2011 (1) TMI 157 - HC - Income Tax

Whether the salary paid to a working partner, who is represented in the partnership firm as Karta of HUF, is allowable as a deduction while computing the income of the assessee-firm - In Rashik Lal and Co. Vs. Commissioner of Income Tax, reported in (1997 -TMI - 5629 - SUPREME Court) It was held that the income, received by a partner in a firm, even though as a Karta of HUF, is as an individual and as a working partner, then the deduction is allowable Appeal is dismissed

Summary

Issues:
1. Interpretation of Section 40(b)(i) of the Income Tax Act regarding the disallowance of salary paid to partners in HUF capacity.

Detailed Analysis:
The High Court addressed two Income Tax Appeals against the orders of ITAT for the Assessment Years 2005-06 and 2006-07. Questions 3, 4, and 5 were considered as questions of fact with no substantial question of law. However, questions 1 and 2 were admitted for consideration, focusing on the interpretation of Section 40(b)(i) of the Income Tax Act regarding the disallowance of salary paid to partners in HUF capacity. The appeals revolved around the payment of salaries to working partners who were also partners in the firm in their capacity as Karta of HUF.

The Assessing Officer disallowed the salary paid to the partners, stating that no employer-employee relationship was established between the firm and the HUFs. On appeal, the CIT (A) deleted the addition, citing precedents from the ITAT. Subsequently, the ITAT upheld the CIT (A) order, allowing the deduction of salary paid to a partner representing HUF who rendered services to the firm.

The central question was whether the salary paid to a working partner, represented in the partnership firm as Karta of HUF, is deductible while computing the firm's income. The court analyzed Section 40(b)(i) of the Act, emphasizing that remuneration is deductible only when paid to a working partner actively engaged in the firm's affairs. The court referred to relevant legal precedents to establish that a Hindu Undivided Family cannot be a partner in a partnership firm, and the remuneration paid to a partner is considered as an individual partner's income.

The court differentiated between the status of a Karta of HUF and the HUF itself, emphasizing that the Karta is an individual partner in the firm. Referring to past judgments, including G.T. Cold Storage case, the court reiterated that salary paid to a partner is not deductible unless the partner is a working partner. The court concluded that a partner, even if representing an HUF, is considered an individual for the purpose of deduction under Section 40(b)(i) of the Act.

In light of the legal provisions and precedents, the court dismissed the revenue's appeals, affirming that the salary paid to a working partner, represented as Karta of HUF, is allowable as a deduction in computing the firm's income.