# JUGAL KISHORE BALDEO SAHAI v. COMMISSIONER OF INCOME-TAX, U.P., LUCKNOW

- **Citation:** [1967] 1 S.C.R. 416
- **Court:** Supreme Court of India
- **Decided:** 1966-09-20
- **Case number:** CIVIL APPELLATE JURISDJ(."TION : Civil Appeal Nos. 594 to 600 of 1965
- **Bench:** J.C. Shah, V. Bhargava
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/jugal-kishore-baldeo-sahai-v-commissioner-of-income-tax-u-p-lucknow-3837
- **Pages:** 7

## Headnote

Income tax Act (11 o/ 1922), s. 10(2)(.rv)-Asses.ree, a Hindu joint
family finn--Paymmt o/ remuneralion to karta /or managing business-If
a deductible item of e.rpendlturt.
The assessee was a Hindu undivided family carrying on a joint family
business and was also deriving some income from partner.;hips, in which
its brta. representing the family, was a partner. Tue family consisted of
two brothers and tb,ei~ minor sons.
One of the brothers, whe> was the
kana. asked the other for a salary of Rs. 1,000 per month, since he was
managing the business. The Oilier brother agreed to it, and the payments
were made.
Tue assessce claimed that the sum of Rs. 12,000 per year,
paid as remuneration to the karta should be deducted as an item of expenditure under s. 10(2) (xv) of the Income-tax Act, 1922. The claim was
rejected by the Department, the Tnbunal and the High Court.
In appeal to this Court,
HELD : As the remuneration was paid under a valid agreement which
was bona fide and in the interest of, a~ expedient for, the business of the
family, and the payment was genuine and not ""cessive and was not a
device to escape income-tax. the remuneration must be held to be an
expenditure laid out wholly and exclusively for the purpose of the busin""s of the family and must be allowed as an expenditure under the section.
[421 B-C, DJ
The karta of a family can be paid remuneration for carrying on family
business, provi_c!ed it is under some valid agreement.
The tes.t of the
validity of such an agreement, when entered into on behalf of a minor,
is that it should be for the benefit of the minor. The agreement in the
instant case was entered into between the liwo adult members.
Their
minor sons were represented by them or by the karta and the agreement
was not prejudicial to tho minors' interests.
In fact, it was acquiesced in
by those minors who had later become majors. If the agreement was in
the interests of the family it would not be invalid, when executed on beh3lf
of the minors by Jhe person authorised to act on their ·behalf. simply because the minors were represented by a person who received ~omc hcncfit
under the agreement.
Further, the
remuneration was not
intenllcd
to
cover any service rendered by the karta to the partnership firm-:;. hut \va-s
for looking after the interests of the family in those businesses and for
managing the affairs
of the family.
[419 H; 420 B.C, D-H; 421 D-E,
422 E-FJ
Jitmal Bhuramal v. Commissioner of lncome4Jll, Bihar and Orissa,
(1962) 44 LT.R. 887 (S.C.J. explained and followed.
CIVIL APPELLATE JURISDJ(."TION : Civil Appeal Nos. 594 to
600 of 1965.
Appeals by special leave from the judgment and order dated
March 28, 1962 of the Allahabad High Court in l. T. Misc. Case
No. 424 of 1959.
416
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JUGAL KJSHORE v. C.!.T. (Bhargava, J.)
417
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A. K. Sen, T. A. Ramachandran, J. B. Dadachanji, for the
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appellants (in all the appeals).
S. T. Desai; Gopal Singh and R. N. Sachthey, fot the respondent
(in all the appeals).

## Text

JUGAL KISHORE BALDEO SAHAI
v.
COMMISSIONER OF INCOME-TAX, U.P., LUCKNOW
September 20, 1966
[J.C. SHAH AND V. BHARGAVA, JJ.j
Income tax Act (11 o/ 1922), s. 10(2)(.rv)-Asses.ree, a Hindu joint
family finn--Paymmt o/ remuneralion to karta /or managing business-If
a deductible item of e.rpendlturt.
The assessee was a Hindu undivided family carrying on a joint family
business and was also deriving some income from partner.;hips, in which
its brta. representing the family, was a partner. Tue family consisted of
two brothers and tb,ei~ minor sons.
One of the brothers, whe> was the
kana. asked the other for a salary of Rs. 1,000 per month, since he was
managing the business. The Oilier brother agreed to it, and the payments
were made.
Tue assessce claimed that the sum of Rs. 12,000 per year,
paid as remuneration to the karta should be deducted as an item of expenditure under s. 10(2) (xv) of the Income-tax Act, 1922. The claim was
rejected by the Department, the Tnbunal and the High Court.
In appeal to this Court,
HELD : As the remuneration was paid under a valid agreement which
was bona fide and in the interest of, a~ expedient for, the business of the
family, and the payment was genuine and not ""cessive and was not a
device to escape income-tax. the remuneration must be held to be an
expenditure laid out wholly and exclusively for the purpose of the busin""s of the family and must be allowed as an expenditure under the section.
[421 B-C, DJ
The karta of a family can be paid remuneration for carrying on family
business, provi_c!ed it is under some valid agreement.
The tes.t of the
validity of such an agreement, when entered into on behalf of a minor,
is that it should be for the benefit of the minor. The agreement in the
instant case was entered into between the liwo adult members.
Their
minor sons were represented by them or by the karta and the agreement
was not prejudicial to tho minors' interests.
In fact, it was acquiesced in
by those minors who had later become majors. If the agreement was in
the interests of the family it would not be invalid, when executed on beh3lf
of the minors by Jhe person authorised to act on their ·behalf. simply because the minors were represented by a person who received ~omc hcncfit
under the agreement.
Further, the
remuneration was not
intenllcd
to
cover any service rendered by the karta to the partnership firm-:;. hut \va-s
for looking after the interests of the family in those businesses and for
managing the affairs
of the family.
[419 H; 420 B.C, D-H; 421 D-E,
422 E-FJ
Jitmal Bhuramal v. Commissioner of lncome4Jll, Bihar and Orissa,
(1962) 44 LT.R. 887 (S.C.J. explained and followed.
CIVIL APPELLATE JURISDJ(."TION : Civil Appeal Nos. 594 to
600 of 1965.
Appeals by special leave from the judgment and order dated
March 28, 1962 of the Allahabad High Court in l. T. Misc. Case
No. 424 of 1959.
416
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JUGAL KJSHORE v. C.!.T. (Bhargava, J.)
417
A
A. K. Sen, T. A. Ramachandran, J. B. Dadachanji, for the
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appellants (in all the appeals).
S. T. Desai; Gopal Singh and R. N. Sachthey, fot the respondent
(in all the appeals).
The Judgment of the Court was delivered by
Bhargava, J. These appeals by special leave are direct d
against the judgment of the Allahabad High Court returning an
answer to the following question referred to it by the Income-tax
Appellate Tribunal:
''Whether on the facts and circumstances of the case
the salary paid or credited to a Karla of the family for
looking after the family's business was a permissible deduction under s. I0(2)(xv) in computing the income of the fainily
business.''
The assessee was a Hindu undivided family carrying on a joint
fall)ilY business of commission agency in cloth under the name
of Jugal Kishore Baldeo Sahai and was, in addition, deriving income
from some property and from some partnership business in which
the karta Babu Ram was a partner representing the interest of the
Hindu undivided family. The family consisted of Babu Ram,
his brother Gobardhandas and their sons. In fone, 1946, the
karta Babu Ram wrote a letter to his brother Gobardhandas, who
was the only other adult member of the family, stating that, since
he was managing all the business, he ought to get a salary 'of Rs.
1,000 per month. Gobardhandas promptly agreed to this proposal
and consequently in the account books of the family for the year
in question a sum of Rs. 12,000 was debited in the expense account
of the Hindu undivided family business, viz., of Jugal Kishore
Baldeo Sahai and the same amount was credited in the name of
Babu Ram as an individual. The first such credit was made in
the account year relevant to the assessment year 1946-47 and similar
credits continued to be made in subsequent accounting years upto
the year relevant to the assessment year 1952-53. Thus, the debit
against the Hindu family business at the rate. of Rs. 12,000 per
year and similar credit in the name of Babu Ram was made in the
accounts for seven yea!'S. In each of these seven years the Hindu
undivided family as the assessee claimed that this sum of Rs.
12,000 every year should be deducted as an expenditure under
s. JO (2) (xv) of the Income-tax Act. The Income-tax Officer
rejected the claim _and that order was upheld by the Appellate
Assistant Commissioner as· well as by the Tribunal. Thereupon,
at the request of the assessee appellant, the question reproduced
by us was referred by the Tribunal for the opinion of the High
Court. The High· Court answered the
question against the
418
SUPREME COURT REPORTS
[1967] l S.C.R.
appellant and upheld the view of the Tribunal. Consequently,
these appeals have been brought up before us.
The High Court has taken the view that
under the Hindu
Law, a karta is bound by reason of his being the karta to manage
all the business of the family without being entitled I<' any remuneration for the service of management.
It went on to comment
that indeed, when under th.e law a karta represents the family,
it would be anomalous to think of a karta as being an employee
of himself or being entitled to remuneration for acting as ·such and
receiving payment from his ownself. This view was expressed
by the High Court on the basis of its opinion about the rights and
duties of a karta of a Hindu undivided family under the Hindu
Law and to arrive at this view, the Court relied on a comment in
Gopalchandra Sarkar Sastri"s Hindu Law, 1940 Edn., N. E. Raghavachariar's Hindu Law, 4th Edn., and Mayne's Hindu Law, I I th
E<ln., and in addition, on a decision of the Madras High Court in
Krishnaswami Ayyangar v. Rajagopa/a A.n•angar.( 1) It was on the
basis of these comments in the books of Hindu Law that the Allahabad High Court held the view that Babu Ram, being the karta
of the family, was not entitled to draw any remuneration for carrying on the business of the Hindu undivided family.
The decision of the Madras High Court and the views expressed
by these commentators do not show that a Karta of a Hindu
undivided family is not
entitled to charge for services rendered
to the family business under any circumstances at all.
The right
to receive remuneration is negatived with some qualifications.
Either it is stated that no remuneration is payable except under
special arrangement, or a scope for payment is recognised by saying
that the manager or karta is not "ordinarily" entitled to remuneration. The Madras High Court in the case of Krislmaswami Ayyangar
v. Rajagopa/a Ayyangar( ') held that "the managing coparcencr
was not entitled to special remuneration in the absence of a
valid special agreement". We arc unable to understand the meaning
of the expression "valid special agreement".
It is, of course,
necessary that before a karta receives remuneration, it should be
under a valid agreement. In judging what is a valid or proper
agreement which would justify the payment of remuneration paid
to a karta of the Hindu undivided family for managing the business
of the family to be deductible as an expenditure under s. 10 (2) (xv)
of the Income-tax Act, the test, we think, which should be applied,
ts whether the agreement has been made by or on behalf of all the
members of the Hindu undivided family and whether it was in the
interest of the business of the family, so that it could be justified
on grounds of commercial expediency. That is the test which
has always to be applied when considering whether a particular
(t) 1.L.R. 18 Mad. 73
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JUGAL KISHORE v. C.I.T. (Bhargava, J.)
419
expenditure claimed as a deductipn under s. JO (2) (xv) of the Incometax Act has been incurred wholly and exclusively for the purpose
of the business.
This Court in Jitmal Bhuramal v. Commissioner of Income-Tax,
Bihar and Orissa (1) has already held that "a Hindu undivided.family
can be allowed to deduct salary paid to a member of the family, if
the payment is made as a matter of commercial or bu.siness expediency''. Mr. S. T. Desai, learned counsel appearing for the
department tried to distinguish that case on the ground that in that
case the salaries which were held to be deductible were paid to junior
member of the family and not to the karta. The view expressed
by this Court was in general terms and did not make any distinction
between a junior member of the family or '&·karta. The principle
was laid down by this Coμrt Without any such diStinction ,even
though the Court was then concerned with salaries which had· been.
paid to junior members of the family.
·
We do not consider that the decision given by this Court
in that case ileeds to be given a narrow interpretaiion so as to
confine the right of deducting the remuneration paid by a Hindu
undivided family 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. It is true
that a karta has a .right to manage the property of the Hindu undivided family 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 a Hindu undivided
family including a karta can have a separate personal . sour,ce of
income if that income is earned independently of the Hindu undivided family 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. 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 karra 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. IO (2) (xv) of the Act.
As we have already indicated above, 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 paid remuneration for carrying on family business, provided it is under some agreement. There
seems to be no reason why, if all persons competent in a Hindu
(1) 44 l.T.R. 887.
420
SUPREME COURT REPORTS
[ 1967] I S.C.R.
undivided family 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.
Jn the present case, Babu Ram received
remuneration when he and his brother Gohardhandas agreed
that such remuneration should be payable. The other members
of the
Hindu undivided family were minor sons of Babu Ram
himself or of Gobardhandas.
Babu Ram and Gobardhandas,
being the only two members of the family competent to act on
behalf of the family including the minors, entered into this agreement, obviously because it was considered in the interest of the
family that Babu Ram should receive this payment.
We arc not
at all impressed by the argument urged on behalf of the department that, since some of the coparccners were minors, no valid
agreement at all on their behalf could have been entered into by
Babu Ram or Gobardhandas so as to allow payment of remuneration to the karta, Babu Ram.
The minor sons of Babu Ram could
certainly be represented by himself and the minor sons of Gobar-
·dhandas could either be represented by him, being his sons, or,
in the alternative, Babu Ram could represent them in the agreement as the karta of the family to which .they belonged. It is
true that under the agreement, some payment was to be made out
of the income of the family to Babu R<lm so as to become his
separate property.
But that circumstance would not, in our opin-
'ion, invalidate the agreement merely because Babu Ram represented
some of the minors on whose behalf the agreement was made.
If the agreement is held to be in the interest of the family, the agreement would not be invalidated when executed on behalf of the
minors by the person authorised to act on their behalf simply because the minors happened to be represented by a person who
receives some benefit under the agreement. The test of the validity
of an agreement on behalf of a minor is that it should be for the
benefit of the minor, and in this case. there is no finding that the
agreement entered into on behalf of the Hindu undivided family
including the minors by Babu Ram and Gobardhandas was in
any way ,prejudicial to the interests of the minor members.
On the other hand, the facts found show that some of the minors
subsequently attained majority and none of them challenged the
validity of this agreement on the ground that it had been executed
during their
minority and that it was against their interest.
In
fact, it was found that subsequently, when there was a partitioil in
which even the sons of Babu Ram separated from him, the amount
to the credit of Babu Ram in the accounts was treated as his separate asset and was not included in the assets of the Hindu undivided
family without any objection from any of the members of the
family who were minors at the earlier stage when the agreement
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JUGAL KISHORE v. C.I.T. (Bhargava, J.)
421
was entered into.
Consequently, we are unable to hold that the
agreement, by which Babu Ram was allowed this remuneration of
Rs. 1,000 p.m., was in any way vitiated, and, as we have already
held above, it was an agreement executed in the interest of the
family.
In our view, if a remuneration is paid to the karta of the family
under a valid agreement which is bonafide and in the interest of,
and expedient for, the business· of the family and the payment is
genuine and not excessive, such remuneration must be held to be
an expenditure laid out wholly and exclusively for the purpose
of the business of the family and must be allowed as an expenditure
under s. 10(2) (xv) of the Act.
In this connection, we may take notice of a decision in the
Patna case, Commissioner of Income-tax, Bihar and Orissa v. Jainarain Jagannath,(') wherein also it was held that "a member of a
joint Hindu family might conceivably do business in his individual
capacity and in that capacity might render services to the joint
family trading firm in consideration of which the firm might pay
him such remuneration as it would pay to,an outsider. If such
remuneration is not excessive and is reasonable and is not a device
to escape jncome-tax, then it will be a legitimate deduction in
computing the profits of the business. If, on the other hand,
the amount paid is unreasonably high and disproportionate to the
services rendered by him, then it may be treated as part of the profits
of the firm distributed in a particular manner. In the present case,
there .is no indication of any finding that the payment to Babu R,am
was at all high, or was not commensurate with the services rendered
by him.
An alternative ground, on which Mr. Desai on behalf of the
department challenged this deduction under s. 10(2) (xv), was that
the remuneration was being paid to Babu Ram not only to manage
the Hindu undivided family business carried on under the name of
Jugal Kishore Baldeo Sahai, but also for other businesses, including
those of the partnership firms in which Babu Ram was a partner
in his own name, tho~gh representing the Hindu undivided family.
In support of this proposition, learned counsel relied on the decision
of the Calcutta High Court in Jitmal Bhuramal v. Commissioner of
Income-Tax, Biliar & Orissa,(2) which judgment was affirmed by this
Court as reported in Jitmal Bhuramal v. Commissioner of Jncometax, Bihar & Orissa.(3 ). In that case, there was a finding of fact that
two junior members of the Hindu undivided family, Gulzarilal and
Madanlal, were employed in the partn~rship business in which the
Karta of the family was a partner and had rendered services to
that business. This Court, while recognising the principle that
(I) 13 1.T.R. 410.
(2) 37 r.°T.R. 52S.
(3) 44 I.T.R. 887.
422
SUPREME COURT REPORTS
[I 967] 1 S.C.R.
"a Hindu undivided family is allowed to deduct salaries paid to
members of the family, if the payment is made as a matter of commercial or business expediency", laid down the exception that the
services rendered must be to the family. It was held that, since
the services had been rendered not .to the family, but to the partnership firm, the remuneration paid to those members was not a
legitimate deduction under s. 10(2)(xv) from the income of the
Hindu undivided family, and that it could be a valid deduction only
when computing the income of the partnership business.
It is true that in the case before us the statement of the 'case
mentions that the agreement for payment of remuneration to Babu
Ram was to the effect that he was to get Rs. 1,000 p.m. for looking
after the businesses of the Hindu undivided family. It is because
of the use of the word "businesses" in the plural that learned
counsel urged that the remuneration given to Babu Ram was not
merely for looking after the Hindu undivided family business,
but also for rendering services to the partnership firms in which
Babu Ram was a partner. We do not consider that this interpretation of the agreement is correct. The agreement docs not envisage
any payment to Babu Ram for services rendered to the partnership
firms. The language used was that Babu Ram should receive
the remuneration for managing all the businesses of the Hindu
undivided family, which can only mean that he was to manage the
affairs of the Hindu undivided family firm and also to look after
the interests of the Hindu undivided family in other businesses.
Thus, the remuneration was not intended to cover any services
rendered by him to· the partnership firms apart from whatever he
was required to do in the capacity of looking after and managing
the affairs of the Hindu undivided family.
The principle laid down
in the case of Jitmal Bhuramal v. Commissioner of Income-tax,
Bihar and Orissa (1) is,
therefore, not applicable to the case
before us.
The appeals are consequently allowed.
Tlie judgment of the
High Court is set aside an-1 the question referred by the Income-tax
Appellate Tribunal is answered in the affirmative. The ap'pel!ant
will be entitled to its costs jn this Court as well as in the High
Court.
V.P.S.
Appeals allowed.
(I) 44 l.T.R. 887.
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