2005 (2) TMI 85 - HC - Income Tax

Applicability of section 40(b) - Whether remuneration paid as business adviser to a partner of the firm is covered under the provisions of section 40(b) or not? - it is a case where the business adviser was rendering services to the respondent-firm and not to the company. Since he was a partner in the respondent-firm, the provisions of section 40(b) of the Act were clearly attracted. Payment has been made directly by the respondent-firm to one of its partners, namely, Sri Sardar Nanak Singh, for the advice rendered by him. - In this view of the matter, the Tribunal was not justified in holding that the provisions of section 40(b) of the Act are not attracted.

Summary

Issues:
1. Interpretation of section 40(b) of the Income-tax Act, 1961 regarding remuneration paid to a partner of a firm.

Analysis:
The High Court of ALLAHABAD was presented with a question of law under section 256(2) of the Income-tax Act, 1961, concerning whether remuneration paid as a business adviser to a partner of a firm falls under the provisions of section 40(b) or not. The case involved a registered partnership firm that had entered into an agreement to carry on a business involving the manufacturing and sale of liquors. The respondent-assessee claimed an amount of Rs. 24,000 as remuneration paid to a business adviser who was also a partner of the firm. The Assessing Officer disallowed this claim under section 40(b), which was upheld by the Commissioner of Income-tax (Appeals). However, the Tribunal ruled in favor of the respondent-assessee, stating that the remuneration was paid under an agreement with the company and not the firm, and thus, section 40(b) was not applicable.

Upon hearing arguments from the Revenue's counsel, the High Court analyzed the terms of the agreement and the nature of the relationship between the respondent-assessee, the partner, and the company. It was observed that the respondent-assessee had taken over the entire business of the company under the agreement, including the obligation to pay expenses such as director's remuneration. As the business adviser, who was a partner, was rendering services to the firm and not the company, the provisions of section 40(b) were deemed applicable. The court concluded that the payment made directly by the firm to its partner for advisory services fell within the scope of section 40(b).

In light of the above analysis, the High Court ruled in favor of the Revenue and against the assessee, affirming that the provisions of section 40(b) were indeed applicable in this case. The court found that the Tribunal's decision to the contrary was not justified based on the agreement's terms and the nature of the payment made to the partner. The judgment was delivered in favor of the Revenue, with no order as to costs.