2003 (4) TMI 236 - AT - Income Tax

Summary

Issues:
1. Justification of rectification under s. 154 disallowing salary paid to partner claimed by the assessee.

Analysis:
The appeal was filed against the order of the Dy. CIT(A) regarding the rectification under s. 154 disallowing the salary paid to the partner claimed by the assessee. The AO withdrew the deduction claimed under s. 40(b) of the IT Act, stating that the partner, being the Karta of HUF, was not entitled to salary as per provisions of s. 40(b). The assessee, a firm with six partners including Shri Sat Pal, HUF, declared nil income for the relevant assessment year. The AO issued a notice under s. 154, rejecting the explanation provided by the assessee, as Shri Sat Pal was not actively engaged in conducting the business of the firm. The Dy. CIT(A) upheld the AO's decision, stating that the term 'individual' in Expln. 4 to s. 40(b) does not include HUF, thus disallowing the deduction claimed by the assessee. The Dy. CIT(A) concluded that the mistake was apparent from the record, justifying the rectification under s. 154.

The assessee contended that the rectification under s. 154 was not justified, as Shri Sat Pal, being the Karta of HUF, was actively engaged in the business of the firm. The assessee argued that the term 'individual' in Expln. 4 to s. 40(b) includes both individual and Karta of HUF, allowing the deduction claimed. The Tribunal analyzed the provisions of s. 154 and judicial pronouncements, emphasizing that a mistake apparent from the record must be objectively demonstrable. The Tribunal noted that a mistake requiring interpretation or construction of the law cannot be considered apparent. Despite a previous Tribunal decision disallowing remuneration to a partner in HUF capacity under s. 40(b), the Tribunal held that the mistake in the present case was not apparent from the record, as it involved interpreting the provisions of the Act. Consequently, the rectification under s. 154 was deemed beyond its purview.

Therefore, the Tribunal set aside the order of the Dy. CIT(A) upholding the rectification under s. 154, allowing the grounds of appeal raised by the assessee. As a result, the appeal was allowed, overturning the decision to disallow the deduction claimed by the assessee for the salary paid to Shri Sat Pal, HUF.