2012 (9) TMI 83 - HC - Income Tax

Disallowance on account of commission paid to two partners who possessed certificate of diploma in pharmacy - commission paid to a partner who is not a working partner is not allowable in the case of assessment of the firm - commission which could be considered as part of remuneration is allowable in case the same is authorized by the partnership deed. If the partnership deed has not authorized, then the same cannot be considered for deduction in the assessment of the firm - in favour of the revenue

Summary

Issues Involved:
1. Whether the commission paid to partners representing HUF in their individual capacity is allowable as a deduction under Section 37 of the Income Tax Act.
2. Interpretation of Section 40(b) of the Income Tax Act concerning payments made to partners.
3. Applicability of the Supreme Court judgment in Rashik Lal & Co. v. CIT [1998] to the current case.

Analysis:

1. Commission Paid to Partners Representing HUF:
The court examined whether the commission paid to partners, who were representing their Hindu Undivided Family (HUF) as Karta, could be allowed as a deduction. The partnership firm, M/s. Srinath Drugs Distributors, paid commission to two partners, who were qualified pharmacists, for their specialized services. The assessing officer disallowed this deduction by referring to Section 40(b) of the Income Tax Act, which prohibits deductions of amounts paid to partners unless certain conditions are met. The appellate authority and the tribunal upheld this disallowance, concluding that the commission paid to partners, even if they were representing HUF, is treated as payment to the partner and not deductible.

2. Interpretation of Section 40(b) of the Income Tax Act:
Section 40(b) explicitly disallows deductions for payments made to partners unless they are working partners and the payment is authorized by the partnership deed. The court emphasized that the legislature did not provide any exception for commission or remuneration paid to partners representing HUF. The tribunal noted that the partnership deed did not authorize the commission payments, and hence, these payments could not be deducted. The court reiterated that Section 40(b) contains a non obstante clause, meaning it overrides other provisions that might allow such deductions under different circumstances.

3. Applicability of the Supreme Court Judgment in Rashik Lal & Co. v. CIT:
The court referred to the Supreme Court's decision in Rashik Lal & Co. v. CIT, which held that a HUF cannot be a partner in a partnership firm. Only individuals can be partners, even if they represent HUF. The remuneration or commission paid to such partners is considered as payment to the individual partner, not the HUF. The court highlighted that the partnership firm cannot claim deductions for such payments because Section 40(b) expressly prohibits it. The court also noted that the individual's obligation to account for the remuneration to the HUF does not alter the firm's position under the Income Tax Act.

Conclusion:
The court concluded that the payments made to the partners, who were representing their HUF, could not be allowed as deductions under Section 37 of the Income Tax Act. The court emphasized that the legislative intent was clear in not extending the benefit of deductions to remuneration, commission, or salary paid to partners, except under the specific conditions mentioned in Section 40(b). Consequently, the court dismissed all appeals, affirming the tribunal's decision to disallow the deductions.

Order:
All the appeals are dismissed.