JITMAL BHURAMAL Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) IN this case the assessee is an HUF comprising of Hiralal, Kunjilal, Gulzarilal and Madanlal and also their sons. It appears that Gulzarilal and MadanLal were employed in partnership business, called Hiralal Gulzarilal, in which the assessee though its Karta had twelve annas share. It appears that there were two agreements between Hiralal, the Karta, and Gulzarilal and madanlal. who agreed to render services to the HUF by looking after the business on the remuneration mentioned in the agreements. Copies of these documents are annexures 'A' and 'A -1' of the statement of the case. In the assessment for the year 1953 -54 the assessee claimed that the sum of Rs. 6,600 should be deducted under S. 10(2)(xv) of the IT Act as the remuneration paid to the two coparceners for a period of 11 months. The ITO disallowed the whole claim except the sum of Rs. 600, on the ground that the payment of salary to the members of the HUF had been claimed only for the purpose of reducing the incidence of taxation and not on any principle of commercial expediency. As appeal was taken before the AACagainst the order of the ITO but the appeal was dismissed. The matter was again taken by the assessee before the Tribunal and it was contended before it that the salaries paid must be allowed as services had been rendered to the partnership business according to the agreement entered into between the Karta and the coparceners of the family. The Tribunal held that the assessee was entitled to a deduction so far as the payments made to Kunjilal and Gobardhanlal were concerned, but it was not entitled to a deduction with regard to the payments to Gulzarilal and Madanlal. The view taken by the Tribunal was that Kunjilal and Gobardhanlal had rendered service to the HUF and the payments made to Kunjilal at the rate of Rs. 150 per month and to Gobardhanlal at the rate of Rs. 100 per month wee justified. But with regard to the payments made to gulzarilal and Madan lal the Tribunal considered that the assessee was not entitled to any deduction on that account. As required by the High Court, the Tribunal has stated a case on the following question of law :

(2.) ON behalf of the assessee, Mr. S. N. Dutta put forward the argument that the Tribunal was wrong as a matter of law in holding that for the services rendered to the partenrrship business the assessee was not entitled to claim any deduction of the salaries paid to Gulzarilal and Madanlal. The submission of learned counsel was that the HUF owned twelve annas share in the partnership business, called Hiralal Gulzarilal, and for the earning profits under the partnerrship the assessee had to employe the two coparceners, Gulzharilal and Madanlal, and, therefore, it was enttitled under S. 10(2) (xv) o the IT Act to claim the expenses incurred in payment of the salaries to the two coparceners from the profits derived from the partnership business as its share. In support of this proposition, learned counsel referred to Tata Sons Ltd, vs. CIT (1950) 18 ITR 460 and Shantikumar Narottam Morarji vs. CIT (1955) 27. ITR 69 We think the proposition of law for which learned counsel contends is correct, and if the assessee is able to show in this case that the expenditure incurred upon the payment of salaries to Gulzarilal and Madanlal was incurred as a matter of commercial expediency and for the purpsoe of earning profits form the partnership business, then the assessee woudl be entitled to claim the deduction of the amount claimed on account of payment of salaries to these two members of the HUF. But the dificulty in this case is that the finidng of fact is against the assessee. It ws found by the ITO that the two members, Gulzarilal and madanlal, did not render any service to the partnership business or to be earning of profits to the HUF, from the share of the partnership business. The same view has been taken by the AAC in appeal. In the course of his order the AAC has stated as follows : "In support of the claim for the salary to the junior members of the family, the learned counsel for the appellant has cited the case of CIT vs. Jainarain Jagannath (1945) 13 ITR 411( ). In this case it has been held by their Lordships that whether an amount paid to a member of the HUF by way of remuneration for services rendered in the business of the family can be legitimately deducted in computing the profit of the business will very largely depend on the facts of each case, but the amount paid can be legitimately deducted if it is found to be a bona fide payment to a bona fide employee for services actually rendered and is not excessive or unreasonable and is not a device to escape the income -tax. The point therefore for determination is whether the payments have been made to the members of the family as a bona fide remuneration for the services rendered by them and are not excessive or un -reasonable or they are merely a device to escape the income -tax. A scrutiny of the appellant's past records shows that the establishment expenses which include salary payments debited in the various assessment years wee as follows: The above table shows clearly that the payment of Rs. 6,600 for salary to the members of the HUF which is included in the establishment expenses of Rs. 8,732 for the previous year is highly excessive and unreasonable when viewed in the light of the decreasing gross profit, made by the appellant family. The only conclusion that can be drawn is that the payment has been made merely with a view to reduce the incidence of taxation. The ITO was, therefore, justified in adding back the salary payment to the tune of Rs. 6,000."

(3.) IN this connection we should point out that the question whether payment was made wholly and exclusively for the purpose of trade is essentially a question of fact for the determination of the IT authorities. It is not right to contend merely because there is an agreement between the employer and the employee and merely because there is the fact of actual payment that the IT authorities must necessarily hold that the payment was made wholly and exclusively for the purposes of the business. Although the payment was actually made and there might be an agreement in existence, it would still be open to the IT authorities to take into consideration various factors which would go to show whether the payment comes within the language of the section. It is open to the ITO to take into consideration whether the money was paid to a near relation for the employer and also consider the quantum of payment, the extent of the business and the particular services rendered by the employee which called for a special remuneration at the hand of the employer. It is open to the IT authorities after taking all these matters into consideration, to reach the conclusion that the payment was not wholly and exclusively for the purposes of the business of the assessee. That is the principle laid down by the Bombay High Court in Jethabhai Hirji & Co. vs. CIT (1949) 17 ITR 533. It is manifest, therefore, that the question whether the amount was expended wholly and exclusively for the purposes of the business is primarily a question of fact to be determined by the IT authorities. It is contended on behalf of the assessee in this case that there is no evidence to support the finding of the IT authorities on this question of fact. We do not accept this contention as correct. On the other hand, there are materials to support the finding that there was no nexus between the payments made to the two coparceners, Gulzarilal and Madanal, and the profits of the partnership derived by the HUF, and so the payments made were not justifited on any principle of commercial expendiency.