The payment of salary to coparceners of a Hindu undivided family is not allowable as a deduction under Sec.10 (2) (xv) of the Income-tax Act if there is no nexus between the payment and the profits of the business.

1. In this case the assesses is a Hindu undivided family comprising of Hiralal, Kunjlal, Gulzarilal and Madanlal and also their sons. It appears that Gulzarilal and Mandalal were employed in a partnership business, called Hiralal Gulzarilal, in which the assessee through 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 Hindu undivided family 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. 6600.00 should be deducted under Sec.10 (2) (xv) of the Income-tax Act as the remuneration paid to the two coparceners for a period of 11 months. The Income-tax Officer disallowed the whole claim except the sum of Rs. 600 on the ground that the payment of salary to the members of the Hindu undivided family had been claimed only for the purpose of reducing the incidence of taxation and not on any principle of commercial expediency. An appeal was taken before the Appellate Assistant Commissioner against the order of the Income-tax Officer, but the appeal was dismissed.

The matter was again taken by the assessee before the Appellate 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 agreements entered into between the karta and the coparcerners of the family. The Tribunal held that the assessee was entitled to a deduction so far as the payments made to Kunjlal 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 Kunjlal and Gobardhanlal had rendered service to the Hindu undivided family and the payments made to Kunjlal at the rate of Rs. 150.00 per month and to Gobardhanlal at the rate of Rs. 100 per month were justified. But with regard to the payments made to Gulzarilal and Madanlal the Tribunal considered that the assessee was not entitled to any deduction on that account.

2. As required by the High Court, the Income-tax Appellate Tribunal has stated a case on the following question of law ;

"Whether in the facts and circumstances of the case, the assessee, namely, the Hindu undivided family who is a partner in the partnership business of Hiralal Gulzarilal, is entitled to a deduction of Rs. 3850 from the assessment of Income-tax for the relevant year under Sec.10 (2) (xv) of the Income-tax Act?"

3. On behalf of the assessee Mr. S.N. Dutta put forward the argument that the Appellate Tribunali was wrong as a matter of law in holding that for the services rendered to the partnership 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 Hindu undivided family owned twelve annas share in the partnership business, called Hiralal Gulzarilal, and for earning profits under the partnership the assessee had to employ the two coparceners, Gulzarilal and Madanlal, and therefore it was entitled under Sec.10 (2) (xv) of the Income-tax 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. V/s. Commissioner of Income-tax, Bombay, (1950)-I8 ITR 460 : (AIR 1950 Bom 383) and Shantikumar Narottam Morarji V/s. Commissioner of Income-tax, Bombay, 1955-27 ITR 69: ((S) AIR 1955 Bom 234). 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 purpos