1975 (4) TMI 33 - HC - Income Tax

Summary

Issues Involved:
1. Whether the salary payment of Rs. 12,000 to a partner is an admissible deduction in the computation of business income.
2. Interpretation of section 40(b) of the Income-tax Act, 1961.
3. Applicability of section 40A of the Income-tax Act, 1961.

Summary:

Issue 1: Admissibility of Salary Payment as Deduction
The Tribunal held that the salary payment of Rs. 12,000 to N. M. Anniah, a partner, was not deductible in computing the firm's business income. This decision was based on section 40(b) of the Income-tax Act, 1961, which explicitly disallows any payment of interest, salary, bonus, commission, or remuneration made by the firm to any partner.

Issue 2: Interpretation of Section 40(b)
The court rejected the assessee's contention that section 40(b) should be interpreted in light of Supreme Court decisions under the Indian Income-tax Act, 1922. The court clarified that section 40(b) is absolute in its terms and applies irrespective of the character in which a person has become a partner. The court cited various precedents, including R.A. Goodsir and Co. v. Commissioner of Excess Profits Tax and A.S.K. Rathnaswamy Nadar Firm v. Commissioner of Income-tax, to support its view that section 40(b) enacts an absolute prohibition on deductions for payments made to partners.

Issue 3: Applicability of Section 40A
The court also addressed the contention that section 40A, which contains a non-obstante clause, overrides section 40(b). The court held that section 40A is intended to address excessive or unreasonable expenditures and does not apply to payments covered by section 40(b). The court emphasized that if Parliament intended section 40A to override section 40(b), it would have repealed section 40(b). Therefore, the court concluded that section 40A does not lift the ban imposed by section 40(b) on deductions for payments made to partners.

Conclusion:
The court answered the referred question in the affirmative, holding that the Tribunal was justified in law in disallowing the salary payment of Rs. 12,000 to N. M. Anniah as a deduction in the computation of the firm's business income.