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2014 (11) TMI 888 - HC - Income TaxDisallowance u/s 40(b) - Whether the dis-allowance of the finance, commission paid to proprietary concern of the partner under provisions of Section 40(b) was justified Held that - Section 40(b) deals with the commission or interest etc. made to a partner and not to an individual, where amounts were advanced by such individual from his personal fund - Shri. Doshi was the sole proprietor of Saurashtra Metal Supplying Co. and Jayant Trading Company, which provided financial assistance to the assessee - the Tribunal held that what was paid to Mr. Doshi, whether, it is Commission or interest , is liable to be disallowed u/s 40(b) - the advances made by Mr. Doshi to the assessee firm were from his personal fund and the commission or interest paid by the assessee to Shri. Doshi was in his individual capacity and not as a partner it was not liable to be disallowed in view of the clear provisions of Section 40(b). In the case of Trust also, which provided financial assistance to the assessee, Shri. Doshi was one of the trustees and on the basis of the same, the AO hold that the amount was paid by the assessee to one of the partners, i.e. Shri. Desai, which is also quite contrary relying upon Chhotalal And Co. Versus Commissioner Of Income-Tax, Gujarat 1984 (4) TMI 40 - GUJARAT High Court - the AO could not have disallowed the amounts paid by the assessee to Shri. Doshi Decided in favour of assesee.
Issues:
1. Disallowance of finance commission paid to partner under Section 40(b) of the Income Tax Act, 1961. 2. Disallowance of commission payment to partners under Section 40(b) for A.Y. 1987-88. Analysis: Issue 1: Disallowance of finance commission paid to partner under Section 40(b) of the Income Tax Act, 1961: The case involved two matters heard together by the Gujarat High Court. In the first matter (ITR No. 67 of 1993), the assessee challenged the order of the ITAT regarding payments made to a partner, Mr. Doshi, under the provisions of Section 40(b) of the Income Tax Act. The AO disallowed the payments made by the assessee to Mr. Doshi as commission, considering him a partner. The CIT(A) and the Tribunal upheld the disallowance. The High Court referred to relevant case laws and provisions of Section 40(b) to determine that the payments were made by Mr. Doshi from his personal fund and not as a partner. Therefore, the disallowance was held unjustified, and the reference was allowed in favor of the assessee. Issue 2: Disallowance of commission payment to partners under Section 40(b) for A.Y. 1987-88: In the second matter (Tax Appeal No. 281 of 1999), the Revenue challenged the ITAT's order regarding commission payments made by the assessee to its partners for A.Y. 1987-88. The AO disallowed the commission payments considering them as payments to partners. The CIT(A) partly allowed the appeal, leading to the matter being taken to the Tribunal. The High Court noted arguments presented by both sides, including references to previous court decisions. It was established that the commission payments were not to partners but to individuals from their personal funds. The High Court, based on the provisions of Section 40(b) and relevant case laws, held that the disallowance was not justified. Consequently, the appeal by the Revenue was dismissed, and the question was answered in favor of the assessee. In conclusion, the High Court ruled in both matters that the disallowance of commission payments made to individuals from their personal funds was not justified under Section 40(b) of the Income Tax Act, 1961. The judgments were delivered in favor of the assessee, and the appeals by the Revenue were dismissed.
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