Commissioner of Income Tax vs Central Scientific Instrument Corporation

We have heard learned Counsel for the petitioner.

the following question has been referred in the form of this reference:

Whether the Hon''ble I.T.A.T. is justified in law and on facts in holding that provisions of Section 40(b) could not be invoked in the case for payment of Rs. 24,000/- as commission made to S/Shri V.K. Varshney and P.K. Varshney partners of the assessee firm?

It appears that the case of the assessee was that there was a registered partnership frim in which there were eight partners. Sri V.K. Varshney was partner in his individul capacity while the rest of the 7 were partners in their HUF capacity. Sri V.K. Varshney and Sri. P.K. Varshney were kartas of their respective HUF.

Section 40(b) prohibits deduction of payments of commission to any partner who is not a working partner in computing income under the head profits and gains of business or profession.

In present case commission is said to have been paid to Sri. V.K. Varshney and Sri. P.K. Varshney.

In the case of Rashiklal and Co. Vs. Commissioner of Income Tax, Orissa, the Supreme Court has held that a HUF directly or indirectly can not become partner of a ''firm'' because ''firm'' is an association of individuals. Thus it has been held by the Supreme Court that it is individuals of HUF who indirectly become a partner in the firm in which the HUF is being said to be a partner.

In this view of the law, Sri V.K. Varshney and Sri P.K. Varshney would be held to be partners of the firm indirectly through their HUFs. It is not the case of the assessee that these are working partners and therefore the commission paid to them would not be deductable u/s 40(b).

The reference is answered accordingly.