1984 (3) TMI 123 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance under Section 40(b) of the Income-tax Act, 1961.
2. Disallowance under Section 40A(5) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(b):

The first issue concerns the disallowance of Rs. 5,42,872 under Section 40(b) of the Income-tax Act, 1961. The partnership firm in question includes three partners: a limited company holding a 60% share and two individuals holding 20% each. The firm reimbursed the limited company for expenses incurred on staff employed for the firm's business. Historically, such reimbursements were not disallowed under Section 40(b) by the Income-tax Officer (ITO) until the assessment year 1976-77. The ITO proposed the disallowance for the assessment year 1979-80, arguing that the reimbursement constituted remuneration to the partner, which should be disallowed under Section 40(b).

The Commissioner (Appeals) disagreed with the ITO, stating that the reimbursement was only for actual expenses incurred on staff employment and did not include any extra charge that could be termed as remuneration or benefits to the partner. The Commissioner (Appeals) noted that the reimbursement was essential for the efficient and smooth conduct of the firm's business and did not extend any benefit or pay any remuneration to the partner.

The Appellate Tribunal upheld the Commissioner (Appeals)'s decision, finding no reason to interfere with it. The Tribunal concluded that the reimbursement was merely for expenses incurred in running the business and did not constitute remuneration to the partner.

2. Disallowance under Section 40A(5):

The second issue involves the disallowance of Rs. 89,606 under Section 40A(5) of the Income-tax Act, 1961. This amount pertains to the remuneration of Mr. Shivram, who was employed by the limited company but managed the firm's operations. The ITO disallowed the amount, arguing that Mr. Shivram was effectively an employee of the firm, and his remuneration should be disallowed under Section 40A(5).

The Commissioner (Appeals) disagreed, stating that there was no employer-employee relationship between Mr. Shivram and the firm. Mr. Shivram was deputed by the limited company to manage the firm's business and received his salary from the limited company, not the firm. Therefore, the provisions of Section 40A(5) did not apply.

The Appellate Tribunal, however, found merit in the ITO's and Inspecting Assistant Commissioner's (IAC) observations. The Tribunal noted that the arrangement between the limited company and the firm effectively circumvented the applicability of Section 40A(5). The Tribunal concluded that the substance of the arrangement should be considered over its form and restored the ITO's order, subject to arithmetical examination of the amount to be disallowed. The correct figure for disallowance was identified as Rs. 79,606 instead of Rs. 89,606.

Conclusion:

In conclusion, the appeal was partly allowed. The Tribunal upheld the Commissioner (Appeals)'s decision regarding the disallowance under Section 40(b) but restored the ITO's order concerning the disallowance under Section 40A(5), subject to the correct calculation of the disallowed amount.