2002 (5) TMI 206 - AT - Income Tax

Summary

Issues:
Interpretation of section 40(b) of the Income-tax Act regarding deduction of remuneration paid to a partner representing his HUF.

Analysis:

1. Issue: The controversy revolves around the deduction of remuneration paid to a partner representing his HUF under section 40(b) as amended by the Finance Act, 1992.

2. Detailed Analysis: The partnership firm in question comprised three partners, including one representing his HUF. The Assessing Officer disallowed the remuneration paid to the partner representing his HUF, citing that only a working partner, as defined in Explanation 4 to section 40(b), is eligible for such payments. The CIT(A) upheld this decision, considering the HUF as the partner, not the individual representing it.

3. Detailed Analysis: The contention of the assessee's counsel was that an individual, whether representing himself, HUF, or any other entity, is the actual partner in the eye of the law. The argument emphasized that the individual entering the partnership agreement is the partner, and if actively involved in the business, qualifies as a working partner. The Departmental Representative supported the Assessing Officer's stance.

4. Detailed Analysis: The Tribunal analyzed the concept of partnership under the Income-tax Act and the Indian Partnership Act. Referring to relevant legal provisions and a Supreme Court case, it was established that an HUF itself cannot be a partner; only an individual representing the HUF can enter a partnership. The decision clarified that, legally, partnerships are between individuals, even if they represent other entities.

5. Detailed Analysis: Further, the Tribunal examined section 40(b) of the Income-tax Act, which delineates conditions for deducting partner remuneration. The amended provisions since 1993-94 allow remuneration to working partners if authorized by the partnership deed. Citing Supreme Court precedents, the Tribunal concluded that the individual representing the HUF was the actual partner and a working partner as per Explanation 4. Consequently, the remuneration paid was deemed allowable under section 40(b).

6. Conclusion: The Tribunal allowed the appeal, setting aside the Commissioner (Appeals)'s decision and deleting the disallowance of remuneration paid to the partner representing his HUF. The judgment clarified the legal interpretation that only individuals, not entities like HUF, can be partners in a partnership firm under the relevant laws.