1994 (4) TMI 91 - AT - Income Tax

Summary

Issues: Disallowance of commission under s. 40A(2) and s. 40(b) for services rendered by HUFs of partners.

In this case, the assessee, engaged in construction business, paid a total commission of Rs. 48,000 to two HUFs of its partners for supplying labor and material. The ITO disallowed this expenditure under s. 40A(2) and s. 40(b) after recording statements of the partners, who confirmed that the income from the commission was a result of their personal experience. The CIT(A) upheld the disallowance. The assessee argued that based on a judgment of the Madras High Court, the commission should be considered as paid to the HUFs, which were already assessed for such income. However, it was admitted that the HUFs did not invest any capital for earning the commission. The Tribunal analyzed the Madras High Court judgment, emphasizing the importance of a clear intention in a partnership deed regarding the nature of the share of profits. In the present case, no legally enforceable contract between the firm and the HUFs was produced, and the payments were solely for the personal skill and experience of the partners. Referring to a Supreme Court case, the Tribunal concluded that the commission was paid for services rendered by the individuals and not as a return on investment by the HUFs. Therefore, the disallowance under s. 40(b) was upheld, rendering the examination of s. 40A(2) unnecessary. The CIT(A)'s decision was affirmed, and the assessee's appeal was dismissed.