Jammu & Kashmir H.C : Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that agreement between the assessee, Karta of the HUF and his wife is an invalid agreement?

Counsel Appeared

None, for the Assessee : Anil Bhan, for the Revenue

JUDGMENT

DR. B.P. SARAF, C.J. :

By this reference under s. 256(1) of the IT Act, 1961 (“the Act”), the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar (“the Tribunal”), has referred the following three questions of law to this Court for opinion at the instance of the assessee :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that agreement between the assessee, Karta of the HUF and his wife is an invalid agreement?

Whether, on the facts and in the circumstances of the case, the ITO as an outsider, has a right to challenge the validity of an agreement entered between the assessee as Karta of the HUF and his wife and whether the Tribunal was right in looking into the validity of the said agreement? If the above questions are answered in the affirmative, whether on the facts and in the circumstances of the case, the Tribunal was right in disallowing salary paid to the assessee in his individual capacity by the HUF for looking after the interests of the HUF in the firm in which he is a partner on behalf of the HUF?”

2. The material facts necessary for deciding the controversy in this case, briefly stated, are as follows : The assessee is an HUF. In its return for the asst. yr. 1978-79, it made a claim for deduction of a sum of Rs. 6,000 paid as salary to its Karta, Shri Ashok Kumar, for looking after the interest of the HUF in the partnership firm, Tirath Ram Lal Chand, which was engaged in the business of cloth. Shri Ashok Kumar, who was the Karta of the HUF w.e.f. 6th Aug., 1969, was a partner in the said firm representing the HUF. No remuneration, however, was allowed to him by the HUF for looking after its interest in the partnership. The HUF consisted of Shri Ashok Kumar, Karta, Smt. Madhu Bala, wife of the Karta, Master Suman, son of Ashok Kumar, a minor aged eight years and Miss Anupama, daughter of Ashok Kumar a minor aged nine years. In its assessment for the asst. yr. 1978-79 the assessee-HUF claimed that it had paid Rs. 6,000 as salary at the rate of Rs. 500 per month to its Karta, Sri Ashok Kumar, for looking after the interest of the HUF in the firm, Tirath Ram Lal Chand. The payment was made pursuant to an agreement between Sri Ashok Kumar, the Karta of the HUF as party of the first part, and Smt. Madhu Bala, wife of the first party, as party of the second part. The terms of the agreement wereincorporated in an “agreement deed” drawn on 20th April, 1977. In its return for the asst. yr. 1978-79, the assessee-HUF claimed deduction of the said amount in the computation of its income, as business expenditure. The ITO turned down the claim of the assessee as, in his opinion, it was the normal obligation of the Karta to look after the interest of the family. The ITO also observed that there was no particular circumstances or development that entitled the Karta to claim remuneration for looking after the interest of the family in the partnership firm in the relevant assessment year. The assessee appealed to the AAC who did not agree with the findings of the ITO and reversed the same. He was of the view that the Karta, Sri Ashok Kumar, who was working whole heartedly for safeguarding the interest of the HUF in the firm, Tirath Ram Lal Chand, was definitely entitled to claim remuneration. He, therefore, held that the assessee-HUF was entitled to claim deduction of Rs. 6,000 paid as salary to its Karta for looking after the interest of the family in the partnership firm where he was a partner in his representative capacity as its Karta. Aggrieved by the order of the AAC, the Revenue appealed to the Tribunal. The Tribunal was of the opinion that the agreement between the Karta of the HUF and his wife for payment of salary to the Karta was an invalid agreement. The Tribunal, therefore, reversed the order of the AAC and disallowed the salary paid to the Karta, Sri Ashok Kumar, for looking after its interest in the firm in which he was a partner on its behalf. Hence, this reference at the instance of the assessee.

3. None appears for the assessee. Mr. Anil Bhan, Advocate, appears for the Revenue.

4. We have heard Mr. Anil Bhan, learned counsel for the Revenue, and perused the order of the Tribunal as also the orders of the AAC and the ITO. Admittedly, the payment of salary at the rate of Rs. 500 per month to Shri Ashok Kumar, the Karta, was in pursuance of the following agreement between the Karta and his wife, who was the only other major member of the family at the material time, the other two members being their minor son and daughter. “Agreement deed This deed of agreement made this 20th April, 1977, in the city of Srinagar between Shri Ashok Kumar, son of Shri Lal Chand r/o Srinagar, hereinafter called party of the first part and Smt. Madhu Bala, wife of Shri Ashok Kumar r/o Srinagar, hereinafter called party of the second part. Whereas party of the first part is the Karta of the HUF consisting of the following members : Shri Ashok Kumar (self) Karta age 56 years ; Smt. Madhu Bala wife of Karta age 28 years ; Master Suman s/o Karta age 8 years ; and Miss Anupama daughter of Karta 9 years. Whereas party of the first part is a partner in Tirath Ram Lal Chand representing the HUF and as such is looking after the interest of the HUF in the said partnership; and Whereas in pursuance of an oral agreement of 13th April, 1977, it is desired by the parties that the terms of the agreement be put into writing. It is, therefore, mutually agreed as under :

That the party of the first part as Karta of the HUF shall continue to represent the HUF family as partner in Tirath Ram Lal Chand; That in consideration of looking after the interest/interests of the HUF it is mutually agreed that party of the first part shall draw a salary of Rs. 500 p.m. from 13th April, 1977, from the funds of HUF which can be increased with mutual consent of the parties of the first and second part, but it shall in no case be more than 25 per cent of the net income earned by the HUF. That party of the first part shall not do any business in his individual capacity in competition with the partners of the firm. Tirath Ram Lal Chand, where he is a partner representing the HUF or shall not do anything in his individual capacity which will in any way deter the interest of the HUF. In witness whereof the parties have signed this deed of agreement in presence of the witnesses.” On a perusal of the above agreement and the facts and circumstances of the case, the AAC was satisfied that ShriAshok Kumar, the Karta of the family, had been working whole heartedly to protect the interest of the family which had paid dividend to the family. He recorded a categorical finding to that effect. The Tribunal has not reversed that factual finding of the AAC. The Tribunal agreed with the contention of the assessee that the Karta of an HUF is entitled to vote himself the salary for the pains he undertakes and the investment of the time he makes in looking after the affairs of the joint family and it does not require any agreement to authorise such a payment. The Tribunal, however, was of the opinion that in the instant case, the agreement between the Karta and the major members of the family, who happened to be his wife, was an invalid agreement, because the interests of the minors were not taken care of while entering into the agreement. The Tribunal, therefore, held that the agreement in question was invalid and disallowed the claim of the assessee-HUF for deduction of the amount of salary of Rs. 6,000 paid to the Karta pursuant thereto as a deduction in the computation of its income.

There is thus no dispute in the present case about the genuineness of the payment. Nor is there any dispute about the fact that the payment was made by the HUF for the services rendered to it wholly and exclusively for the purpose of its business. What is in dispute is the validity of the agreement between the Karta and the major member of the family by which it was agreed that the Karta would be entitled to a salary of Rs. 6,000 per annum for looking after the interest of the family in the firm in which he was a partner in his representative capacity as the Karta of the family. Some important questions of law arise for consideration. First, whether the agreement in question is void or voidable? Second, if it is voidable, whether the authorities under the IT Act can go into the validity of the same, or declare the same as void? Third, whether the remuneration paid to a Karta of an HUF for managing the family’s business, or looking after the interest of the family in a partnership, where he is a partner representing the HUF, is eligible for deduction as a business expenditure in computing the income of the HUF? So far as the validity of alienation by the Karta or manager of an HUF or a joint Hindu Family is concerned, the law is well-settled that an alienation by the Karta or the manager of joint Hindu family, even if without legal necessity, is voidable and not void. The Karta of an HUF has power and authority to alienate the joint family property so as to bind the interests of both the adult and minor coparceners in the property, provided that the alienation is made for legal necessity, or for the benefit of the estate. When alienation is made by the manager without legal necessity, but with the consent of all other coparceners, they being all adults, the alienation is valid in its entirety. The alienation by a manager of a joint family made without legal necessity is not void, but voidable, at the option of the other coparceners—they may affirm or repudiate it. But a third party cannot repudiate it. In Raghubanchmani Prasad Narain Singh vs. Ambica Prasad Singh AIR 1971 SC 776, the Supreme Court has held that in any event an alienation by the manager of the joint Hindu family even without legal necessity is voidable and not void. In CIT vs. Gangadhar Sikaria Family Trust (1982) 31 CTR (Gau) 140 : (1983) 142 ITR 677 (Gau), the Gauhati High Court was called upon to decide whether the ITO can challenge the validity of an alienation by the Karta of an HUF. The High Court held that under Hindu Law, the Karta of an HUF has an unfettered right to alienate the joint family property for legal necessity and for the benefit of the estate or the family. It was further held that even if a transfer by the Karta were not for legal necessity or for the benefit of the estate, it would be only voidable and not void ab initio.

It is clear from the above discussion that alienation by the Karta or manager of a joint family is voidable, but not void. Hence, a third party cannot repudiate it, except in cases where there is a suggestion that it was in fraud of creditors. In view of the above, in the instant case, it is clear that the ITO and the Tribunal has no power to treat the agreement between the Karta and the major member of the family for payment of salary of Rs. 6,000 per year to the Karta for looking after the interest of the HUF in the firm in which he was a partner on behalf of the HUF as invalid for reasons more than one. First, the payment of salary to the Karta for looking after the interest of the HUF in the firm was for the benefit of the HUF and the estate. The interest of the HUF in the partnership firm is an asset of the family and part of its estate. Looking after the same is looking after the interest of the estate of the family. Salary for looking after the same is remuneration for the service rendered to the family. It is not for any service rendered to the firm. The payment of salary of Rs. 500 per month to the Karta was thus wholly and exclusively for the purpose of the business of the HUF. Moreover, even if the payment made to the Karta was not for legal necessity or for the benefit of the family or the estate, the agreement would be voidable on that count but not void. The IT authorities have no power or authority to repudiate the same. The contention of the Revenue that the agreement was entered into between the major members of the family without proper representation of the two other members who were minors is also without any merit. The agreement for payment of salary to the Karta for the services rendered by him to the family was entered into between the Karta and the only other adult member of the family competent to act on behalf of the family, the other two members being minors. There is no legal infirmity in such an agreement. The remuneration payable under such an agreement has to be held to be expenditure incurred in the interest of the family and consequently a business expenditure deductible under s. 37 of the Act in computation of the income of the family. Secondly, law is well-settled that the junior members of the family or the Karta can be paid remuneration for carrying on family business, provided it is under some agreement and such remuneration is a business expenditure under s. 37 of the Act, deductible in computing the income of the assessee.

11. Identical controversy came up for consideration before the Supreme Court in Jugal Kishore Baldeo Sahai vs. CIT (1967) 63 ITR 238 (SC) : TC 17R.1088. In that case also, the Supreme Court was called upon to decide whether the salary paid to a Karta of the family for looking after the family’s business was a permissible deduction under s. 10(2)(xv) of the Indian IT Act, 1922. The Supreme Court referred to its earlier decision in Jitmal Bhuramal vs. CIT (1962) 44 ITR 887 (SC) : TC 17R.1085, where it was held that an HUF can be allowed to deduct the salary paid to a member of the family, and observed: “We do not consider that the decision given by this Court in that case needs to be given a narrow interpretation so as to confine the right of deducting the remuneration paid by an HUF to junior members only. There seems to be no reason at all why if a Karta is paid remuneration he should be in a position different from that of any junior member.” The Supreme Court further observed : “It is true that a Karta has a right to manage the property of the HUF on behalf of all the coparceners but there is no obligation or duty on him to carry on a particular business of the family. It is well-established that any member of an HUF including a Karta can have a separate personal source of income if that income is earned independently of the HUF assets or business. It is primarily on this basis that it has been held that salary or remuneration paid to the junior member of the family for the services rendered to the family business becomes his separate income, and, consequently, a deductible expenditure under s. 10(2)(xv) of the Act when computing the income of the family. In similar circumstances, if a Karta offers his services to the family instead of choosing an independent career to earn his separate income and receives remuneration from the family, there is no reason why the remuneration so paid to him cannot be treated as an expenditure for carrying on the business of the family and consequently expended wholly and exclusively for the purpose of the business and deductible under s. 10(2)(xv) of the Act.” The legal position was summed up by the Supreme Court thus: “The general view expressed by commentators on Hindu law as well as in decided cases is that even the Karta of a family can be paidremuneration for carrying on family business, provided it is under some agreement. There seems to be no reason why, if all persons competent in an HUF to enter into an agreement on its behalf consider it appropriate that the Karta should be paid remuneration and enter into an agreement to pay remuneration to him, that remuneration should not be held to be an expenditure incurred in the interest of the family, and, consequently, an expenditure deductible under s. 10(2)(xv) of the Act [corresponding to s. 37(1) of the 1961 Act].”

12. The facts and circumstances of the present case are identical to the facts and circumstances of the case before the Supreme Court. In the present case also, both the members of the HUF, who were the only persons competent to enter into an agreement on its behalf, considered it appropriate that the Karta should be paid salary @ Rs. 500 per month for looking after its interest in the partnership in which it had a substantial interest because its Karta was a partner therein as its representative, and entered into an agreement to pay salary to him for the services rendered to the family. The ratio of the above decision is, therefore, applicable to the present case. Accordingly, the salary paid to him has to be held to be an expenditure incurred in the interest of the family. The expenditure having been incurred under a valid agreement, bona fide, and in the interest of and wholly and exclusively for the purpose of the business of the HUF, is allowable as a deductible expenditure under s. 37(1) of the Act in computing the income of the HUF. In view of the above, question No. 1 is answered in the negative, i.e., in favour of the assessee and against the Revenue. We have already held that an agreement between the Karta of the HUF and its members for alienation of the property of the HUF being voidable, can be repudiated only by the members of the HUF and not by a stranger. That being so, we are of the opinion that, on the facts and in the circumstances of the case, the ITO had no right to challenge the validity of the agreement between the karta of the HUF and his wife. The Tribunal too was not justified in looking into the validity of the said agreement and holding it to be invalid. Therefore, question No. 2 is also answered in the negative, i.e., in favour of the assessee and against the Revenue. So far as question No. 3 is concerned, it does not arise in view of our answers to questions Nos. 1 and 2 being in the negative. Otherwise also, the view taken by the Tribunal that a Karta of an HUF, by reason of his being a Karta, is under a legal obligation to manage all the business of the family without being entitled to any remuneration for the service rendered by him is not correct in view of the decision of the Supreme Court in Jugal Kishore Baldeo Sahai vs. CIT (supra). We have already held that, on the facts and in the circumstances of the case the Tribunal was not right in disallowing the salary paid by the HUF to its Karta, Shri Ashok Kumar, for looking after the interest of the family in the firm in which he was a partner on its behalf. Question No. 3, therefore, need not be answered. It is returned unanswered. This reference is disposed of accordingly with no order as to costs.

[Citation : 246 ITR 261]