1. This appeal by the assessee is directed against the order of the AAC, dated 22-11-1981, relating to the assessment year 1978-79. It raises a very interesting issue for determination. But before the issue is framed, it is necessary to have the factual back-drop of the case as under : 2. Shri Badri Dass is an individual. He is also the karta of a HUF known as Badri Dass & Sons, which owns a manufacturing concern working under the name and style of Vishal Motor Industries located at Link Road, Industrial Area A, Ludhiana. Shri Badri Dass is a technical hand and has sufficient experience in the line of manufacture and sale of motor parts. The HUF wanted his services to be utilised in the joint family business run by it. Therefore, on 3-10-1977 when the business was actually running, the HUF through Shri Badri Dass as its karta on one hand, and Shri Badri Dass, individual, on the other hand, entered into an agreement, the terms and conditions of which are as under : 1. That the party of the 1st part shall pay a monthly salary of Rs. 1,500 to the party of the 2nd part. The said amount of salary may be increased or decreased according to the trading results of the said business. It is, however, stipulated that the party of the 2nd part shall be entitled to his salary from the party of the 1st part, as from the 1st April, 1977.
2. That the party of the 1st part shall be competent to terminate the services of the party of the 2nd part by serving on him one calendar month's notice or by paying one month's salary to him.
Similarly, the party of the 2nd part shall also be at liberty to relinquish his above said assignment by giving one month's clear notice to the party of the 1st part or by forfeiting his one month's salary.
3. That any dispute arising out of the terms and conditions of this agreement shall be referred to arbitration according and subject to the provisions of the Indian Arbitration Act then in force.
4. That the party of the second part has accepted the said assignment as from the 1st April, 1977.
3. In view of the terms and conditions mentioned above, for the assessment year 1978-79, the assessee filed the return of income on 11-7-1978 declaring total income of Rs. 14,360. In arriving at this totaly income, the assessee took into consideration remuneration of Rs. 18,000 received from the HUF for running their business in terms of the above agreement. This sum of Rs. 18,000 was shown by the assessee under the head 'Salaries', and deduction under Section 16(a) of the Income-tax Act, 1961 ('the Act'), was claimed. The ITO considered whether he should tax this amount under the head 'Salaries' or under the head Income from other sources'. According to him, the issue depended upon whether there was an employer and employee relationship between the HUF and the assessee. According to him, no person can be an employee and employer at the same time. He, therefore, held the view that the assessee, having received the income from himself, was liable to be taxed under the head 'Income from other sources'. The standard deduction under Section 16(0 was though claimed, but not allowed.
4. The assessee took the matter in appeal before the AAC but the AAC also held that in the absence of an employer and employee relationship, the amount of Rs. 18,000 was to be taxed under the head 'Income from other sources' as done by the ITO. On this issue, the appeal of the assessee was dismissed. Hence, the present proceedings.
5. The learned counsel for the assessee submitted before me that there could be a valid agreement between the HUF and any one of its coparceners in view of the ratio decidendi of the Supreme Court judgment in the case of Jugal Kishore Baldeo Sahai v. CIT [1967] 63 ITR 238. He further contended that if remuneration is paid to the karta of a HUF under a valid agreement which is bona fide and in the interest of, and expedient for, the business of the family and the payment is genuine and not excessive, such remuneration would be an expenditure laid out wholly and exclusively for the purpose of the business of the family and would be allowable as an expenditure.
6. The learned counsel for the assessee further submitted that the agreement shows that the HUF was to pay salary to the karta in his individual capacity and it has not been doubted that the salary has, in fact, been paid for the services rendered. However, only the character of the amount paid is in dispute. He contended that the salary paid is clearly covered by Section 16(i) because the Supreme Court in the case of Accountant General v. E. Bakshi AIR 1962 SC 505 has pointed out that there is no definition of remuneration in the Constitution but that is not a ground for holding that the expression is used in any limited sense as merely salary. The expression 'remuneration' in its ordinary connotation means 'reward, recompense, pay, wages or salary for services rendered'. It was contended that once there is an agreement which has been acted upon by the parties and the agreement shows that it is salary paid by the HUF to the coparcener, it should not have been treated as anything else but salary and if it is treated as salary, deduction under Section 16(i) automatically follows.
7. The learned counsel for the assessee submitted that the Appellate Tribunal, Bombay Bench 'A' in the case of Mohamad Ibrahim Sehhdad v.ITO has held that standard deduction under Section 16(ii) is available to a partner if he receives salary income from the firm. In such cases the firm is the employer and the partner is the employee. Relying on the ratio of this judgment of the Tribunal, it was contended that the same treatment should be given in the case of a HUF paying similar salary or remuneration to one of its coparceners even if he is a karta.
He supported his contentions that a partner can bean employee of the firm by placing reliance upon the Madras High Court judgment in the case of Commissioner of Agricultural Income-tax v. Tipperary Estates Co. [1970] 76 ITR 396.
8. The revenue, on the other hand, contended that the nature of payment was decided by the ITO as 'other sources' and, therefore, the question of deduction under Section 16(i) does not arise. According to the revenue, despite the agreement referred to, there was no employer and employee relationship between the HUF and the individual because he was the karta of the HUF. It was contended that the observations of the Supreme Court in the case of Jugal Kishore Baldev Sahai (supra) are not correct and not applicable to the facts of the case before me because the assessee was not under the control of the HUF and as such the employer and employee relationship did not exist. For this, support was drawn from the judgment of the Allahabad High Court in the 'case of CIT v. Lakshmipati Singhania [1973] 92 ITR 598.
9. I have given due consideration to the rival submissions made by the parties before me and gone through the authorities cited. It is very clear to me that the authorities below erred, in refusing to grant to the assessee standard deduction under Section 16(i). The agreement dated 3-10-1977 has not been doubted. It is an instrument in law and binding on the parties. I also do not find any constraint on the karta acting in a dual capacity-acting as karta on behalf of the HUF and also acting as an individual on behalf of self. This exactly is the position in this case. Moreover, it is also a trite law that any coparcener of a HUF, having acquired competence in any field which can be put to use for purposes of recompense, need not necessarily use it for the use of and benefit of the HUF to which he belongs even if such a coparcener, at a particular point of time, is acting as its karta. Therefore, there is no bar in law, in my humble opinion, which prohibits the karta of a HUF entering into an agreement with himself acting in a dual capacity, placing his services at the disposal of the HUF for recompense and this is exactly the case before me.
10. The agreement shows that the karta acquired technical experience in the line of manufacture and sale of motor-parts and he could give the benefit of this experience to the proprietary business of the HUF run in the name of Vishal Motor Industries but for giving benefit of such experience he demanded and got remuneration of Rs. 1,500 per month.
This remuneration of Rs. 1,500 per month has been paid to him as stipulated in the agreement and, in fact, there is no doubt that the agreement is genuine. It has been acted upon, the remuneration has been paid and that it is otherwise not excessive. The agreement further shows that the services of Badri Dass could be terminated by the HUF by giving him either one calendar month's notice, or by making payment of the one month's salary in advance. There is even a provision in the agreement that any dispute arising out of the terms and conditions of the agreement shall be referred to arbitration. All these things indicate that the instrument dated 3-10-1977 created an employer and employee relationship between the joint family on the one hand acting through its karta Shri Badri Dass, and Shri Badri Dass, individual, on the other. In fact, Clause (1) of the agreement shows that Rs. 1,500 was paid to him as 'monthly salary'.
11. Since the employer and employee relationship existed between the joint family and the individual, the salary received by him was for all intents and purposes taxable as 'salary' as defined in Section 15. When it is salary for purposes of taxation under the Act, deduction under Section 16(i) is a necessary accompaniment of such treatment of a sum received by the assessee. Therefore, when the assessee made a claim for standard deduction under Section 16(j) before the ITO, he was fully justified in doing so. The authorities below erred in rejecting this claim of the assessee on untenable grounds. Therefore, the orders of the authorities below are reversed and the ITO is directed to allow the admissible claim of the assessee.