1979 (11) TMI 95 - HC - Income Tax

Summary

Issues:
- Disallowance of deductions for salary amounts paid to partners by a firm under s. 10(4)(b) of the I.T. Act, 1922.
- Interpretation of whether salaries paid to partners were allowable as a revenue expenditure for assessment years 1957-58 to 1961-62.

Analysis:
The case involved a partnership firm, M/s. K.C. Raj & Co., with three partners acting as kartas of their respective Hindu undivided families. The firm paid salaries to these partners for their services as working partners, claiming it was in their individual capacities, not as kartas. However, income-tax authorities disallowed these deductions under s. 10(4)(b) of the I.T. Act, 1922, which prohibits certain expenditures by a firm to its partners. The Delhi Bench "B" of the Appellate Tribunal upheld these decisions.

The court clarified that a Hindu Undivided Family (HUF) cannot directly enter a partnership; only the karta can enter into a partnership for the benefit of the family. The other family members do not become partners in the firm vis-a-vis outsiders. The court cited the Supreme Court's view in CIT v. Kalu Babu Lal Chand [1959] 37 ITR 123 to support this position.

Regarding s. 10(4)(b) of the I.T. Act, the court emphasized that it prohibits the allowance of expenditure like interest, salary, or commission paid by a firm to any partner. This prohibition applies regardless of whether the partner joins as an individual or as a karta of his HUF. The court relied on various High Court decisions, including A.S.K.Rathnaswamy Nadar Firm v. CIT [1965] 58 ITR 312 (Mad) and CIT v. London Machinery Co. [1979] 117 ITR 111 (All), to support its interpretation.

The court distinguished the case from CIT v. Ram Laxman Sugar Mills [1973] 90 ITR 73, where a salary was allowed to a partner in his capacity as an authorized controller, not as a partner. Ultimately, the court held that the salaries paid to the partners were rightly disallowed as revenue expenditure by the Tribunal. The question was answered in the affirmative, and the respondent was awarded costs.