JUDGMENT
S.C. Mohapatra, J.
1. This is a reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”), at the instance of the assessee. The statement of case on the following question of law has been referred to this court :
“Whether, on the facts and in the circumstances of the case, the commission paid by the assessee-firm to Sri Rashiklal P. Rathor (individual) is allowable under Section 40(b) of the Income-tax Act, 1961, as a deduction while computing the business income of the assessee ?”
2. The assessee is a partnership firm which carries on business in sale and purchase of several commodities as well as of operation of a mining lease. The following are partners of the firm :
(a) Popatlal Devram,
(b) Jayantilal Jagmal,
(c) Pragji Devram,
(d) Ratilal Odhavji,
(e) Rashiklal P. Rathor.
3. Popatlal is the father of the last mentioned partner Rashiklal. On April 1, 1957, there was an oral partition of the share of Popatlal in the firm amongst Popatlal, his wife and two sons including Rashiklal. The assets of Rashiklal continued to be invested in the partnership firm. Rashiklal is the karta of his smaller Hindu undivided family. While the
partnership so continued, on October 17, 1978, there was an agreement between Rashiklal and the firm that Rashiklal would receive 37 paise per tonne of mineral ore extracted and sold from the leasehold area. In the assessment year 1980-81, Rashiklal received Rs. 28,579 towards commission as per this agreement. The firm claimed deduction of this amount from its income. The Income-tax Officer, however, refused to deduct the same, treating it to be payment to a partner in view of Section 40(b) of the Act which reads as follows :
“40. Notwithstanding anything to the contrary in Sections 30 to 39, the following amounts shall not be deducted in computing the income chargeable under the head ‘Profits and gains of business or profession’. . .
(b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm. . .”
4. The assessee preferred an appeal. The Appellate Assistant Commissioner perused the agreement and held that commission was paid to Rashikal in his individual capacity and not as karta of the smaller Hindu undivided family which is a partner of the firm. Accordingly, the payment not being to a partner, the prohibition under Section 40(b) would not have any application to the amount paid to Rashiklal. For coming to this conclusion, the Appellate Assistant Commissioner relied upon Clause (3) of the agreement and the return of Rashiklal as individual in respect of his business in Rourkela in which the amount received as commission was also included.
5. The Revenue preferred an appeal against the appellate order before the Income-tax Appellate Tribunal. Before the Tribunal, reliance was placed by the Department on a decision in Agarwal and Co. v. CIT [1970] 77 ITR 10 (SC), where it was observed that the concept of a Hindu undivided family joining a partnership creates considerable difficulty since it is a fluctuating body whose composition changes by birth, death, marriage and divorce. Accordingly, a partnership is to be constituted by individuals. Such individual may be a benamidar of another in which case benefits received by the individual from the partnership would be of the real owner. For the purpose of partnership, the individual benamidar would, however, be treated as partner. On behalf of the assessee, reliance was placed on a decision in S. RM. CT. PL. Palaniappa Chettiar v. CIT [1968] 68 ITR 221 (SC), where a Hindu undivided family acquired shares of a company out of its funds. The karta of the family became the managing
director of the company in due course and earned remuneration and other fees. It was held that such remuneration and other fees received by the karta is not assessable as income of the undivided family.
6. On a consideration of the materials, the Tribunal held that, in view of the prohibition contained in Section 40(b), payment to Rashikal would be payment to the partner which would not be deducted from the income of the firm.
7. The assessee, being aggrieved, filed an application under Section 256(1) of the Act on the basis of which the statement of the case has been made to this court on the question of law extracted earlier.
8. There is clear material that Rashiklal entered into the partnership and invested his joint family funds. Payment was made to Rashiklal who is a partner. Accordingly, in the absence of any material that payment to Rashiklal would not enure to the benefit of his undivided family, the Tribunal is correct in coming to the conclusion that the plain language of Section 40(b) would be applicable. A clause in the agreement that payment would be made to Rashiklal in his individual capacity would be of no assistance to the assessee. What would be the legal position if there had been a clear finding that Rashiklal was made commission agent on account of his own skill, learning and acumen need not be considered in this case. The circumstances under which Rashiklal was to be paid commission as reflected in the agreement were known to the firm. The assessee ought to have brought materials to indicate that payment to Rashiklal was not payment to a partner. Accordingly, the general presumption being that the payment to a karta enures to the benefit of the undivided family, payment of commission under the agreement has rightly been held by the Tribunal on the facts and in the circumstances of the case to be payment to a partner exigible to tax in view of the prohibition under Section 40(b). There is also no prohibition for a juristic person like a Hindu undivided family carrying on business as a commission agent though, having no living mind, it has to act through individuals.
9. In the result, the question is to be answered in favour of the Revenue and against the assessee. There shall be no order as to costs.
S. K. Mohanty, J.
10. I agree.