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

CIVIL APPEAL No. 594/1965Supreme Court[1967] 1 S.C.R. 41620 September 1966Bench: 2 JudgesAuthor: J.C. SHAH, VISHISHTHA BHARGAVA KISHORE BALDEO SAHAI7 pages
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What were the facts?

The assessee, a Hindu Undivided Family (HUF), carried on a joint family business and derived income from partnerships where its karta, Babu Ram, was a partner representing the HUF. Babu Ram, the karta, requested a salary of Rs. 1,000 per month from his brother, Gobardhandas, the only other adult member, for managing the business. Gobardhandas agreed, and Rs. 12,000 annually was debited to the HUF's business expenses and credited to Babu Ram's individual account from the assessment year 1946-47 to 1952-53. The assessee claimed this Rs. 12,000 as a deductible expenditure under Section 10(2)(xv) of the Income-tax Act, 1922. The Income-tax Officer, the Appellate Assistant Commissioner, the Tribunal, and the High Court rejected this claim.

What did the Supreme Court hold?

The Supreme Court held that the remuneration paid to the karta, Babu Ram, was a permissible deduction under Section 10(2)(xv). The Court reasoned that the agreement for remuneration was valid, bona fide, and entered into in the interest of and expedient for the family business. The payment was genuine, not excessive, and not a device to escape income-tax. The Court found that the agreement was not vitiated by the minority of some family members at the time of its inception, as they subsequently attained majority and did not challenge it, and their interests were not prejudiced. The Court clarified that the remuneration was for managing the HUF's businesses, which included looking after the family's interests in other businesses, and not for services rendered to the partnership firms independently of the HUF's interests. Therefore, the principle in Jitmal Bhuramal v. Commissioner of Income-Tax, Bihar & Orissa, was not applicable. The High Court's judgment was set aside, and the question was answered in the affirmative. The assessee was allowed its costs.

What were the issues?

1. Whether the salary paid or credited to the karta of the family for looking after the family's business was a permissible deduction under Section 10(2)(xv) of the Income-tax Act, 1922, in computing the income of the family business. Assessee's Contention: The remuneration paid to the karta was under a valid, bona fide agreement, in the interest of and expedient for the family business, genuine, not excessive, and not a device to escape income-tax. Therefore, it should be allowed as an expenditure wholly and exclusively for the purpose of the business under Section 10(2)(xv). Revenue's Contention: The High Court held that under Hindu Law, a karta is bound to manage the family business without remuneration. Furthermore, the remuneration was paid not only for managing the HUF business but also for services rendered to partnership firms in which the karta was a partner, which would not be a legitimate deduction from the HUF's income as per the principle in Jitmal Bhuramal v. Commissioner of Income-Tax, Bihar & Orissa.

Which sections of the Income-tax Act were involved?

Section 10(2)(xv)

AI-generated summary — verify with the full judgment below

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 expen- diture 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 order continues below.

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