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TMI Blog1988 (1) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal. 3. Before the CIT(A) the appeals for the first time for the asst. yrs. 1982-83 and 1984 agitated that the salary paid to Shri Hasija, one of the two managing partners, was admissible deduction in computing the income of the firm. This was a fresh plea. The first appellate authority referred the above additional ground to the ITO for his comments in his letter dt. 12th Aug., 1985, The ITO in his reply dt. 12th Sept., 1985 had submitted that the salary was paid to one of the partners of the firm and, therefore, it was not an admissible deduction from the income and also he pointed out that the assessee himself had not chosen to deduct the same from the income of the firm. 4. For the asst. yr. 1984-85, the assessee claimed the deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ners, he is a partner and the firm recognises him only as a partner and not HUF, and, therefore, any payment to the partner by way of salary, commission or interest, certainly attracts the provisions of s. 40(b). The Parliament had introduced an Expln. to s. 40(b) by the Taxation Laws(Amendment)Act, 1984 w.e.f. 1st April, 1985 recognising the dual capacity of a partner but that was only in respect of the interest payments made to a partner by the firm and would not cover the payment by way of salary, commission and bonus to a partner. He relied on the decision of the Patna High Court in the case of Chandulal Rajgadiya vs. CIT (1986) 52 CTR (Pat) 129: (1987) 164 ITR 486(Pat) and of the Supreme Court in V.D. Dhanwatey vs. CIT reported in (196 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case before the Supreme Court case of Premnath and Ors. the Hon'ble Supreme Court approvingly quoted a passage from the case of Rajkumar Singh Hukamchandji vs. CIT (1970) 78 ITR 33 (SC) as follows: "..........the broader principle that emerges is whether the remuneration received by the coparcener in substance though not in form was but one of the modes of return made to the family because of the investment of the family funds in the business or whether it was a compensation made for the services rendered by the individual coparcener. If it is the former, it is an income of the HUF but if it is the latter, then it is the income of the individual coparcener. If the income was essentially earned as a result of the funds invested, the fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cope of allowable expenditure'. Same is the approach towards salary, bonus, commission or remuneration. The Privy Council in Pichappa Chettiar vs. Chockalingam (1934) AIR 1934 PC 912 held that where a managing member of a joint family enters into a partnership with a stranger, the other members of the family do not ipso facto become partners in the business so as to clothe them with all the rights and obligations of a partner so defined by the Indian Contract Act. In such a case, the family as a unit does not become a partner, but only such of its members as in fact enter into a contractual relation with the stranger: the partnership will be governed by the Act. Approving this decision, the Supreme Court in Charandas Haridas and Anr. vs. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is ultimately to be assessed." 9. In the light of the Full Bench decision it is not valid to argue that a partner in a firm, for the purpose of s. 40(b) of the IT Act, would be treated as a partner in individual capacity only irrespective of status in which he is a partner in the firm and thus any salary, interest, bonus etc., paid to him by the firm would be disallowed. As per the Full Bench decision cited supra, the status and the representative capacity of the partner, has to be kept in view while applying the provisions of s. 40(b). If a person is a partner in representative capacity as Karta of HUF, as admittedly in the case before us, then, the income received as Karta on behalf of the HUF can only be disallowed. Other payments such ..... X X X X Extracts X X X X X X X X Extracts X X X X
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