2005 (9) TMI 291 - AT - Income Tax

Summary

Issues involved:
Appeal by revenue regarding deletion of addition made on account of remuneration paid to partners representing their HUF's as Karta under section 40(b) of the Income-tax Act for assessment year 1993-94.

Detailed Analysis:
1. Ground Nos. 1 and 2 - Remuneration to Partners:
The issue revolves around whether a firm can claim deduction for remuneration paid to partners representing their HUF's as Karta under section 40(b). The Assessing Officer disallowed the remuneration, citing that working partners must be individuals actively engaged in the firm's affairs. The CIT(A) disagreed, allowing the expenditure under section 37(1) as the partners had looked after the firm's affairs and the payment was within limits. The revenue contended that an HUF cannot be a working partner, citing a case from the Delhi High Court. However, the respondent-assessee argued that partners, even as Kartas of HUF's, are working partners and eligible for remuneration, supported by various decisions.

2. Amendment in Section 40(b):
The Tribunal analyzed the amended provision of section 40(b) which now allows deduction for remuneration to working partners as per the partnership deed, subject to prescribed limits. The amendment changed the earlier disallowance of such payments to prevent tax evasion. The Tribunal noted that the remuneration to a Karta representing an HUF was allowable as the Karta functioned as an individual partner in the firm, as per the new provision. This interpretation was supported by past precedents and co-ordinate benches' decisions.

3. Precedents and Interpretation:
The Tribunal considered past judgments like Rasik Lal & Co.'s case, emphasizing that a firm comprises individuals and an HUF cannot be a partner. The law strictly applied to disallow salary to partners under the old section 40(b). However, the amended law now permits such deductions, aligning with decisions that partners, including Kartas of HUF's, are considered individuals for partnership purposes. The Tribunal upheld the CIT(A)'s decision, affirming that the remuneration to Kartas representing HUF's was allowable under the amended section 40(b).

In conclusion, the Tribunal dismissed the revenue's appeal, upholding the allowance of remuneration to partners representing their HUF's as Karta under section 40(b) of the Income-tax Act for the assessment year 1993-94.