1984 (3) TMI 59 - HC - Income Tax

Implied agreement for remuneration upheld in Karnataka HUF case

The High Court of Karnataka ruled in favor of the assessee, finding that there was an implied agreement between the karta of the Hindu undivided family ... Business Expenditure, HUF Issues:1. Existence of an agreement between the karta of the assessee-HUF and other members for payment of remuneration.Detailed Analysis:The judgment by the High Court of Karnataka involved a dispute regarding the deduction of remuneration paid to the karta of a Hindu undivided family (HUF) for services rendered. The Income Tax Officer (ITO) disallowed the deduction claimed by the HUF for the assessment year 1975-76, stating the absence of an agreement between the HUF and the karta for remuneration payment. The Appellate Authority Commissioner (AAC) and the Tribunal upheld this decision, emphasizing the necessity of a valid agreement for such deductions.The counsel for the assessee acknowledged the requirement of an agreement for claiming deductions under section 37(1) of the Income Tax Act, 1961 but argued that the agreement could be implied from the parties' conduct. The court agreed with this contention, citing the Supreme Court's decision in Jugal Kishore Baldeo Sahai v. CIT, which allowed remuneration to the karta based on a valid agreement in the interest of the family business. The court emphasized that such agreement need not be in writing and could be inferred from the parties' conduct.The Revenue contended that there was no evidence of consultation between the husband and wife regarding the remuneration payment. However, the court noted that the karta was the sole member capable of managing the HUF's business, and the past practice of paying remuneration indicated an implied understanding among the family members. The court highlighted that the Department had previously allowed deductions for remuneration paid to the karta, indicating the existence of an agreement for such payments.Additionally, the court addressed the issue of excessive remuneration claimed by the HUF for the years in question. While acknowledging the Tribunal's concern about excessive payments potentially harming the family's interests, the court suggested that a reasonable remuneration amount could be determined considering factors like past payments, business growth, and profits earned by the HUF.In conclusion, the court ruled in favor of the assessee, affirming the existence of an agreement between the karta and the HUF for remuneration payment. The court declined to award costs in this matter. The judgment also referenced a similar view taken by the Allahabad High Court in CIT v. Raghunandan Saran, supporting the decision in the present cases.