2007 (7) TMI 295 - HC - Income Tax

Whether section 40(b) is applicable to the amount of salary and bonus paid by the assessee-firm to its partners for their individual service as against their Hindu undivided family character - Tribunal was right in law in allowing the amount of salary and bonus paid by the firm to partners for services rendered by them on the ground of having technical qualification and expertise, though they represented their Hindu undivided family and section 40(b) was not attracted revenue appeal dismissed

Summary

Issues:
Applicability of section 40(b) of the Income-tax Act, 1961 to salary and bonus paid by an assessee-firm to its partners for individual services against their Hindu undivided family character.

Analysis:
1. The case involved a dispute regarding the applicability of section 40(b) of the Income-tax Act, 1961 to the salary and bonus paid by an assessee-firm to its partners for their individual services as opposed to their representation of Hindu undivided families. The Revenue contended that the salary and bonus paid to the partners should be disallowed under section 40(b) of the Act. The Tribunal initially allowed the amount, stating that the partners received the payment as individuals and not on behalf of their Hindu undivided families.

2. The Tribunal's decision was based on a judgment of the Andhra Pradesh High Court, which held that payments made by a firm to partners as individuals, even if they represent Hindu undivided families, should not be disallowed under section 40(b) of the Act. The Commissioner of Income-tax (Appeals) concurred with this view, emphasizing that the partners rendered personal services to the firm based on their technical qualifications and expertise, and the payments were made to them in their individual capacity.

3. The Revenue, dissatisfied with the decision, approached the Tribunal seeking a reference to the High Court for adjudication on the matter. The Tribunal accepted the request and referred the question of law for the court's opinion. Despite the absence of the assessee during the proceedings, the court examined the issue in detail.

4. The High Court relied on the Supreme Court's judgment in Brij Mohan Das Laxman Das v. CIT [1997] 223 ITR 825, which clarified the application of Explanation 2 added to section 40(b) of the Act. The court highlighted that the Explanation was declaratory in nature and applicable even for assessment years prior to April 1, 1985. The court emphasized the distinction between an individual and a Hindu undivided family for tax purposes, concluding that payments to partners in their individual capacity should not fall under section 40(b) if made for personal services.

5. Drawing from the principles established in Brij Mohan Das Laxman Das case, the court determined that the salary and bonus paid to partners for personal services in their individual capacity, distinct from their representation of Hindu undivided families, should not be disallowed under section 40(b) of the Act. The court ruled in favor of the assessee, holding that the payments were not subject to disallowance under the specified provision.

This detailed analysis of the judgment provides a comprehensive overview of the legal issues involved and the court's reasoning in resolving the dispute regarding the application of section 40(b) of the Income-tax Act, 1961 to the payments made by an assessee-firm to its partners.