1988 (1) TMI 91 - AT - Income Tax

Summary

Issues:
- Disallowance of salary paid to a partner from the income of the firm.
- Interpretation of provisions of section 40(b) of the Income Tax Act regarding payment of salary to a partner.

Analysis:
The appeals were filed by the Revenue against the deletion of salary paid to a partner of a firm from the firm's income. The firm, a partnership, had paid salary to one of the managing partners, Shri Hasija, without seeking deduction in the initial returns for the assessment years 1982-83 and 1983-84. The CIT(A) allowed the deduction for the salary paid to Shri Hasija, stating that he was a partner in his individual capacity, not detrimental to the joint family funds, and the salary was accepted as a deduction in the assessment of the HUF. The Revenue contested this decision, arguing that any payment to a partner attracts the provisions of section 40(b) of the Act.

The Revenue's argument was based on the premise that a partner, regardless of any other capacity, is recognized only as a partner by the firm, and payments such as salary should fall under section 40(b). However, the counsel for the assessee contended that the payment was genuine, for services rendered by Shri Hasija in his individual capacity, supporting the CIT(A)'s decision. The Tribunal upheld the CIT(A)'s order, emphasizing that the payment was made to Shri Hasija in his individual capacity for services rendered, not as a return of capital invested by the HUF.

The Tribunal referred to a Full Bench decision that highlighted the importance of considering the partner's status and representative capacity when applying section 40(b). It was clarified that if a partner is in a representative capacity, such as a Karta of an HUF, only income received on behalf of the HUF could be disallowed under section 40(b). Payments like salary or interest received in a different capacity do not fall under the section's purview. The Tribunal concluded that the salary received by Shri Hasija, based on his individual services to the firm, could not be disallowed under section 40(b) and upheld the CIT(A)'s decision.

In light of the above analysis, the appeals by the Revenue were dismissed, affirming the decision to allow the deduction of the salary paid to the partner from the firm's income.