2002 (2) TMI 57 - HC - Income Tax

Summary

Issues Involved:
1. Disallowance of salary payments to partners under Section 40(b) of the Income-tax Act, 1961.
2. Disallowance of interest payments to partners under Section 40(b) of the Income-tax Act, 1961.

Issue-Wise Detailed Analysis:

1. Disallowance of Salary Payments to Partners:
The primary issue addressed is whether 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 justified. The court noted that the assessee-firm made salary payments to its partners and claimed them as allowable expenditure under Explanation 2 to Section 40(b) of the Act. However, the Income-tax Officer disallowed this claim, a decision upheld by the Commissioner (Appeals) and the Income-tax Appellate Tribunal, which relied on the Madras High Court decision in Dwarkadas Rameshwar Goenka v. CIT [1981] 127 ITR 397.

The assessee's counsel argued that the position of law established by the Supreme Court in Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825 and Suwalal Anandilal Jain v. CIT [1997] 224 ITR 753, which held that interest paid to a partner representing a Hindu undivided family (HUF) is not disallowable under Section 40(b), should also apply to salary payments. However, the court noted that the Supreme Court in Rashik Lal and Co. v. CIT [1998] 229 ITR 458 held that the Explanation to Section 40(b) applies only to interest payments and not to salary, commission, or remuneration.

The court further referred to the Gujarat High Court decision in National Wire Manufacturing Co. v. CIT [2002] 253 ITR 496, which reiterated that the term "interest" in Explanation 2 to Section 40(b) cannot be interpreted to include salary, commission, or remuneration. The court concluded that the salary paid to partners is not covered by Explanation 2 to Section 40(b) and thus, the disallowance of salary payments to partners is justified.

2. Disallowance of Interest Payments to Partners:
The second issue was whether the disallowance of interest payments amounting to Rs.8,412 to the partners of the assessee-firm in their individual capacity by invoking Section 40(b) of the Act is justified. However, this issue was not argued by the assessee's counsel as it was covered in favor of the assessee by the Supreme Court judgments in Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825, Suwalal Anandilal Jain v. CIT [1997] 224 ITR 753, and CIT v. Kanji Shivji and Co. [2000] 242 ITR 124. Both parties agreed that this question was concluded by these judgments and it had to be answered in favor of the assessee.

Conclusion:
The court answered the reference against the assessee and in favor of the Department, holding that the disallowance of salary payments to partners under Section 40(b) of the Income-tax Act, 1961, is justified. The court also confirmed that the disallowance of interest payments to partners was already settled in favor of the assessee by earlier Supreme Court judgments. Thus, the payment of salary to the partners by the firm is hit by Section 40(b) and disallowed as business expenditure.