2003 (4) TMI 262 - AT - Income Tax

Summary

Issues Involved:
1. Prima facie adjustment by the Assessing Officer.
2. Allowability of remuneration paid to a partner representing an HUF under Section 40(b) of the Income-tax Act.
3. Relief granted by CIT(A) in view of the non obstante provisions of Section 40 of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Prima Facie Adjustment by the Assessing Officer:
The Revenue contended that the CIT(A) failed to observe that the prima facie adjustment carried out by the Assessing Officer was in order. However, this ground was deemed misconceived because the assessment was made under Section 143(3) of the Income-tax Act, not under prima facie adjustment provisions.

2. Allowability of Remuneration Paid to a Partner Representing an HUF:
The primary issue was whether the remuneration paid to Shri Nagendra Prasad, a partner representing his HUF, could be allowed as a deduction under Section 40(b) of the Income-tax Act. The Assessing Officer disallowed the claim, arguing that since Nagendra Prasad was a partner in a representative capacity (as Karta of HUF) but received remuneration in his individual capacity, the remuneration was not paid to a "working partner" as defined under the Act.

The CIT(A) allowed the claim, citing several judicial precedents, including the Supreme Court's decisions in CIT v. Nandalal Gandalal and CIT v. Bhagyalakshmi & Co., which established that a partner representing an HUF occupies a dual position: as an individual in the partnership and as a representative of the HUF. The CIT(A) also noted that the amended provisions of Section 40(b) with effect from the assessment year 1993-94 allow for such remuneration if the partner is actively engaged in the firm's business, regardless of the capacity in which he joined the partnership.

The Tribunal upheld the CIT(A)'s decision, emphasizing that remuneration paid to a partner, even if received in an individual capacity, is allowable as a deduction because the partner is accountable to the partnership. The Tribunal referenced the Supreme Court's decision in Rashik Lal & Co. v. CIT, which clarified that an HUF cannot be a partner in a partnership firm; only the individual representing the HUF can be a partner. Therefore, remuneration paid to such an individual is allowable under Section 40(b).

3. Relief Granted by CIT(A) in View of the Non Obstante Provisions of Section 40:
The Revenue argued that the CIT(A) erred in granting relief to the assessee considering the non obstante provisions of Section 40. The Tribunal, however, found that the CIT(A)'s interpretation was consistent with the legislative intent to avoid double taxation and to allow remuneration paid to a working partner, even if he represents an HUF, as a deductible expense. The Tribunal noted that the Assessing Officer could still determine in whose hands (individual or HUF) the remuneration should be taxed, but this did not affect the firm's eligibility for deduction under Section 40(b).

Conclusion:
The Tribunal upheld the CIT(A)'s order, allowing the remuneration paid to the partner representing his HUF as a deductible expense under Section 40(b) of the Income-tax Act. The appeal was dismissed for statistical purposes, affirming the CIT(A)'s decision and clarifying the applicability of Section 40(b) in cases involving partners representing HUFs.