2002 (11) TMI 37 - HC - Income Tax

Whether, Tribunal was justified in law in holding that the 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? - 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. - we answer the question referred to us in the affirmative, i.e., in favour of the Revenue and against the assessee.

Summary

Issues:
Whether the provisions of section 40(b) of the Income-tax Act, 1961 apply to salary, consultancy fees, and professional fees paid to partners who are also representing their Hindu undivided family as kartas of the firm.

Analysis:
The case involved a partnership firm that had paid salary and consultancy fees to its partners, who were also representing their respective Hindu undivided families as kartas. The Income-tax Officer disallowed these expenditures under section 40(b) of the Act. The Commissioner of Income-tax (Appeals) and the Tribunal upheld this decision, leading to the matter being referred to the High Court.

The High Court considered the issue in light of previous judgments, including the case of National Wire Mfg. Co. v. CIT [2002] 253 ITR 496. The court noted that as per the Supreme Court's decision in Rashik Lal and Co. v. CIT [1998] 229 ITR 448, a Hindu undivided family can only be represented by a karta in a partnership firm, not as a partner. Therefore, the High Court held that salary and consultancy fees paid to partners representing their Hindu undivided families as kartas should be disallowed under section 40(b) of the Act.

Based on the precedent set by the National Wire Mfg. Co. case, the High Court concluded that the Tribunal and other revenue authorities were justified in disallowing the expenditure incurred by the assessee-firm on salary and consultancy fees paid to its partners. The court answered the question in the affirmative, ruling in favor of the Revenue and against the assessee. Consequently, the reference was disposed of with no order as to costs.