1988 (12) TMI 128 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of salary payment to a partner under Section 40(b) of the Income Tax Act, 1961.
2. Non-following of judicial precedents by the CIT(A), Baroda.

Detailed Analysis:

1. Disallowance of Salary Payment to a Partner under Section 40(b) of the Income Tax Act, 1961:

Facts and Contentions:
- The assessee, a registered partnership firm, paid Rs. 10,800 as salary to one of its partners, Shri Bhogilal P. Desai.
- The Income Tax Officer (ITO) disallowed this payment under Section 40(b) of the Income Tax Act, 1961, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], Baroda.
- The assessee argued that the salary should be allowed as the partner received it in his individual capacity for services rendered, citing the Andhra Pradesh High Court's decision in NTR Estate vs CIT and the Gujarat High Court's decision in L. Chhotalal & Co. vs CIT.

Legal Precedents and Analysis:
- The Andhra Pradesh High Court in NTR Estate vs CIT held that if a partner in a representative capacity lends money individually, the interest paid is not disallowed under Section 40(b). This principle was extended to salary payments, provided the salary was for individual services and not connected to the representative capacity.
- The Gujarat High Court in L. Chhotalal & Co. vs CIT distinguished between interest payments and salary payments to partners, emphasizing that the nature of services rendered by a partner cannot be traced to individual or representative capacity, making salary payments disallowable under Section 40(b).

Tribunal's Conclusion:
- The Tribunal noted that the Gujarat High Court's decision in L. Chhotalal & Co. was binding and clarified that salary payments to partners stand on a different footing from interest payments.
- The Tribunal rejected the assessee's reliance on the Andhra Pradesh High Court's decision, emphasizing that the Gujarat High Court's decision should prevail.

2. Non-following of Judicial Precedents by the CIT(A), Baroda:

Facts and Contentions:
- The assessee contended that the CIT(A), Baroda, erred by not following the Gujarat High Court's decision in L. Chhotalal & Co. vs CIT and other relevant decisions.

Legal Precedents and Analysis:
- The Tribunal reiterated the importance of following binding judicial precedents and noted that the CIT(A) correctly upheld the ITO's disallowance based on the Gujarat High Court's decision.
- The Tribunal also referenced the Full Bench decision of the Allahabad High Court in CIT vs Nitro Phosphatic Fertilizer, which supported the view that salary payments to partners are disallowable under Section 40(b).

Tribunal's Conclusion:
- The Tribunal found that the CIT(A) correctly followed the binding precedent of the Gujarat High Court, and the disallowance of the salary payment was justified.

Final Judgment:
- The appeal was dismissed, and the Tribunal upheld the disallowance of the salary payment to the partner under Section 40(b) of the Income Tax Act, 1961. The Tribunal emphasized the binding nature of the Gujarat High Court's decision and rejected the reliance on the Andhra Pradesh High Court's decision.