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Judgment
V.S. Sirpurkar, J.—Two questions have been referred by the Income Tax Appellate Tribunal, Madras. They are: �1. Whether on the
facts and in the circumstances of the case the disallowance of salary payments amounting to Rs.1,92,000/- to the partners of the assessee-firm by
invoking section 40(b) of the Income Tax Act, 1961 is right in law?
Whether on the facts and in the cirumstances of the case the disallowance of interest payments amounting to Rs.8,412/- to the partners of the
assessee-firm in their individual capacity by the assesseepartnership by invoking section 40(b) of the Act is justified in law?
At the beginning of his arguments, the learned senior counsel appearing for the assessee categorically stated that he was not arguing the second
question. We are, therefore, only concerned with the first question here which relates to the salary payments made to the partners of the assessee
firm.
One M/s. RM. Appavu Chettiar Sons, Madurai, which is a partnership firm, is the assessee. In the relevant assessment year 1983-84, the
assessee�s accounts showed that salary payments were made to the tune of Rs.1,92,000/- to the partners of the assessee firm in their individual
capacity by the assessee partnership firm. The assessee had claimed this amount as the allowable expenditure relying on Explanation (2) to Sec.
40(b) of the Income Tax Act, 1961 (hereinafter referred to as �the Act�). That was disallowed by the Income Tax Officer. In the appeal
before the Commissioner (Appeals) also the said disallowance was upheld. The Commissioner (Appeals) followed the decision of the Madras
High Court in the case of Dwarkadas Rameshwar Goenka Vs. Commissioner of Income Tax, Madras, . Therefore, an appeal came to be
preferred before the Income Tax Appellate Tribunal. The Tribunal followed their earlier order which they had passed relating to the assessment
year 1982-83 as regards the same assessee and held that it was bound by the decision in Dwarakadas Rameshwar Goenka�s case, cited supra
and the contrary decision of the Andhra Pradesh High Court in N.T.R. Estate Vs. Commissioner of Income Tax, was not binding. The Tribunal
also chose to follow the later decision of the Madras High Court in Venkatesh Emporium Vs. Commissioner of Income Tax, Tamil Nadu, as also
the decision in A.S.K. Rathnaswamy Nadar Firm Vs. Commissioner of Income Tax, Madras, . The Tribunal held that the earlier order passed by
itself was based on the direct authorities of the two decisions of the Madras High Court, which were binding on the Tribunal, and, therefore, the
Tribunal upheld the disallowance of salary payments to the tune of Rs.1,92,000/- as also the interest payment of Rs.8,412/-. Ultimately, the two
questions came to be referred, which we have quoted above, out of which, we would be concerned only with the question regarding the salary
payment.
The learned senior counsel appearing for the assessee very painstakingly chartered the history of Sec. 40(b) of the Act as it stood then and
more particularly invited our attention to the language of the relevant provision which is as under:
40.Amounts not deductible.- Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in
computing the income chargeable under the head �Profits and gains of business or profession�.- ...
(b) in the case of any firm, any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm;
Explanation 1.- Where interest is paid by a firm to any partner of the firm who has also paid interest to the firm, the amount of interest to be
disallowed under this clause shall be limited to the amount by which the payment of interest by the firm to the partner exceeds the payment of
interest by the partner to the firm.
Explanation 2.- Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being
hereinafter referred to as �partner in a representative capacity� and �person so represented� respectively),-
(i) interest paid by the firm to such individual or by such individual to the firm otherwise than as partner in a representative capacity, shall not be
taken into account for the purposes of this clause;
(ii) interest paid by the firm to such individual or by such individual to the firm as partner in a representative capacity and interest paid by the firm to
the person so represented or by the person so represented to the firm, shall be taken into account for the purposes of this clause.
Explanation 3. - Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such
individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit of any other
person.
The learned counsel drew our attention to the decision of the Apex Court in Brij Mohan Das Laxman Das Vs. Commissioner of Income Tax,
Allahabad, and pointed out that though the above amendment had become effective from 1-4-1985. The Apex Court had specifically held that
even for the period anterior to 1st April, 1985, any interest paid to a partner representing his Hindu Undivided Family, on deposit of his personal/
individual funds, does not fall within the mischief of clause (b) of Sec. 40. The learned counsel further pointed out that the Apex Court had upheld
the view taken by the Rajasthan High Court in GAJANAND POONAM CHAND AND BROTHERS Vs. COMMISSIONER OF Income
Tax., that the explanation in the context of Sec 40(b) is declaratory in nature (and hence operative retrospectively). It is also pointed out by the
learned counsel that this decision was later on followed and upheld by the Apex Court in M/s. Suwalal Anadilal Jain Vs. Commissioner of Income
Tax, Bihar-II, Ranchi, . Therefore, according to the learned counsel, the position of law which emerges is that the payment of interest to a partner
representing a Hindu Undivided Family is not hit by clause (b) of Sec. 40 and does not become disallowable expenditure under that section and
secondly, that the said provision is retrospective in nature being declaratory. The learned counsel also explains that though in the subsequent
decision in Rashiklal and Co. Vs. Commissioner of Income Tax, Orissa, the Supreme Court expressed that the amendment was not retrospective,
it was immediately decl ared by the Apex Court in the subsequent decision in Commissioner of Income Tax, Bombay Vs. M/s. Kanji Shivji and
Co., that those observations in Rashiklal case, cited supra, regarding the amendment not being retrospective were obiter and, therefore, the legal
position that emerges is that the aforementioned provision under Explanation 2 to (clause (b) of Sec. 40 is also retrospective. From all this, the
learned senior counsel urges that what is obtained in case of �interest payment� has also to be applied in respect of the �salary
payments� to the partners. In this case, according to the learned senior counsel, the amounts pertained to the year 1983-84 and if the interest
payment was not made disallowable then, same logic must apply to the salary payments.
The learned senior counsel then took us to the section as it stands and pointed out that even the salary paid to a partner has been held not to be
hit by Sec. 40(b). For this proposition, the learned counsel relies on two decisions of the Andhra Pradesh High Court, they being N.T.R. Estate
case, cited supra and A. Ramakrishnaiah, B. Narayana and Co. Vs. Commissioner of Income Tax, . The learned counsel urges that even without
relying upon the present form of the section, the Andhra Pradesh High Court has held categorically in these two decisions that what applies to the
interest payable to the partners also applies to the salary payable to the partners where such a partner is a partner on behalf of a Hindu Undivided
Family.
In the case of N.T.R. Estate case, cited supra, the Division Bench was concerned with the explanations to Sec. 40(b) and was considering the
question of disallowance of interest as well as the salary paid to the partners. After discussing the caseload, the Division Bench came to the
conclusion that the effect of the explanations was:
(a) if a person is a partner in a firm in a representative capacity and if such partner lends to the partnership Moines belonging to him individually,
then the interest paid to such partner on the monies lent by him is not liable to be added back u/s 40(b) of the Act; and
(b) similarly, if a person is a partner in his individual capacity and if such partner lends to the partnership monies belonging to the Hindu joint family
of which he is the �karta�, then the interest paid on the monies lent by the joint family is not liable to be added back u/s 40(b) of the Act.
Ultimately, a finding was recorded that the interest paid by the assessee firm to its partners on the monies lent by them in their individual capacity is
not liable to be disallowed under Sec. 40(b) inasmuch as the partners were acting in a representative capacity so far as the partnership interest is
concerned. It is then the following observations appeared in the judgment:
In our opinion, the same principles as are mentioned above in connection with the payment of interest by a partnership firm to its partners are also
applicable in regard to the payment of salary to a partner. In order to determine whether the salary paid to a partner should be allowed as a
deduction in computing the income of the partnership firm, it is necessary to examine who is the real recipient of the salary paid to the partner.
Thereafter referring to the judgment of the Madras High Court in T.M.N.M. SOMASUNDARA NADAR SONS Vs. COMMISSIONER OF
Income Tax, TAMIL NADU-IV., , the Division Bench observed:
The principle enunciated by the Madras High Court is that the allowance or otherwise of interest shall have to be determined with reference to the
real recipient of the interest and not merely with reference to the person formally receiving the interest. We are in entire agreement with this view.
The principle of �real recipient� is as much applicable to salary as it is to interest. In some cases, salary may be paid to a partner under the
agreed terms and conditions between the partners for services rendered by the partner individually in connection with the business carried on by
the partnership; in some cases, the payment of salary may have connection with the investment of capital by the Hindu joint family whom the
partner is representing in the partnership. In a case, where a paerson is a partner in his individual capacity and salary is paid to him for services
rendered by him individually in connection with the business carried on by the partnership, there can be little dispute that such salary paid to the
partner falls to be disallowed u/s 40(b) of the Act. If it is, however, found that the person concerned is not a partner in the partnership firm in his
individual capacity but is a partner in a representative capacity (representing for instance the joint family of which he is either the karta or a
member) and the payment of salary has no real and sufficient connection with the share held by the joint family through the partner concerned, then
the salary paid to the partner for his individual services cannot be disallowed in the computation of the income of the partnership firm. If, however,
the real recipient of the salary is the joint family, although it was paid ostensibly to the partner, then the salary paid falls to be disallowed u/s 40(b)
of the Act. If it is established that the salary or remuneration received by the karta of a joint family from a firm in which he is a partner in a
representative capacity was for services rendered by him individually and that there was no real and sufficient connection between the investment
of the joint family assets in the firm and the salary or remuneration received by the karta could not be treated as income of the family. It has to be
treated as his individual income and assessed as such. ... In the present case, it is admitted that salary was paid to two of the partners of the
assessee-firm for services rendered by them individually, although they were partners in a representative capacity as kartas of their respective joint
families. It is further admitted that the salary paid to the two partners was assessed in their individual hands, obviously accepting that there was no
real and sufficient connection between the partnership interest held by the joint family through the karta and the salary or remuneration paid to the
partner. In such circumstances, the same principles as are applicable in the matter of disallowance of interest which we have set out above are
applicable in the matter of disallowance of salary or remuneration paid to a partner. ...�(emphasis supplied)
The learned counsel also brought to our notice the subsequent decision of the Andhra Pradesh High Court in Ramakrishnaiah B. Narayana and
Co., cited supra. This is also a decision by the Division Bench whereby the aforementioned decision in N.T.R. Estate case was referred. However,
the argument therein was that the decision in N.T.R. Case require reconsideration in view of the Supreme Court decision in Commissioner of
Income Tax, Madras Vs. R.M. Chidambaram Pillai and Others, . In that case, the Apex Court had held that salary paid to a partner is nothing but
a share of profit and the explanation added to Sec. 40(b) recognising the representative capacity of a partner referred only to the payment of
interest and that could not be applied to the payment of salary. The Division Bench then went on to note that after the decision of the Supreme
Court in Commissioner of Income Tax, Madras Vs. Bagyalakshmi and Co., Udamalpet, , where the Apex Court had held that a Hindu Undivided
Family cannot be a partner in a firm and it is only the individuals who can form a partnership and that representative capacity of the individuals
forming the partnership would be no relevance to the other partners, certain hardships had arisen in cases where an individual was a partner of the
firm and the joint family advanced money to the firm and such interest paid to the joint family was being added back to the profit of the firm. The
Division Bench, however, observed that recognising this hardship the section was amended and the explanations to Sec. 40(b) recognising the
representative capacity of a partner in case of payment of interest was acknowledged. The Division Bench observed that there could not be partial
recognition of such representative capacity and once it was recognised that the real partner was the joint family, it would follow that payment of
salary could be regarded as a share of the profit only if the salary was paid to the joint family itself and assessed in its hands in the status of a joint
family. The Division Bench also relied upon the provisions of the Hindu Gains of Learning Act, Act 30 of 1930 and observed:
Once the joint family is recognised as a the real partner of the firm, the law has departed from the original position of recognising only the individual
as a partner and, consequently it must also be recognised that the salary paid to the individual not being part of the income of the firm, cannot be
taken as part of the share of profit of a partner. In the circumstances, when section 40(b) refers to the salary paid to a partner, it cannot take into
account the salary paid to the individual as a representative of the joint family as he is not a partner in his individual capacity.
The Division Bench, thus, confirmed the law laid down by the Andhra Pradesh High Court in N.T.R. Estate case, cited supra.
Both these decisions, however, came much prior to the decisions of the Supreme Court in Brij Mohan case and Suwalal case, cited supra, and
for that matter even Rashiklal case, cited supra. As such, the Andhra Pradesh High Court did not have the advantage of the aforementioned
decisions of the Supreme Court.
The learned Departmental Counsel very heavily relied on Rashiklal�s case, cited supra, and pointed out that in Rashiklal case, the Supreme
Court has explained and reiterated the position of a Hindu Undivided Family is-a-is a partnership firm and has in very certain terms held that a
Hindu Undivided Family directly or indirectly cannot become a partner of a partnership firm because the firm is an association of individuals alone.
The learned Judges of the Apex Court also clarified that all the provisions relating to the mutual rights and liabilities are only applicable to the
individual partners who are members of the firm and there was no way that a Hindu Undivided Family could intrude into the relationship created by
a contract between certain individuals. The only right of the Hindu Undivided Family was possible to call upon its nominee partner to render
accounts for profits that he had made from the partnership business but that would be something between the nominee and Hindu Undivided
Family and the partnership firm would not be concerned with what goes on between the nominee and the Hindu Undivided Family. The learned
Judges also referred to Sec. 13 of the Partnership Act, 1932 and observed that under that provision a partner was not entitled to receive any
remuneration for taking part in the conduct of the business and every partner was bound to attend diligently to the business and for doing his duties,
he cannot charge his CO-partners any sum or remuneration, whether in the shape of salary, commission or otherwise, on account of the trouble
taken by him in conducting the partnership business. The learned Judges, however, observed that there could be a special contract to the contrary
in which case, the provisions of that contract would prevail. The learned Judges, therefore, came to the conclusion that Sec. 40(b) of the Act
would apply even where there is such a special contract and any commission paid by a firm to its partners will not be permitted as deduction as
business income of the firm. If a claim was made by a nominee representing a Hindu Undivided Firm or any body of persons then the position of
law would not be differ ent. The learned Judges again reiterated:
The Hindu undivided family is not and cannot be a partner in a partnership firm. The remuneration or the commission that is paid to the partner
cannot be claimed to be a remuneration or commission paid to the Hindu undivided family. The partner may be accountable to the family for the
monies received by him from the partnership. But, in the assessment of the firm, the partner cannot be heard to say that he has not received the
commission as a partner of the firm, but in a different capacity. ... A partner does not act in a representative capacity in the partnership. He
functions in his personal capacity like any other partner. The provisions of the Partnership Act and the Income Tax Act relating to partners and
partnership firms will apply in full force in respect of such a partner. If any remuneration is paid or a commission is given to a partner by a
partnership firm, section 40(b) will apply even if the partner has joined the firm as a nominee of a Hindu undivided family. The Hindu undivided
family or its representative, does not have any special status in the Partnership Act. ... The assessment of a firm will have to be made strictly in
accordance with the provisions of the Income Tax Act. The law has to be taken as it is, Section V40(b) applies to certain payments made by a
firm to its partners. Neither the firm nor its partners can evade the tax law on the pretext that although in law he is a partner, in reality he is not so.
He may have to hand over the money to somebody else. That may be his position qua a third party. But the firm has nothing to do with it. It has
paid the commission to one of its partners. It cannot get any deduction in its assessment for that payment, because section 40(b) of the Act
expressly prohibits such deduction.
This was a case where the Supreme Court was considering the question of commission paid to a partner Rashiklal which payment was claimed as
a deduction. The Supreme Court relied on the decision in Dulichand Lakshminarayan Vs. The Commissioner of Income Tax, Nagpur, to hold that
a firm was not a � person� and as such it was not entitled to enter into a partnership with another person or an individual. After referring to the
definitions of �Partnership firm�, �Partner� and �Firm name� and after quoting the excerpts of the judgment in Dulichand case, cited
supra, the Supreme Court observed:
that the Hindu undivided family cannot be in a better position than a firm in the scheme of the Partnership Act. The reasons that led this court to
hold that a firm cannot join a partnership with another � individual� will apply with equal force to a Hindu undivided family. In law, a Hindu
undivided family can never be a partner of a partnership firm. In law, a Hindu undivided family can never be a partner of a partnership firm. Even if
a person nominated by the Hindu undivided family joins a partnership, the partnership will be between the nominated person and the other partners
of the firm.
The Court then took the stock of the judgements in Brij Mohan case and Suwalal case, cited supra, as those cases were referred to suggest therein
that interest paid to a partner in his representative capacity was outside the purview of Sec. 40(b) of the Act because of the explanation. The Court
specifically pointed out on this as follows:
However, in the case before us, no question of payment of any interest is involved. A commission was paid by the firm for the services rendered
by the partner. Such commission cannot be paid because of the provisions of section 13 of the Partnership Act in the absence of a special
contract. Even if a special contract exists, section 40(b) of the Income Tax Act prohibits allowance of such commission as deduction from the
business income of the firm.
Thus, in so far as the argument of representative capacity was concerned, the Supreme Court restricted that representative capacity only to the
interest as per the express language of the explanation to Sec. 40(b). At more than one places, the Apex Court has specified that the position of
payment of interest may be different because of the explanation but that cannot apply to a commission or remuneration paid by the firm to the
partners. Thus, it is obvious that in Rashiklal case, cited supra, the Supreme Court rejected the claim for the deduction of the commission paid to
the partner on two counts, viz.:
(i) That the said payment could not be deducted merely because the partner represented a joint Hindu family and the payment would have to be
viewed as payment to the partner himself;
(ii) The explanation covered only interest and that the commission or the remuneration could not be read on par with interest which could not be
disallowed by reason of explanation (2).
The learned senior counsel tried to get out of this position by suggesting that the observations in Rashiklal case, cited supra, were treated to be
obiter in a subsequent decision in Kanji Shivji and Co. Case, cited supra. We must point out that what was held to be obiter was not the whole
law laid down in Rashiklal case, cited supra, but only the aspect of retrospectively of the explanation (2) to Sec. 40(b). The Court clearly observed
as:
The observations in Rashiklal case relating to the said explanation must therefore be treated as obiter dicta.
The Court also reiterated that the law laid down in Brij Mohan case and Suwalal case, cited supra, continue to be the correct law. The only
concerned issue was relating to the prospectively or retrospectively of explanation (2) to Sec. 40(b) and only the view regarding the retrospectively
alone which was contrary to the earlier decided case which were held to be obiter. Therefore, the observation in Rashiklal case, cited supra,
regarding remuneration or commission paid to a partner by a firm being covered by Sec. 40(b) was never doubted nor were held to be obiter in
the subsequent Supreme Court decision of Kanji Shivji case, cited supra. Thus the law appears to be clear that where there was a payment made
in the nature of salary, it could not be covered by Explanation 2 to Sec. 40(b). This precise view was followed by the Gujarat High Court in
National Wire Manufacturing Co. v. CIT.
The Gujarat High Court, in National Wire Manufacturing Company case, after taking the stock of the Supreme Court decisions in Brij Mohan
case and Suwalal case, cited supra noted the established law regarding the interest paid to the partner by the firm to be covered under Sec. 40(b)
and, therefore, not deductible. The Gujarat High Court also referred to its earlier judgment in Commissioner of Income Tax Vs. Yoganand
Textiles, wherein Sec. 40(b) was interpreted to mean that any payment to the nature described made by the firm to any of the partners of the firm
would not be deductible. The Gujarat High Court also took note of the stress given in the aforementioned judgment on the word �any� and
concurred that the word being of wide import has to be given its full meaning in the context of the provision. The Bench also agreed and confirmed
the view that there is no indication whatsoever to differentiate between the nature of remuneration or between the purpose for which remuneration
was given to any partner and held that the provision imposed an absolute embargo against the deduction in respect of any of the payments made
by the firm of the nature enumerated to any of the partner of the firm in the earlier judgment. Regarding Explanation 2 it was held that it was added
to clarify that interest paid by the firm to an individual who is a partner in a firm in a representative capacity shall not be taken into account for the
purpose of the said clause. The Division Bench also endorsed the view that there was nothing in the said provision to indicate that any category of
salary, remuneration, etc. though paid by a firm to a person who is a partner were to fall outside the scope of Sec. 40(b). The Bench also took
stock of the dictionary meaning of the words �salary�, � commission� and �remuneration� and pointed out that the three terms carry
the same basic meaning, i.e. to compensate for services rendered. The High Court, therefore, posed a question as to what would be the difference
in between the payment of interest and the commission, remuneration, salary, etc. paid for the services rendered by the partner. The High Court
then reiterated the earlier view expressed by the Supreme Court in RM Chidambaram Pillai case, cited supra, and also then referred to Rashiklal
case, cited supra and noted the law laid down therein that if a firm cannot join with another on similar lines a Hindu undivided family also cannot
join the partnership with another individual and that the Hindu undivided family being a fluctuating body of individuals cannot join a partnership with
other individuals and if Karta of any other member of a Hindu undivided family joins a partnership firm he does it only as an individual and his rights
and obligations would be determined by the Partnership Act and not by the Hindu law. The judgment then quotes the passage from the Rashiklal
case, cited supra, and notes the law laid down therein that the remuneration or commission that is paid to the partner cannot be claimed to be a
remuneration or commission paid to the Hindu Undivided Family. The Bench then holds:
Insofar as the interest is concerned the same would stand on a different footing in view of the fact that it is possible to trace the source of the funds.
Therefore, the aspect of a partner having dual capacity, i.e. one as a partner in a partnership firm and the other qua the interest of the person who
is represented by such partner is recognised because the question that could be posed and answered : interest is paid on which funds and who has
invested those funds?
The Court then referred to its Full Bench decision Chhotalal and Co. Vs. Commissioner of Income Tax, Gujarat, and also noted the observations
made by P.S. Poti, C.J. Wherein the salary payment was treated on a different footing than the other payments. Though even there, the question of
the finality of the law as decided by Rashiklal case, cited supra, was questioned, the Gujarat High Court answered the question that the
observations in that case were held to be obiter in Kanji Shivji case, cites supra, on an entirely different issue which was stated specifically in Kanji
Shivji case and which pertained only to the question of retrospectivity. It noted that the Apex Court itself was aware that the payment of salary,
commission or remuneration should stand on the different footing. Ultimately, the Court came to the conclusion that there was no conflict between
the position relating to payment of interest on the one hand and positions dealing with the payment of salary, commission, remuneration on the other
hand. In short, the Gujarat High Court completely accepted the stand that the payment of salary could not be equated with the payment of
commission.
We see no reason to take a different view. In fact, if Explanation 2 to Sec. 40(b) spoke only of the interest paid to the partners by the firm
providing an escape route for such payments from the rigour of Sec. 40(b) an interpretation cannot be handed out enlarging the scope and reading
into the explanation additional words like �salary�, �commission�, �remuneration�, etc. At least when the explanation was
introduced, the legislative intent was only to provide for such an escape to the interest paid and it clearly excluded from the explanation, the salary,
commission, remuneration, etc. paid by the firm to the partners. Therefore, the word �interest� cannot be interpreted to mean any other
payments like salary, remuneration, commission, etc. which, though are to be found to be in the main provision of Sec. 40(b), are not to be found
in Explanation 2. As held in Rashiklal case, cited supra, the assessment of a firm has to be made strictly in accordance with the provisions of the
income tax Act. The law has to be taken as it is. In that case, the Apex Court refused to equate the � interest� with the �commission�
paid by the firm for the services rendered by the partners on the ground that under Sec. 13 of the Partnership Act, in the absence of a special
contract, commission would not have been payable and that even such a special contract existed, Sec. 40(b) prohibited treating of such
commission as deduction from the business income of the firm.
Further, the argument that since Rashiklal had joined the firm not as an individual but in a representative capacity and, therefore, the amounts
paid to him could not be covered under Sec. 40(b) was repelled by holding that the partnership firm was a compendious way to describe the
individuals who are partners of the firm and other partners of the firm could have the contractual relationship with Rashiklal only and if Sec. 40(b)
categorically disallowed any deduction of payment of commission to a partner, there would be no question of allowing such payment to be
deducted. The Court observed:
Therefore, there is no scope for any argument that even though under the Indian Partnership Act, a Hindu Undivided Family not being a �
person� cannot be a partner, the payment of commission to the nominee partner will be tantamount to payment to HUF and, therefore, such
payment will not come within the mischief of the Partnership Act or Sec. 40(b) of the income tax Act.
The Apex Court has considered the whole gamut of a partner�s liability vis-a-vis the other partners as also his position vis-a-vis the Hindu
undivided family which he represents. The Apex Court then very specifically held:
If any remuneration is paid or a commission is given to a partner by a partnership firm, Sec. 40(b) will apply even if the partner has joined the firm
as a nominee of the Hindu undivided family. The Hindu undivided family or its representative does not have any special status in the Partnership
Act. Although the partnership firm is not a legal entity, it has been treated as an independent unit of assessment under the Income Tax Act. The
assessment of a firm will have to be made strictly in accordance with the provisions of the Income Tax Act. The law has to be taken as it is.
All this will go to show that there is no scope for salary paid to a partner by the firm being excluded from the operation of Sec. 40(b) of the
Income Tax Act.
The learned counsel lastly argued, almost by way of a desperate argument, that the amendment made by Finance Act 1992 with effect from 1-
4-1993, provides the remuneration paid to the partner, if the terms of the partnership deed provides for the same, is outside the purview of Sec.
40(b). The relevant provisions are as under:
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) not relevant
(b) in the case of any firm assessable as such,-
(i) not relevant
(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 in accordance
with, the terms of the partnership deed; or
(iii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case,is authorised by, and
is in accordance with, the terms of the partnership deed, but which relates to any period ( falling prior to the date of such partnership deed) for
which such payment was not authorised by, or is not in accordance with, any earlier partnership deed, so, however, that the period of authorisation
for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed; or
(iv) not relevant
(v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the
partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners
during the previous exceeds the aggregate amount computed as hereunder:
... ... ...
From this the learned counsel says that the legislature though had directed the disallowance of such remuneration in the unamended provision of
Sec. 40(b), such remuneration will not now be hit by Sec. 40(b) so as to be disallowed under that section. The argument is such remuneration or
salary paid to the working partner has been brought on par with the interest paid by the firm to the partner for which an escape route was provided
vide Explanation 2. The argument goes further to say that therefore, even in respect of the earlier period, we must interpret Explanation 2 so as to
include the salary or as the case may be the remuneration paid to the partner along with the interest paid by the firm to the partner. The argument is
clearly misconceived.
The learned counsel very fairly and candidly submitted that it was not his case that the amendment made in 1992 which had the effect of
allowing the salary paid to the working partner in terms of the partnership deed being a allowable expenditure was retrospective in nature. The only
argument is that since the legislature has now treated such salary on par with and identically as the interest paid by the firm to the partner, we
should hold that the remuneration or salary in this case for the assessment year 1982-83 is not hit by Sec. 40(b).
The argument is totally incorrect. In the first place, the interpretation of Explanation 2 with effect from 1-4-1985 was held to be retrospective
on the ground that such explanation was of declaratory nature. In Brij Mohan case and Suwalal case, cited supra and though it�s retropestive
nature was doubted in Rashiklal case, cited supra, the Supreme Court, in Kanji Shivji case, cited supra, clarified the situation to the extent that the
observations in Rashiklal case, cited supra, were obiter. Here the learned counsel himself is conceding that it is not his case that the present
amendment made in the year 1992 are of retrospective nature. Therefore, there will be no question of making applicable these amendments to the
case in hand which pertains to the assessment year 1982-83. Once that situation is obtained, there would be no scope to hold that the the
legislature intended to include even the remuneration and the salary on par with the interest paid to the partner by the firm so as to be out of the
mischief of Sec. 40(b). The law has to be read as it is and merely because subsequently the law underwent change in respect of the remuneration
to the partner, it cannot be treated that the legislature always had the intention to take out the remuneration of the mischief of Sec. 40(b). In fact,
Rashiklal case, cited supra, is a complete answer that the commission also was completely covered by Sec. 40(b) as it stood then. We do not see
any merit in this contention and reject the same.
We, accordingly, answer the reference against the assessee and in favour of the Department holding that the concerned authorities were right in
treating the payment of salary to the partners by the firm as hit by Sec. 40(b) of the Act and disallowing those business expenditure.
In T.C. No.165 of 1989, the question regarding the assessment year 1982-83 is identical in nature except for the difference in the amount
claimed on account of payment of salary. Needless to say that this case will be governed in the same manner as has been done in this judgment.
We, accordingly, answer this reference also against the assessee and in favour of the Department.