Industrial Linnings vs Commissioner of Income Tax

A.R. Dave, J.

At the instance of the applicant-assessee, the following question has been referred to this court under the provisions of section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as the "Act")

"Whether, on the facts and in the circumstances of the case the Tribunal was justified in law in holding that provisions of section 40(b) of the Act were applicable in relation to (a) salary amount to Rs. 42,000 paid to Shri N.R. Shah (b) consultancy fees of Rs. 12,000 paid to Shri V.R. Shah and (c) professional fees of Rs. 4,500 paid to Shri S.R. Shah in their individual capacities even though each of them was a partner in the assessee-firm in his capacity as karta of his Hindu undivided family (hereinafter referred to as the HUF") ?"

Learned advocate Shri B.D. Karia has appeared for the applicant-assessee whereas learned Senior Central Government Standing Counsel Shri M.R. Bhatt has appeared for the revenue.

The facts giving rise to the Reference in a nutshell are as under :

The assessee is a partnership firm. During the assessment year 1982-83, the assessee had paid a sum of Rs. 42,000 and Rs. 12,000 as salary and consultation fees to its partners Shri N.R. Shah and Shri S.R. Shah respectively. The Income Tax Officer disallowed the said expenditure under the provisions of section 40(b) of the Act.

Being aggrieved by the disallowance, an appeal was filed before the Commissioner (Appeals). The Commissioner (Appeals) was pleased to dismiss the appeal and confirm the order passed by the Income Tax Officer.

Thereupon, the assessee filed an appeal before the Tribunal but the Tribunal also upheld the view expressed by the Income Tax Officer as well by the Commissioner (Appeals).

In the circumstances, the question which has been referred to this court is whether the salary or the consultation fees paid to the partners by the assessee-firm can be disallowed under the provisions of section 40(b) of the Act. It is relevant to note that both the partners namely Shri N.R. Shah as well as Shri V.R. Shah were representing their respective H.U.F. and, therefore, in capacity as a karta of the respective H.U.F. they were partners of the assessee-firm. The question is whether in such a set of circumstances whether salary or consultation fees paid to the partners who are representing their H.U.F. can be disallowed under the provisions of section 40(b) of the Act. Our attention has been drawn by the learned advocates to the judgment delivered by this court in the case of National Wire Manufacturing Co. Vs. Commissioner of Income Tax, . In the said case, this court has opined that in the circumstances which have been referred to hereinabove, the salary or consultation fees paid to the partner has to be disallowed under the provisions of section 40(b) of the Act. It has been held by this court after considering the judgment delivered by the Supreme Court in the case of Rashiklal and Co. Vs. Commissioner of Income Tax, Orissa, that HUF cannot be a partner but only a karta representing the HUF can become a partner in a partnership firm. Looking to the said judgment delivered by the Supreme Court, this court has held in National Wire Mfg. Co.''s case (supra) that the salary or the consultation fees paid to the partner must be disallowed under the provisions of section 40(b) of the Act.

Looking to the law laid down by this court in the case of National Wire Mfg. Co. (supra), we are of the view that the Tribunal and other revenue authorities were justified in disallowing the amount of expenditure incurred by the assessee-firm in the nature of salary and consultation fees paid to its partners.

In the circumstances, we answer the question referred to us in the affirmative i.e. in favour of the revenue and against the assessee.

The Reference thus stands disposed of with no order as to costs.