B.L.GUPTA J. - (1.) 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 ?
(2.) 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 He has not withdrawn any part of it.
(3.) 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 : ;