JUDGMENT Sahai, J.
1. The Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, has referred the following question of law for the opinion of this court under Section 256(1) of the I.T. Act, 1961 :
"Whether, on the facts and in the circumstances of the case, salary paid to the karta of the Hindu undivided family was an allowable deduction ?"
The assessee, an HUF, comprising of Gopi Nath Seth, his wife and their two minor sons under guardianship of their mother, claimed deduction under Section 37 of the I.T. Act of salary paid by it to Gopi Nath, the karta, for rendering service to it and looking after its business interest, etc. Although the AAC accepted the claim because :
" Participation of minors is not essential for an agreement. The only point on which the Tribunal threw away the claim of salary was that the agreement was not a valid one. The Tribunal never expressed the opinion that the amount had not been paid for commercial expediency. The appellant's wife was certainly not a coparcener, but she was a member of the HUF. In the spirit of the two judgments quoted above, if carefully analysed, it will be seen that the claim of salary in the hands of the HUF is clearly an allowable expense ", it was disallowed by the Tribunal ;
" We cannot accept the plea of the assessee that the agreement dated 11-8-69 was relevant for the assessment year 1970-71 which was under dispute. It has been specifically mentioned in Clause 6 of the agreement dated 11-8-69 that the agreement will come into force from 11-7-69. The previous year of the assessee ended on 15-7-69 and, therefore, the agreement dated 11-8-69 was only operative for the assessment year 1971-72 and not for the assessment year 1970-71. Under the circumstances, the deduction could only be claimed on the basis of agreement dated 4-7-66. The Tribunal, vide its order for the assessment years 1968-69 and 1969-70, has held that the agreement dated 4-7-66 was not a valid agreement. The Tribunal has also held that payment made by the assessee was not for business or commercial expediency."
The income of the assessee was from share income from different firms in which it was a partner and some interest earned on deposits. The assessee, therefore, did not carry on any independent business. Although the claim of the assessee has not been disallowed by the Tribunal due to this, yet learned counsel for the Commissioner put forward the observations made in the case of this very assessee, for the earlier year (Gopinath Seth v. CIT [1982] 135 ITR 365, 367), that, we are not satisfied that in the present case the karta was required to do any specific work or job in connection with the business of the partnerships in which the family has shares except, of course, to see that he receives the share income from the various partnership firms.. From this point of view, "we are not satisfied that the finding that the agreement is not dictated by any commercial expediency suffers from any error of law". It is apparent that these observations were made to highlight the finding of fact recorded by the Tribunal.
2. Deductibility of salary paid by an HUF to its karta, as an expenditure wholly and exclusively for business purposes under Section 37, I.T. Act, has two facets, one, whether deduction could be claimed even if the HUF did not carry on any independent business, second, whether-such a claim can be made by the karta at all as he, by nature of his status, is under obligation to look after the interest of family including the business without any remuneration. And both these aspects have been put beyond controversy by the Supreme Court.
3. The first aspect came up for consideration in CIT v. Ramniklal Kothari [1969] 74 ITR 57 (SC). It was held that profits earned by a person by himself or in partnership with others was income under Section 10 of the Act of 1922 and any expenditure incurred for earning it was deductible under Section 10(2) of the Act as business expenditure. It did not approveof the view of the Calcutta High Court in Ishwardas Subhkaran v. CIT (ITR No. 38 of 1952, decided on June 2, 1953), that salary paid to a munim to look after the interest of the assessee, an HUF, which entered into a partnership agreement with third parties to run a rice mill, which could not be attended to by any member personally, was not deductible.
4. Deduction of salary paid to members of an HUF as an allowable expenditure came up for consideration in Jitmal Bhuramal v. CIT [1962] 44 ITR 887 (SC). It was held that an HUF could be allowed to deduct salaries paid to members of a family if the payment was made as a matter of commercial or business expediency, but the service rendered must be to the family. The principle was extended to the karta by the court in Jugal Kishore Baldeo Sahai v. CIT [1967] 63 ITR 238 (SC). The Hon'ble court did not accept the view of this court based on texts on Hindu law that a karta was bound by reason of his status as "karta to manage all business of the family without being entitled to remuneration". It was held (p. 242):
"There seems to be no reason why, if all persons competent in a Hindu undivided family to enter into an agreement on its behalf consider it appropriate that the karta should be paid remuneration and enter into an agreement to pay remuneration to him, that remuneration should not be held to be an expenditure incurred in the interest of the family, and consequently an expenditure deductible under Section 10(2)(xv) of the Act."
But the condition precedent for such claim is that payment should be made under a valid agreement. It was so observed in Jugal Kishore's case [1967] 63 ITR 238 (SC). The Madras High Court in the case of Krishnasami Ayyangay v. Rajagopala Ayyangar [1894] ILR 18 Mad 73, held that the managing coparcener" was not entitled to special remuneration in the absence of a valid agreement. We are unable to understand the meaning of the expression "valid special agreement". It is, of course, necessary that before a karta receives remuneration it should be under a valid agreement.
5. What survives for consideration, therefore, is whether the two agreements, one entered into on July 4, 1966, and the other on August 11, 1969, effective from July 11, 1969, between the karta and the wife, the only other adult member of the HUF, are valid. In respect of the first agreement, the Tribunal, relying on its own finding recorded in the assessment years 1968-69 and 1969-70, found it to be invalid. Finding of the earlier year is quoted thus :
"There was no valid agreement on the basis of which the remuneration was paid to the karta. The agreement was between the karta and his wife and was certainly not a coparcener of the family. As such she was not competent to enter into any agreement on behalf of the family in respect of the family's business interest. She could not be considered the natural guardian of the minor coparceners as well. The karta, being the father of the minors, was their natural guardian. In other words, there was no member of the family who could validly enter into an agreement with the karta for the payment of any remuneration to him."
Invalidity of agreement, therefore, proceeded because it was entered into by a female. In other words, the defect was legal rather than factual In coming to the conclusion extracted above, the Tribunal appears to have mixed up the concept of coparcenary and joint Hindu family. The former is a narrower body and females are excluded from it. It is confined to male lineal descendants who acquire interest by birth. But a female can be a member of a joint family. (Mulla's Hindu Law, 14th Edn., para. 212). Necessary corollary of it is that a female who is a member of the HUF can enter into an agreement as well. In C1T v. Banaik Industries [1979] 119 ITR 282, 285, it was held by the Patna High Court:
"A female is as good, a member of an HUF as a male, of course, with certain limits, in the sense that she cannot become the karta of the family, nor can she be a coparcener. These limits, however, do not disable her from acting in the capacity of a member of the family and enter into a contract of partnership with the permission of the family, for the family."
In C1T v. Raghunandan Saran [1977] 108 ITR 818 (All), a Division Bench of this court, of which one of us was a member, held that an agreement could be inferred because the wife did not object to the payment of salary by the HUE. In Jugal Kishore's case [1967] 63 ITR 238, the Supreme Court, apart from laying down that remuneration can be paid by an HUF to its karta, also detailed the test to find out if the agreement was valid. At p. 241 it was observed :
"In judging what is a valid or proper agreement which would justify the payment of remuneration paid to a karta of the HUF for managing the business of the family to be deductible as an expenditure under Section 10(2)(xv) of the Indian I.T. Act, the test, we think, which should be applied, is, whether the agreement has been made by or on behalf of all the members of the HUF and whether it was in the interest of the business of the family, so that it could be justified on the grounds of commercial expediency."
While rejecting the assessee's claim, the Tribunal did not advert to any of the tests laid down in this decision. On the contrary, it held the agreement to be invalid only because the other party was the wife, which, in view of what has been stated earlier, cannot be sustained. In Shankerlal H. Dave's case [1980] 124 ITR 733, it was held by the Gujarat High Court, in more or less identical circumstances, that an agreement between the karta of the HUF and his wife, the only other member of the HUF, on her behalf and on behalf of her minor sons as next natural guardian was valid. It repelled the argument advanced on behalf of the Commissioner that the mother not being natural guardian of the minors during the lifetime of father was not competent to enter into agreement.
6. The learned counsel for the Commissioner vehemently argued that the finding on the validity or otherwise of agreement was a finding of fact. And the assessee having not challenged it, the answer to the question raised must be given accepting it as it is. According to him, even if the question referred is construed widely, it cannot be deemed to include in it a challenge to the finding of fact. Similar argument was raised in Shankerlal Dave's case. The learned judges of the Gujarat High Court, after discussing the authorities of the Supreme Court and the Privy Council, repelled the contention. We are in respectful agreement with it.
7. Apart from it, the Tribunal, while rejecting the agreement, did not record any finding of fact. It assumed it as a matter of law, because a female was not competent to contract. Even the finding that payment was not made for business or commercial expediency is not based on any evidence or material on record. In earlier years, it was assumed to be so because the HUF did not carry on any independent business. It has been noticed earlier that the Supreme Court has not approved this approach. The business and commercial expediency has to be inferred from facts. It cannot be accepted to be a pure question of fact. But as the Tribunal did not record necessary findings on these aspects, we consider it necessary to direct it to decide the appeal afresh.
8. In respect of the agreement dated August 11, 1969, the ITO disallowed the claim only because it was not claimed for managing any independent business. The AAC assumed that there was an agreement. But he did not specifically record any finding on either of the agreements. The Tribunal, as is clear from the extract quoted earlier, did not consider it relevant for the assessment year in dispute. Learned counsel for the assessee argued that the assessee's accounting year was from July to July. And as one of the clauses of agreement provided that the agreement shall operate from 11th July, it shall be deemed to have come into effect 5n that date. The learned counsel urged that income accrues on the close of the year and the agreement of 1969 having been applied from 11th July, it was in operation on the date the accounting year closed. Therefore, the assessee was entitled to claim benefit under it which was not found to be invalid. We do not consider it necessary to decide this controversy at present, as it can be raised before the Tribunal which is being directed to decide the appeal again.
9. For the reasons stated above, the question referred to us is decided by saying that the Tribunal was not justified in disallowing deduction of salary without recording proper findings in the light of the law laid down by the Supreme Court. The Tribunal shall, therefore, decide the appeal afresh. The assessee shall be entitled to its costs, which is assessed at Rs. 200.