ORDER
K.C. Singhal, J.M.
1. A short but interesting question has arisen in this appeal. The controversy
relates to the question whether the remuneration paid to the partner representing his HUF can be allowed as deduction under Section 40(b) as amended by Finance Act, 1992 effective from asst. yr. 1993-94.
2. The assessee is a partnership firm comprising of three partners, namely, Shri Sudershan Kumar Sethi son of Shri Sunder Dass Sethi, Smt. Kanchan Sethi wife of Shri Pawan Kumar Sethi and Shri Pawan Kumar Sethi representing Pawan Kumar Sethi, HUF. This deed was executed on 1st day of April, 1992. According to Clause (8) of the partnership deed, the parties, of second and third part were working partners and they were entitled to remuneration at rate as may be agreed upon between the partners from time to time. In view of this clause, these two partners were paid remuneration and the same was claimed as deduction. According to the AO, payment of remuneration is allowed only to a working partner which has been defined in Expln. 4 to Section 40(b), according to which, working partner means an individual, who is actively engaged in conducting the affairs of business or profession of the firm of which he is a partner. On the basis of this provision, AO was of the view that HUF could not be considered as working partner. Accordingly, he disallowed the remuneration of Rs. 56,000 paid to Pawan Kumar Sethi representing Pawan Kumar Sethi, HUF. The CIT(A) was also of the view that Pawan Kumar Sethi was not a partner in his individual capacity and it was the HUF, which was a partner and, therefore, could not be considered as a working partner within the meaning of the Expln. 4 to Section 40(b). The order of AO was, therefore, confirmed. Aggrieved by the same, the assessee is in appeal before the Tribunal.
3. The contention of the learned counsel for the assessee is that in the eye of law, only individual person can become a partner, who may represent either himself or HUF or trust or an AOP or a firm etc. Proceeding further, it was submitted that if a person as an individual represents any other person or legal entity then such person or legal entity does not become the partner. Therefore, it is the individual who enters into the partnership agreement, whether on his own behalf or on behalf of the HUF, is the partner and if such partner engages actively in the affairs of business then such partner has to be considered as a working partner. According to him, both the lower authorities proceeded on the wrong assumption that it was the HUF, which was partner. On the other hand, the learned Departmental Representative has strongly supported the reasonings given by the AO as well as the CIT(A).
4. Rival submissions of the parties have been considered carefully. The question for consideration is as to who is the partner. In other words, whether HUF or the person representing the HUF is the partner in the eye of law. No relevant case law has been cited by either party to assist the Bench to resolve this controversy. At this stage, it would be useful to refer certain relevant provisions of the IT Act, 1961 (in short 1961 Act) as well as Indian Partnership Act, 1932 (in short 1932 Act). According to Section 2(23) of the 1961 Act, ‘firm’, ‘partner’ and ‘partnership’ have the meanings respectively assigned to them in the Indian Partnership Act, 1932; but the expression ‘partner’ shall also include any person, who, being a minor, has been admitted to the benefits of the partnership. According to Section 4 of 1932 Act, ‘partnership’ is the relation between persons, who have agreed to share the profits of a business carried on by all or
any of them acting for all. Persons, who have entered into partnership with one another are called individually ‘partners’ and collectively’a ‘firm’ and the name under which their business is carried on is called the ‘firm’s name’. The word ‘person’ has not been defined in 1932 Act. The General Clauses Act, 1887, however, by Section 3(42) provides that ‘person’ shall include any company or association or BOI, whether incorporated or not. So it is not clear as to whether HUF can enter into a contract or not. On careful study of case law on this issue, I find that this aspect of the issue has been dealt with by the Constitution Bench of the Hon’ble Supreme Court in the case of Kshetra Mohan Sanyasi Charan Sadhukhan v. CEPT (1953) 24 ITR 488 (SC) wherein their Lordships held as under :
“An HUF is included in the expression ‘person’ as defined in the Indian IT Act as well as in the EPT Act but it is not a juristic person for all purposes. When two Kartas of two HUFs enter into a partnership agreement the partnership is popularly described as one between the two HUF but in the eye of law it is partnership between the two Kartas and the other members of the families do not ipso facto become partners. There is, however, nothing to prevent the individual members of one HUF from entering into a partnership with the individual member of another HUF and in such a case it is a partnership between the individual members and it is wholly inappropriate to describe such a partnership as one between two HUFs.”
[Emphasis, italicised in print, supplied by us]
5. The perusal of the above observations clearly shows that HUF by itself can never be a partner and in the eye of law, it is only an individual member representing an HUF, who can become partner in a partnership firm. Accordingly, it is to be held that it is the individual who is the partner in the eye of law though such individual may represent his HUF. No doubt such individual is accountable to HUF and income from such firm would be assessable in the hands of HUF which is represented by such individual. But as far as partnership is concerned, it is only between individuals who enter into an agreement of partnership. This view is further fortified by another decision of the apex Court in the case of Dulichand Laxmi Narayan v. CIT (1956) 29 ITR 535 (SC) wherein it has been held that partnership firm itself cannot become partner. That impliedly means that it is only the individual who can become partner though he may represent the firm.
6. Now let me also examine the relevant provisions of Section 40(b) of 1961 Act, which are being reproduced as under :
“Section 40 : Notwithstanding anything to the -contrary in Sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head ‘Profits and gains of business or profession’,–
(A) ** ** **
(b) in the case of any firm assessable as such,–
(i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as ‘remuneration’) to any partner who is not a working partner; or
(ii) any payment of remuneration to any partner who is a working partner, or of
interest to any partner, which, in either case, is not authorised by, or is not in accordance with, the terms of the partnership deed; or
(iii) to (v)** ** **
Explanation 4 : For the purpose of this clause, ‘working partner’ means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner.”
7. It may be mentioned that these provisions were substituted by Finance Act, 1992 effective from asst. yr. 1993-94. Prior to the substitution, the remuneration paid to the partners was absolutely prohibited and disallowable irrespective of the status or capacity of the partner. However, from asst. yr. 1993-94, the remuneration to the partners is disallowable only in certain situations where :
(i) payment is made to non-working partners; and
(ii) where such remuneration is not authorised by the terms of the partnership deed.
8. There are certain other situations where remuneration to partners is disallowable under Sub-clauses (ii), (iv) and (v) of Clause (b) of Section 40 with which we are not concerned at this stage. The combined reading of Section 40(b) shows that remuneration to a partner can be allowed if he is a working partner and such remuneration is authorised by the terms of the partnership deed. The working partner, according to Expln. 4, means an individual, who is actively engaged in conducting the affairs of the partnership firm. As mentioned above in the earlier paragraphs, the Hon’ble Supreme Court has held that partnership is always between the persons who are individuals or a juristic person though such individual may represent some other entity and in such case, it is only the individual, who can said to be a partner of the partnership firm. It is not in dispute that Pawan Kumar Sethi had worked and was actively engaged in the affairs of the business of the partnership and, his remuneration was also authorised by the partnership deed. Accordingly, it is held (i) that it was Pawan Kumar Sethi as individual who was partner in firm; (ii) that he was working partner within the ambit of Expln. 4 to Section 40(b). Consequently, it is also held that the remuneration paid to Pawan Kumar Sethi was an allowable deduction under the amended provisions of Section 40(b). The order of the CIT(A) is, therefore, set aside and the disallowance sustained by him is, therefore, deleted.
9. In the result, appeal is allowed.