1997 (12) TMI 2 - SC - Income Tax

Rashiklal is a partner of the firm, Rashiklal and Company - Whether commission paid by the assessee-firm to Sri Rashiklal P. Rathor (individual) is allowable u/s 40(b) - provisions relating to assessment of firms should not be construed in a way to defeat its object. Section 40(b) forbids deduction of any amount paid by way of commission to a partner - the commission received by him from the partnership firm cannot be allowed as a deduction from the business income of the partnership

Issues Involved:
1. Whether the commission paid by the assessee-firm to an individual partner is allowable as a deduction under section 40(b) of the Income-tax Act, 1961.
2. The applicability of section 40(b) to payments made to a partner representing a Hindu undivided family (HUF).

Detailed Analysis:

1. Deductibility of Commission Paid to a Partner under Section 40(b):
The primary issue was whether the commission paid by the assessee-firm to an individual partner could be allowed as a deduction while computing the business income of the firm under section 40(b) of the Income-tax Act, 1961. The assessee-firm claimed a deduction for the commission paid to one of its partners, Rashiklal P. Rathor. The Income-tax Officer disallowed this deduction, but the Appellate Assistant Commissioner allowed it, stating that the payment was made to Rashiklal in his individual capacity and not as the karta of a Hindu undivided family (HUF). The Tribunal reversed this decision, holding that section 40(b) applied, and the High Court upheld the Tribunal's decision. The Supreme Court affirmed that section 40(b) clearly disallows any deduction for payments made by a firm to its partners, including commission. The court emphasized that the language of section 40(b) is "simple and clear," and any commission paid to a partner cannot be deducted from the firm's income.

2. Applicability of Section 40(b) to Payments Made to a Partner Representing an HUF:
The argument presented by the assessee was that Rashiklal had joined the firm in a representative capacity for his HUF, and thus the commission paid to him should not be considered as paid to a partner. The court rejected this argument, stating that a firm is essentially an association of individuals, and a Hindu undivided family cannot directly or indirectly become a partner in a firm. The court referred to the precedent set in Dulichand Laxminarayan v. CIT, which established that a firm is not a "person" and cannot enter into a partnership with another firm, HUF, or individual. The court reiterated that even if a person joins a partnership as a representative of an HUF, within the firm, he functions in his personal capacity. Therefore, any payment made to such a partner is considered a payment to an individual partner and falls within the purview of section 40(b).

The court elaborated that the Partnership Act and Income-tax Act treat partners as individuals, and any remuneration or commission paid to a partner, even if he represents an HUF, is not deductible under section 40(b). The court further clarified that the firm is not concerned with the internal arrangement between the partner and the HUF. The commission paid to Rashiklal was thus a payment to an individual partner, and the firm could not claim it as a deduction.

Conclusion:
The Supreme Court concluded that the commission paid by the firm to Rashiklal, a partner, could not be deducted from the firm's income under section 40(b) of the Income-tax Act, 1961. The appeals were dismissed, and the judgment of the High Court was upheld, affirming that the firm was not entitled to claim any deduction for the commission paid to one of its partners. The court emphasized the principle that a firm is a compendious mode of describing the persons constituting the firm, and payments to partners are treated as payments to individuals, irrespective of any representative capacity.

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