in the negative in favour of the Revenue. No order as to costs.