1987 (1) TMI 117 - AT - Income Tax

Summary

Issues Involved:

1. Applicability of Section 40(b) of the Income-tax Act, 1961 regarding salary paid to a partner representing his HUF.
2. Distinction between individual partner and representative partner for the disallowance of salary under Section 40(b).

Detailed Analysis:

1. Applicability of Section 40(b) of the Income-tax Act, 1961 regarding salary paid to a partner representing his HUF:

The core dispute in both appeals revolves around the ITO's addition of salary paid to S. Boota Singh under Section 40(b) of the Income-tax Act, 1961. The assessee argued that the salary was paid to S. Boota Singh in his individual capacity while he was a partner representing his HUF in the firm, and thus, Section 40(b) should not apply. The ITO, however, disallowed the salary, stating that under Section 40(b), salary paid to a partner is not deductible, even if the partner represents a joint family as a manager. The AAC upheld the ITO's decision, emphasizing that there is no distinction between individual and representative partners for the purposes of Section 40(b). The Tribunal, upon reviewing the case, supported the ITO and AAC's stance, referring to various case laws, including the Supreme Court's decision in CIT v. R. M. Chidambaram Pillai, which clarified that salary paid to a partner is essentially a share of profits and is non-deductible under Section 40(b).

2. Distinction between individual partner and representative partner for the disallowance of salary under Section 40(b):

The AAC and the Tribunal both concluded that for the purposes of Section 40(b), no distinction exists between an individual partner and a representative partner. The Tribunal highlighted that the partnership agreement required S. Boota Singh to work for the firm, and his salary was a result of this agreement. The Tribunal cited the Supreme Court judgment in R. M. Chidambaram Pillai's case, which established that a partner cannot be employed by the firm and any salary paid to a partner is a part of the firm's profits. The Tribunal also referenced the Patna High Court's decision in CIT v. Atma Ram Budhia, which reinforced that salary paid to a partner, irrespective of the capacity, is disallowed under Section 40(b). The Tribunal concluded that S. Boota Singh's salary, being a share of profits, is non-deductible under Section 40(b), thus dismissing the assessee's appeals.

Conclusion:

The Tribunal dismissed both appeals, upholding the lower authorities' decision to add back the salary paid to S. Boota Singh under Section 40(b). The Tribunal emphasized that salary paid to a partner, whether in an individual or representative capacity, is considered a share of profits and is non-deductible under Section 40(b).