IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 25/11/2003
CORAM
THE HON'BLE MR.JUSTICE R.JAYASIMHA BABU
and
THE HON'BLE MR.JUSTICE S.R.SINGHARAVELU
T.C.No.99 of 2000
The Commissioner of Income-tax,
Tamilnadu-III, Madras. ..Applicant
-Vs-
M/s Packwell (Karnataka) Industries,
6,Cathedral Road,
7,madras-86. ..Respondents
Tax Case reference under Sec.256 (2) of the Income-tax Act, 1961,
against the JUDGMENT of the Income-tax Appellate Tribunal, 'A' Bench, Madras,
dated 19.12.1995, made in R.A.No.154/Mds/1996 in ITA No.1866/ Mds/1987.
^For Applicant : Mrs.Pushya Sitaraman
!For respondent : Mr.P.P.S.Janarthanaraja
:JUDGMENT
(Delivered by R.JAYASIMHA BABU, J.)
The assessment year in this case is 1982-83. The question referred is
as to whether the Tribunal was right in holding that the remuneration paid by
the assessee firm to one of it’s partners who was a partner in his capacity as
karta of Hindu Undivided Family was not taxable in computing the total income
of the assessee firm and that the provisions of Section 40 (b) of the
Income-tax Act are not attracted.
2. The amount that was disallowed was paid to one of the partners as
a technical consultation fee. Though the assessing officer and the appellate
authority did not regard that payment as falling outside the description
contained in Section 40 (b), the Tribunal accepted the assessee’s appeal and
held that that payment was a permissible deduction. Learned counsel for the
assessee submitted that a partner in a firm can have more than one role to
play and that he can, if he is a person possessed of expertise, make available
such expertise to the firm for consideration and that consideration so
received by him would be consideration received by an expert and not by a
partner. In support of his submission, he placed reliance on a decision of
this Court in the case of Commissioner of Income Tax v. Surendra Manilal
Mehta (154 ITR 264).
3. This Court has far back as in the year 1965 in the case of
A.S.K.Rathnaswamy Nadar Firm v. Commissioner of Income Tax (58 ITR 312) had,
after considering the language contained in Section 10 (4) (b) of the
Income-tax Act 1952, which is similar to the language employed in Section
40-(b) of the Income Tax Act, 1961 as it stood during the assessment year
1982-83 observed thus:-
“It is manifest that this sub-section indicates an absolute
prescription. It does not limit the operation of the Act to a remuneration
paid to a partner as such. It takes within its scope remuneration or salary
paid to a partner in any capacity. We are not here concerned with the
distinction between his role as a Manager or Karta of the joint family and his
role as an individual. The only test that is relevant under Section 10 (4)
(b) of the Act is whether the payment is made to a partner or not. We do not
think that we can accede to the proposition of the learned counsel for the
assessee that when a payment is not made to a partner as partner but in
respect of the services rendered by him to the partnership it falls outside
the sweep and range of the sub-section”.
4. Section 10 (4) (b) of the 1922 Act reads thus:-
“any allowance in respect of any payment by way of interest, salary,
commission or remuneration made by a firm to any partner of the firm”
5. Section 40 (b) of the 1961 Act as it stood at the relevant time
reads thus:-
“..any payment of salary, bonus, commission or remuneration paid to
any partner who is not a working partner”.
6. The Supreme Court in the case of Rashik lal and Co. v.
Commissioner of Income Tax (1997) 229 ITR 458, decided by a two Judge Bench
held, that a partner does not act in a representative capacity in a
partnership firm and in the assessment of the firm a partner cannot be heard
to say that he has not received the commission as a partner of the firm but in
a different capacity.
7. It was further held by the Court that a contract of partnership
has no concern with the obligation of the partner to others in respect of
their shares of profit in the partnership and that Section 40 (b) will apply
even if the partner joined the firm as a nominee of a Hindu Undivided Family.
8. Explanation 2 under Sec.40 (b) which was introduced with effect
from 1.4.1985 excludes only interest paid by the firm to a partner who is a
partner in a representative capacity and who receives the same on behalf of or
for the benefit of any other person.
9. Earlier decision of this Court in the case of A.S.K.Rathnaswamy
Nadar Firm v. Commissioner of Income Tax (58 ITR 312) which was noticed in
the later case in Commissioner of Income Tax v. Surendra Manilal Mehta (154
ITR 264) is in accordance with the law declared by the Supreme Court in the
case of Rashik lal and Co. v. Commissioner of Income Tax (229 ITR 458). The
law laid down in the case reported in 154 ITR 164 being inconsistent with the
decision of the Supreme Court in the case of Rashik Lal, must be held to have
been impliedly overruled.
10. On principle as well it is not possible to accept the argument
that the statutory prohibition is to be ignored or diluted by regarding a
partner to whom remuneration is paid as a person who besides being a partner
is something more or something different when he deals with the firm. A
partner in a firm is very much a partner and it is that status which defines
his rights and also imposes on him the obligation to render all the services
that he is capable of for the advancement of the objects of the firm. Such a
person cannot seek to avoid the effect of the prohibition made in the statute
by describing himself as an expert. any expertise that he may possess is
required to be made available to the firm as a partner and even if
remuneration therefor is permissible in terms of the partnership deed,
nevertheless, having regard to the statutory provision which prevailed until
the law was amended in 1992, payment so made cannot be regarded as being items
of expenditure so far as the firm is concerned. The question is answered in
favour of the Revenue and against the assessee.
To
1.The Assistant Registrar,
Income Tax Appellate Tribunal,
Rajaji Bhavan,
III Floor, Besant Nagar,
Madras-90. (with records) (5 copies)
2.The Secretary,
Central Board of Revenue,
New Delhi. (3 copies)
3.The Commissioner of Income Tax,
Tamil nadu-III, madras.
4.The Commissioner of Income-tax,
(Appeals)-VI, Madras.
5.The Income-tax Officer,
City Circle-VII (9), Madras.
Dev/