Opinion Of Eminent Legal Luminaries On Controversial Issues

Amounts not deductible – Working partner – Remuneration – Remuneration paid to HUF

QUERY: In case when both the HUF and his Karta is a partner of same partnership firm, remuneration paid to HUF will be allowed or not?
ANSWER: It depends upon the fact:
In V. D. Dhanwatey v. CIT [68 ITR 365 (SC)], V. D. D. as a member of a bigger HUF was looking after the family business of lithography and printing and was remunerated for the same between 1930 and 1939. After partition the business was converted into partnership but VDD continued to be with one eighth share on behalf of his smaller HUF which had contributed proportionate capital. Under clause 7 of the partnership deed the general management and supervision of the business was to be in the hands of VDD, who under clause 16, was to be paid remuneration.
The Supreme Court, by a majority of four to one, held that salary to VDD was paid due to the contribution made by the joint family and the remuneration paid was directly related to investments from the assets of the HUF. There was a real and sufficient connection between the investment made by the HUF and the remuneration paid to him. It, therefore, followed that remuneration was not earned without detriment to HUF funds, and the case fell directly within the principles laid down by the Court in Kalu Babu Lal Chand [37 ITR 123(SC)] and Mathura Prasad v. CIT [60 ITR 428 (SC).]
The majority, therefore, held that the Karta was partner representing the family and under the partnership agreement, that he was responsible for general management and supervision of the partnership business and that he was to be paid monthly remuneration for the same. The remuneration paid was held to be directly related to the investment in the partnership business from the assets of the family and salary was held to be assessable in the hands of HUF.
The principle laid down in V. D. Dhanwatey [68 ITR 365 (SC)] was applied by the Allahabad High Court in Nagar Das v. CIT [66 ITR 203.]
From the study of the judgments, the guidelines set out by the Supreme Court, it is obvious that the dividing line between the two views is thin and is based –
(A) (i) First on the fundamental principle as to whether the remuneration was earned because of any personal qualification of the members of HUF, and
(ii) Secondly as to whether the remuneration was merely a form of profit sharing and was earned by detriment to HUF funds invested therein.
(B) If there as a clear finding on facts that the remuneration was earned due to personal qualifications of the Karta or member of the HUF and was not earned by detriment to HUF funds, then the remuneration would be taxed in the hands of individual and will be excluded from the income of HUF.
If it is because of detriment to HUF fund it would be taxed in the hands of HUF.

However, the Supreme Court in Jitmal Bhuramal v. CIT [44 ITR 887] held that a HUF can be allowed to deduct salaries paid to the members of the family, if the payment is made as a matter of commercial or business expediency, but service rendered must be to the family.

Similarly, the Supreme Court in Jugal Kishore Baldeo Sahai [63 ITR 238] has held that there was a valid agreement in the interest of the family and the remuneration was only for services to the family business and to look after the interests of the family in other business and there was no finding that the payment to B, Karta, was not commensurate with the services rendered by him and therefore, remuneration was deductible.


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