1994 (3) TMI 58 - HC - Income Tax

Summary

Issues:
1. Whether the salary paid to partners in their individual capacity should be treated as salary paid to the partners and added back under section 40(b) of the Income-tax Act.

Analysis:
The judgment pertains to a firm engaged in the business of "dealer in pulses and grains" where two partners received a salary in their individual capacity. The Income-tax Officer treated this salary as paid to the partners and added it back under section 40(b) of the Income-tax Act. The Commissioner of Income-tax and the Income-tax Appellate Tribunal upheld this view. The main question was whether the Tribunal was justified in disallowing the remuneration paid to the partners for their services under section 40(b) of the Income-tax Act in the hands of the firm. The Revenue argued for a reconsideration of a previous decision based on the Supreme Court's ruling that salary paid to a partner is a share of profit. However, the court held that the salary paid to the individual partners, who represent their respective Hindu undivided families in the firm, cannot be considered as part of the share of profit of a partner. The court emphasized that the salary paid to the individual should not be added back under section 40(b) as it would unfairly burden the joint family and other partners with higher taxes, even though the salary does not represent the share of profit.

The court referred to the Explanation added to section 40(b) recognizing the representative capacity of a partner in the case of payment of interest. It was noted that a Hindu undivided family cannot be a partner in a firm, and the representative capacity of the individuals forming the partnership is crucial. The court highlighted that once the joint family is recognized as the real partner of the firm, the salary paid to the individual should not be considered part of the share of profit of a partner. The court rejected the Revenue's plea for reconsideration of the previous decision, citing consistency in the interpretation of the law. It was also mentioned that a similar view had been taken in the assessee's own case, leading to the judgment being in favor of the assessee and against the Revenue.