R.J. Trivedi and Sons vs Commissioner of Income Tax

N.D. Ojha, C.J.—This order shall also govern the disposal of Misc. Civil Case No. 633 of 1985 between the same parties. The Tribunal, Jabalpur Bench, has referred the following question to this Court for its opinion u/s 256(1) of the income tax Act, 1961 (''the Act''):

Whether, on the facts and in the circumstances of the case, the salary paid by the assessee-firm to Shri R.J. Trivedi as coal mines agent, had to be disallowed u/s 40(b) of the income tax Act, 1961?

The assessee, R.J. Trivedi and Sons is a registered partnership firm carrying on the business as a contractor in collieries. There is another firm named J.A. Trivedi Bros., owners of West Barkuni collieries and Ghorawari Hirdagarh collieries. This firm shall, hereinafter, be referred to as the owners of the collieries.

An agreement was executed between the owners of the collieries and the assessee on which reliance has been placed by the Commissioner as also by the Tribunal. The assessee paid certain amounts as salary to Shri R.J. Trivedi who is one of the partners of the assessee-firm. According to the assessee, this sum was paid to Shri R.J. Trivedi not in his capacity as a partner of the assessee-firm, but in his capacity as an agent of the owners of the collieries. The finding which was recorded by the Commissioner in the instant case on an interpretation of the agreement referred to above is that it is the assessee which is the agent of the owners of the collieries and not Shri R.J. Trivedi who was a partner of the assessee-firm. It has been held by the Tribunal that the salary paid to one of its partners by the assessee-firm, came within the purview of section 40(b) of the Act. On this finding, the amount of the salary was disallowed. At the instance of the assessee, however, the Tribunal referred the aforesaid question to this Court for its opinion.

Misc. Civil Case No. 633 of 1985 is an application made by the assessee u/s 256(2) with a prayer that the Tribunal may be required to submit an additional statement of the case making Annexures C and H to this application as part of the statement already submitted u/s 256(1). Annexure G to the application u/s 256(2) giving rise to Misc. Civil Case No. 633 of 1985, is a copy of the letter dated 22-3-1963, by the Regional Inspector of Mines, Parasia Inspection Region, to Shri R.J. Trivedi whose designation has been stated in this letter as agent, West Barkuni Colliery owned by J.A. Trivedi Civil Lines Chindwara, Annexure H, on the other hand, is a copy of the annual return for the year ending on 31-12-1964 of J.A. Trivedi Brothers. In Col. No. 8 of this return, R.J. Trivedi is shown as the agent as defined in section 3(c) of the Mines Act, 1952. It has been urged by the learned counsel appearing for the department that the question which has been referred to this Court in view of the finding of fact recorded by the Commissioner and accepted by the Tribunal that Shri R.J. Trivedi was not the agent of the owners of the collieries, but that the assessee was the agent, deserve to be answered in favour of the department and against the assessee on the plain language of section 40(b).

For the assessee, on the other hand, it has been urged by its learned counsel that even though the Tribunal has recorded a finding that since the salary was paid to R. J. Trivedi who was a partner of the assessee-firm, it deserved to be disallowed u/s 40(b), it has not gone into the question as to in what capacity was the salary paid to Shri R.J. Trivedi. According to the learned counsel for the assessee, a partner can have another capacity also apart from being a partner. If salary is paid to a partner in his capacity as a partner, section 40(b) may be attracted, but if salary was paid to a partner in some different capacity, section 40(b) would not be attracted. In support of this submission, reliance has been placed on a decision of a Division Bench of this Court in Balchand Hashmatrai and Co. Vs. Commissioner of Income Tax, where while dealing with the question of payment of interest to a partner, it was held that disallowance of interest paid by the firm to a partner in his capacity as a partner and that no disallowance can be made if it is paid by the firm to the partner in a capacity other than the capacity of a partner.

In this connection, it has been pointed out by the learned counsel for the assessee that the case of the assessee was that R. J. Trivedi had been an agent of the owners of the collieries u/s 2(c) of the Mines Act even from before the constitution of the assessee-firm in the year 1970 and it was clear from the documents, copies whereof have been filed as Annexures G and H to Misc. Civil Case No. 633 of 1985. In this connection, the learned counsel for the assessee has also referred to the agreement reliance on which was placed by the Commissioner and the Tribunal and it has been urged on the basis of paragraph 14 thereof that the facts stated in the said paragraph supported the contention of the assessee that R.J. Trivedi was an agent of the owners of the collieries at the time when the said agreement was executed and that it was for this reason that in paragraph 14, it was stipulated that the assessee-firm would conduct its business in the supervision of the agent of the owners of the collieries u/s 2(c). According to the learned counsel for the assessee, the mere fact that R.J. Trivedi was a partner of the assessee-firm, was per se, not sufficient to attract section 40(b). It was incumbent on the Tribunal to record a further finding as to whether salary which was paid to R.J. Trivedi, a partner of the assessee-firm, had been paid to him in his capacity as a partner or in his capacity as an agent of the owners of the collieries.

At this place, we may point out that when these cases were taken up, it was submitted by the learned counsel for the assessee that Misc. Civil Case No. 633 of 1985 may be disposed of before taking up Misc. Civil Case No. 124 of 1985 and the question referred to by the Tribunal may be answered only after the documents (Annexures G and H) referred to above, had been submitted by the Tribunal along with the supplementary statement of the case. In reply, the learned counsel for the department stated that for the purpose of these cases, these two documents may be taken into consideration and it is in this view of the matter that we have considered those documents also.

Having heard the learned counsel for the parties, we are of the opinion that in view of the decision of this Court in the case of Balchand Hashmatrai & Co. (supra) which has been approved of by a subsequent Full Bench decision of this Court in the case of CIT v. Narbharam Mopatbhai & Sons [1987] NPLJ 618, it is necessary to call for a supplementary statement of the case from the Tribunal on the point as to whether the salary which was paid to R.J. Trivedi, a partner of the assessee-firm, was paid to him in his capacity as a partner or in his capacity as an agent of the owners of the mines. We accordingly direct the Tribunal to draw up a supplementary statement of the case in the light of the observations made above and submit the same to this Court within three months. Misc. Civil Case No. 633 of 1985 stands disposed of by this order. Misc. Civil Case No. 124 of 1985 may be listed for hearing after the supplementary statement of the case has been received.